For most Americans, the cost of living appears to increase on a daily basis. While that might be a touch dramatic, it’s not necessarily incorrect.
The Federal Reserve aims for a healthy 2% annual inflation rate, which the U.S. hasn’t seen since the early part of 2021. In June, that rose to 9.1% from 7.5% the previous month. (Source: BBC) This seems to be a record-setting inflation rate for the 21st century. The July rate dropped to 8.5%, still significantly above the long-term average.
In the last year, grocery prices increased by more than 12%. The last time that happened? April 1979. (Source: US Inflation Calculator)
For anyone who’s been farming for more than 30 years, these rates and trends should feel familiar, in an uncomfortable way. The last time interest rates jumped unbelievably fast was in the late 70s and early 80s.
While interest rate trends suggest we’re on a course much like the farm crisis of the 80s, agriculture learned from those mistakes and is much more prepared for anything an unstable financial climate can muster. According to Farm Credit Mid-America, today’s agricultural industry has less debt riding the coat tails of adjustable interest rates.
Even though rising interest rates will impact farmers in every aspect of their operation, it shouldn’t reach the extremes of the Farm Crisis. It’s still important to know where we are now.
2022 Interest Rates
“Overall, interest rates across all areas are consistently on the rise,” said Farm Credit Mid-America’s Senior Financial Officer Max Niespodziany. “Long-term rates we’ve seen increase 2-3% and short-term 1.5-2% increase.”
In the last 10 years, interest rates remained consistently low. Most haven’t risen higher than 3% in those years. (Source: US Inflation Calculator) Now rates are 4% to 6%.
Lower interest rates promote spending to stimulate the economy. When that spending leads to inflated values of the U.S. dollar, it’s up to the Federal Reserve to correct it.
“The simplest way to think about it is that interest rates have an impact on the available funds for conducting business and the ability to buy on credit,” Niespodziany explained. “Lower interest rates prompt people to borrow money. Raising those rates decreases that willingness to borrow and should work to tame the inflation.”
While farmland sales remain strong, interest rates could have an impact on that in the coming months. The cost of borrowed funds is increasing right along with almost all other farm inputs. Many fertilizers increased in cost by 40-80% over the past year. However, increasing costs aren’t a foreign concept to producers.
“Since agriculture is a commodity business, we need to figure out the break-even costs and how to deal with associated risk,” Niespodziany said. “The best way to protect yourself in this financial climate is to surround yourself with a good group of advisors and look for opportunities to cut costs and market at a profitable level.”
Now is a time to lean into strengths and trim the fat on weaknesses for any operation. Finding a financial institution to become a partner in your operation is Niespodziany’s best advice.
“Something that Farm Credit offers are long-term fixed interest rate loans,” Niespodziany said. “That can take some of the risks and guesswork out. In the last 11 years that I’ve been working for Farm Credit, interest rates remained historically low. It’s difficult to predict how everything will shake out in the next few months and years, but anything you can do to hedge your risk now should be a top priority.”