Federal interest rate cut could provide relief to the agricultural industry

Interest rates significantly impact the agricultural industry by affecting the cost of borrowing money, investment decisions and farmland values. 

Currently, interest rates on farm loans are at multi-decade highs, and many hope relief will come from a series of anticipated interest rate cuts.

During a news conference on Sept. 18, U.S. Federal Reserve System (Fed) Chair Jerome Powell announced the Federal Open Market Committee voted to cut the interest rate by one-half of a percentage point, which is the first rate cut since 2020.

“We understand our actions affect communities, families and businesses across the country,” Powell says. “Everything we do is in service to our public mission. At the Fed, we will do everything possible to achieve our maximum employment and price stability goals.”

Economists had predicted a quarter point reduction, but the Fed cited slowing inflation and weakness in the labor market as the primary factors in its decision to lower rates.

Interest rates impact the ag industry

The interest rate cut could provide some relief for the ag industry, which has been weighed down by elevated lending expenses.

According to recent projections, central bank officials expect to trim the federal funds rate to 4.4 percent by December, 3.4 percent by the end of 2025 and 2.9 percent by 2026.

The ag industry has been challenged by high interest rates far more than any other sector, as the majority of farm assets are tied to real estate, an area influenced by rate changes. 

Higher interest rates make it more difficult for agricultural producers to take out loans to expand their operations while maintaining profitability.

In a recent Kansas City Fed report, the average interest rate on farmland loans more than doubled from 2022-24, increasing loan payments considerably.

“Demand for non-real estate loans, including operating loans, has been rising at the fastest rate since,” states the Kansas City Fed. “This spike is the result of higher production costs and lower commodity prices.”

However, high interest rates have impacted other sectors as well, including the strength of the U.S. dollar, which has made U.S. commodities more expensive for foreign buyers compared to other countries, hurting competitiveness. 

Ag outlook

Industry experts say the one-half percent rate cut is a good start for easing price pressures on agriculture.

Days prior to the interest rate cut, Farmer Mac Chief Economist and Head of Strategy, Research and Analytics Jackson Takach spoke at the Kansas City Agribusiness Council’s Ag Outlook Forum, stating lower interest rates could start showing up in the upcoming loan renewal season for operating debt but it may take several financial cycles before farmers realize the full benefits of a lower interest rate.

Takach adds, “Over the course of the next 24 months, there’s an expectation of almost 200 basis points of cuts in short-term interest rates.”

It’s good news for agriculture because the average interest rate on the farm has increased considerably in the last two years, he adds.

“The Fed has been in a tightening cycle trying to address some of the concerns about inflation, excess gross domestic product and economic growth,” Takach continues. “It’s led to a direct impact on farming and ranching operations as operating costs have increased dramatically with higher interest rate environments.”

A look inside 

Farm interest expenses are the fastest growing production expense for producers, hitting approximately $35 billion in 2023, nearly a $10 billion increase over the year before.

While all Americans have felt the squeeze of higher interest rates and rising inflation, America’s farm and ranch families have been hit the hardest.

Many producers will borrow more capital in one year than most Americans will in their entire lifetime.

The August Ag Economists’ Monthly Monitor by Farm Journal reports nearly 60 percent of the 70-plus agricultural economists they surveyed are concerned U.S. agriculture is either already in a recession or on the brink of one.

The economists surveyed agreed if it weren’t for strong cattle prices, the ag economic picture would look even worse.

Some economists surveyed state, “At least for most crop producers, the sharp drop in prices and cash receipts has resulted in lower net income and financial pressure on leveraged producers. The picture is generally less dire on the animal agriculture side of the ledger, as prices are up for some commodities, like cattle and milk, and feed costs are declining.”

The ag outlook plummeted in August as producers express concern over a weak farm income prospect, citing declining crop prices despite an expected strong fall harvest for many crops.

The total farm sector debt is projected to reach its highest level since at least 1970, and according to the U.S. Department of Agriculture, net farm income is projected to fall to $140 billion in 2024, a $42 billion collapse since 2022.

Melissa Anderson is the editor of the Wyoming Livestock Roundup. Send comments on this article to roundup@wylr.net.