More than just mortgages: Interest rate hikes affect farming too
August 28, 2023
LITTLE ROCK — Expect one more interest rate hike before the end of the year, says Ryan Loy, extension economist for the University of Arkansas System Division of Agriculture.
In his newly released fact sheet “How are Interest Rates Influenced?” Loy discusses the rationale behind this year’s interest rate increases, the intended impacts and what it means to farmers and consumers.
So far this year, the Federal Reserve has raised interest rates four times, raising it by 0.25 percent on Feb. 1, again on March 22, May 3 and on July 26.
When the Federal Open Market Committee meets again in September “the expectation for market insiders and market outlooks is that they’re going to raise it again,” Loy said in an interview on Tuesday. “If they choose not to, then that’s going have a kind of tumultuous impact versus if they just continue with the status quo.
“We’re not really sure what to expect, but it’s likely there will be at least one more interest rate hike by the end of the year of about 0.25 percent,” Loy said.
On Friday, Fed Chair Jerome Powell said that there was some improvement, more action was needed to keep inflation reined in.
“At upcoming meetings, we will assess our progress based on the totality of the data and the evolving outlook and risks. Based on this assessment, we will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data,” Powell said.
While most people think of mortgages when they hear about interest rate hikes, there are many more lending actions that are affected, Loy said, adding that farmers who need operating loans need to be paying close attention to the Fed’s actions.
“If they need an operating loan, they should get it now,” Loy said. “If the outlook is that interest rates are going to continue to rise and at the very least it seems like they’re not going to go down quickly then time is of the essence. They’d better do this now because if it continues on this trajectory, then they’ll be paying even more in interest per acre.”
According to the Kansas City Fed, operating loan rates are typically higher than the effective federal funds rate. A survey of lending terms to farmers for the 10th financial district showed that, on average, a producer paid an 8.03 percent fixed interest rate for operating loans in the second quarter of 2023, compared with what was the current federal funds rate of 5.08 percent.
The 10th financial district includes parts of Oklahoma, Missouri and five other states, but not Arkansas. However, the Kansas City Fed is the only one of the 12 Federal Reserve Banks with an agriculture lending survey.
“Agricultural lending has become increasingly expensive, combined with historically high production costs creating an even more financially stressed agricultural sector,” Loysaid.
Loy said the rising interest rates should have eligible farmers looking toward loans from the U.S. Department of Agriculture’s Farm Service Agency loans.
Simplified budget from FSA73, a fact sheet on interest rates and thier implications for agriculture. (U of A System Division of Agriculture image)
“If they’re beginning farmers and ranchers who are underserved, or if they were affected by the pandemic in any way, then they can go to the FSA and get USDA loans which are right about 4.5 percent,” Loy said. “So those are a lot more attractive.”
Why rates are rising
While the underlying economy is strong and employment hovering around 3.5 percent, the Fed is “still trying to curb the amount of money that’s in the marketplace,” Loy said. “I think there’s too much supply of money in the marketplace and they’re trying to take it out so the demand for it rises. It all boils down to simple supply and demand.
“If there’s less money in the marketplace you are going be less willing to spend it or they’re going be less willing to try to get loans which at least in that aspect it’s worked a little bit,” he said.
Still, Loy called the current economy “weird,” in that despite inflation, people are still spending and despite the low unemployment rate, “every business from here to Timbuktu has got ‘help wanted’ signs out.”
“It’s a very interesting time in the economy right now and a lot of it doesn’t make sense,” Loy said. “And I think that all comes back to how there are so many opposing signals.”
Loy said current Fed chairman Jerome Powell is looking “to curb inflation while not slowing it too much and forcing a hard-landing recession as was the case in 1980.”
Loy also said Powell is looking back at the events that led to the Great Recession of 2008 “and he doesn’t want that to happen again.”