The Federal Reserve's aggressive interest rate increases to curb inflation is raising the cost of farm operating, equipment and real estate loans and could potentially weigh on land values, experts say.

“Certainly the cost of credit has escalated pretty rapidly this year,” said Tim Koch, the executive vice president of business development at Farm Credit Services of America.

The Fed, which serves as the central bank of the United States, has raised its federal funds rate by 75 basis points (0.75%) in each of its last four meetings, with the most recent increase bringing it up to a range of 3.75% to 4%. The funds rate is what banks charge each other for overnight loans.

“We’re now 18 months into this episode of high inflation and we don’t have a clearly identified, scientific way of understanding at what point inflation becomes entrenched,” Federal Reserve Chair Jerome Powell said at a press conference. “The thing we need to do from a risk management standpoint is use our tools forcefully, but thoughtfully, and get inflation under control, get it down to 2%, get it behind us.”

Variable interest rates on all types of loans were approximately 75 basis points higher than last quarter in the Tenth Federal Reserve District, which covers the states of Colorado, Kansas, Nebraska, Oklahoma and Wyoming, as well as parts of Missouri and New Mexico. Fixed interest rates, according to the Kansas City Federal Reserve, were 65 basis points higher than the last quarter.

The survey found fixed interest rate amounts in the third quarter were at 6.47% for operating loans, an increase from 5.75% in the second quarter. The rates were 6.37% for machinery or intermediate loans, up from 5.75%, and 6.07% for real estate loans, up from 5.5%.

In the Seventh Federal Reserve District, which spans Illinois, Indiana, Iowa, Michigan and Wisconsin, the average nominal interest rates on new operating loans and feeder cattle loans are at their highest levels since the third quarter of 2008. The rate on new operating loans was at 6.52% as of October 1, while the rate on feeder cattle loans was at 6.58 percent.

The average nominal interest rate on farm real estate loans had reached 6.13% on Oct. 1, a level not seen since the second quarter of 2009, the Federal Reserve Bank of Chicago said in a report. 

Chad HartChad Hart, Iowa State

Economist Dan Basse, president of AgResource Co., noted that rates are "likely to keep going higher. This is going to impact farm profitability and what happens on the farm looking forward." 

Koch of Farm Credit Services of America said interest rates are up significantly, especially when it comes to operating loans. But he said a number of other things are currently having a greater impact on producer profit margins than interest rates.

“Certainly inflationary pressure and other input costs, cash rents, equipment prices, real estate prices, all of that has a much more significant impact on overall cost structure than what the increase in interest rates are,” Koch said. 

The increase in interest rates could eventually bring land values down, according to Chad Hart, an extension economist at Iowa State University. So far, the booming farm real estate market has shown no signs of peaking, with some regions continuing to see record land prices. 

One 73-acre plot of farmland in Sioux County, Iowa, for instance, brought $30,000 per acre at auction Nov. 11. Farm real estate prices for Iowa averaged $9,400 per acre in August, a 21.4% increase from last year, according to the Agriculture Department.

That growth can also be seen nationwide. The average per-acre value of farm real estate for all regions of the United States was at $3,800 in August, a 12.4% increase from last year, when the nationwide value was $3,380 per acre.

Sixty-eight percent of the respondents to the Chicago Fed’s survey said they anticipated farmland values within the Seventh District to stay the same through the final quarter of 2022. In another banker survey conducted by Creighton University, 60.9% of the bank CEOs surveyed expect farmland values to plateau at current levels. 

“We probably are still yet to see its peak, but I'd say it's slowing down,” Hart said. “A lot of that is being linked to the increase in interest rates.”

Interest rate increases will likely have a larger impact on beginning farmers, who often are more dependent on loans than farmers that have been in operation longer. He said that he expects to see established producers use more of the cash they have on hand to cover their expenses as the interest rates rise.

“If you’re a beginning farmer that doesn’t have that amount of cash on hand, these higher interest rates are leading to an additional cost,” Hart said. “Not only do you have to purchase your inputs, but it’s costing you more to get access to the money to do that as well.”

Some economists predict that the heightening of interest rates could result in a recession as early as next year. Koch says the magnitude of that recession has yet to be seen, but believes some of the protein sectors may see the first impacts from changes in global export demand.

At the same time, he said farmers are coming out of several years with “pretty strong” profitability and working capital levels, which should help them as they navigate the new cycle.

“While it’s likely that we’ll go through a period of reduced and potentially negative profit margins, the overall financial health of producers is really strong and certainly that’ll help them weather whatever that downturn looks like,” Koch said. 

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