The Bond Market and Farmer Loan Rates

OMAHA (DTN) -- As Treasury bonds reach levels not seen in nearly two decades, the consequences of higher bond rates can eventually show up in the cost of financing everything from farmland to machinery.

For farmers, the latest surge in the bond market threatens to keep borrowing costs elevated -- and potentially push some rates higher -- at the same time diesel prices are at record highs and other inputs such as fertilizer remain expensive.

The Federal Reserve gets most of the attention when interest rates rise or fall, but longer-term borrowing costs are increasingly being driven by the bond market, where yields on U.S. Treasury securities have climbed to levels not seen in nearly two decades.

The 10-year Treasury note on Monday was at 5.25% in midday trading -- a level not seen since 2007 -- while the Treasury's 30-year bonds, at 5.57%, are at their highest levels since 2004.

The higher cost for long-term borrowing has implications for farmers financing land and equipment, refinancing debt or carrying operating losses into another crop year.

The Fed exerts strong influence over short-term interest rates, but longer-term rates are set in financial markets and reflect expectations for inflation, economic growth and other risks, along with investor demand for Treasury debt.

"The long end doesn't need the permission of the Fed to move," said Tommy Grisafi with AgBull Trading. "So, in theory, the Fed could keep the short end rates low, when the long end rates can explode higher."

For now, agricultural fixed rates for operating loans in the Midwest and Plains -- states covered by the Kansas City Fed -- are still lower than they were from 2023-2026. The average operating loan peaked at 8.83% in 2024, but was down to 7.51%, according to KC Fed reports.

There are growing risks to the economy from a higher bond market. Economists at the Federal Reserve Bank of Kansas City and others warned earlier this year in a report that unexpected increases in Treasury debt issuance can raise yields and tighten financial conditions, eventually crowding out some private investment and production.

Here are 5 things farmers should know about the changing bond market.

1. A FED RATE CUT DOESN'T GUARANTEE CHEAPER CREDIT

Matt Clark, a senior economist with Terrain, said long-term agricultural interest rates generally move in the same direction as longer-term Treasury yields.

"As long-term rates go up, specifically I'm talking Treasuries, typically that puts pressure on longer-term rates for farmers too, across the board, regardless of what institution they're lending at," Clark said.

Clark cautioned, however, against simply adding a margin to the 10-year Treasury yield to determine what farmers should expect to pay. Agricultural loans and Treasury securities are different assets with different pricing mechanisms.

"I'd be careful taking that and applying it directly to the rate that a farmer is going to get," Clark said.

That distinction also means a decline in the Fed's short-term policy rate doesn't guarantee a similar decline in longer-term agricultural rates.

2. FARM CREDIT HAS TO BUY ITS MONEY, TOO

The Farm Credit System raises much of the money it lends to agriculture by selling securities to investors. Those securities must compete with U.S. Treasury debt and other highly rated investments.

Farm Credit's Sept. 25 estimated funding costs show the relationship.

With the five-year Treasury at 5.023%, Farm Credit's estimated five-year funding cost was 5.063%. At 10 years, a 5.175% Treasury yield translated into an estimated Farm Credit funding cost of 5.325%. Thirty-year funding was estimated at 5.963%.

Those rates represent what it costs Farm Credit banks to raise money in the capital markets. Actual funding costs can vary with market conditions, investor demand and other factors/ But the figures illustrate the connection: When the underlying Treasury benchmark rises, the wholesale cost of money available to agricultural lenders can rise with it.

The Farm Credit Administration earlier this month pointed to pressure on longer-term Treasury rates as an issue lenders should be watching.

3. HIGHER RATES HURT MORE WHEN EVERYTHING ELSE COSTS MORE

Interest rates are only part of the equation.

Farmers are also financing historically expensive land, machinery and production costs, magnifying the effect of even relatively small increases in borrowing costs.

"What makes it more difficult now is we also have really high costs, whether that's land or equipment or inputs," Clark said. "So, any time even a smaller move can feel bigger because it's taking up a larger share of your gross income."

Grisafi also pointed to the sheer size of modern farm borrowing. Some of his clients have operating lines as large as $15 million, he said.

"This ain't 1980 when you're borrowing 200 grand," Grisafi said. "I have clients who have operating notes of $15 million."

At those levels, seemingly modest changes in rates translate into significant dollars. Each percentage point increase on $1 million of debt amounts to $10,000 annually if the entire balance remains outstanding. On $5 million, the difference is $50,000; on $15 million, $150,000.

That contrasts sharply with the financing environment farmers became accustomed to during the extended period of low interest rates.

"They were getting operating notes for 3% for a long time," Grisafi said. During the pandemic, he added, farmland could sometimes be financed around 2.5%.

4. THE BIGGEST EXPOSURE MAY COME WHEN FARMERS REFINANCE

Higher bond yields don't immediately raise borrowing costs for every farmer. The pressure is greater for producers who need new money.

"The bigger stress point is you have upward pressure on long-term interest rates at the same time in which you have extremely high land values, equipment values, everything else," Clark said.

That adds stress to new purchases and refinancings, he said, as well as situations where a farmer suffers crop losses and needs to finance those losses over a longer period.

That could become increasingly important given deteriorating liquidity in the farm economy.

Farmers are also becoming more sophisticated about managing that interest-rate exposure, Clark said. Some borrowers are considering adjustable-rate loans or loans that reset after two or three years rather than locking in today's rates for a decade.

"I would say the level of sophistication as rates have gotten higher has gone up, trying to think through how different options would work with their own cash flow," Clark said.

The Farm Credit Administration reported earlier this month that "liquidity continues to be the 2026 pain point" for agriculture. Working capital is expected to decline while farm debt repayment continues to weaken.

There are signs of that deterioration in Farm Credit's loan portfolio even though widespread defaults have not emerged. Loans classified as "less than acceptable" increased from 5% of the System's portfolio in June 2025 to 6.8% this June. The rate reached 9.2% for production and intermediate-term loans and 10.7% for agribusiness loans.

At the same time, loans delinquent 30 days or more remained just 0.49% of Farm Credit's portfolio.

Delinquency rates at commercial banks on farm real estate (1.35%) and non-real estate loans (1.1%) also remain low.

5. THE FARM ECONOMY DOESN'T LOOK LIKE 2007

The last time longer-term Treasury yields were around current levels was nearly two decades ago, inviting comparisons with the financial crisis that followed.

There are important differences for agriculture.

Farmers entering the 2007-08 period were also benefiting from rapidly expanding ethanol demand. That was followed by drought-reduced crop supplies and strong international demand that helped produce an extraordinary period of commodity prices and farm income.

"We saw just a historic run in commodity prices during that period of time," Clark said. "China was buying at a huge clip, all those things. That may not be our situation now."

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on social platform X @ChrisClaytonDTN

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