Businesslink

Interest rates on agricultural loans doubled between the fourth quarters of 2021 and 2022, increasing by more than 300 basis points.

"The only time loan rates increased at this pace was in the early 1980s," says Tait Berg, a senior agricultural coordinator with the Minneapolis Federal Reserve. "Elevated interest rates will impact producer financials in 2023 and beyond, especially for the least-profitable producers."

Brian Briggeman, an agricultural economics professor and director of the Arthur Capper Cooperative Center, at Kansas State University, says the way farmers should navigate this environment is "tried-and-true."

Start by creating a budget, and then stress-test it. See what happens to total costs if fertilizer prices go up 15% or yield falls by 10%.

Berg's research using University of Minnesota's FINBIN database shows that farms in the bottom 20% of profitability carried an average of $2,500 of debt per acre of farmland compared to $1,000 per acre for farms in the top 20% of the profitability spectrum.

"All producers should prepare for elevated interest rates by incorporating higher interest expenses into cash-flow projections regardless of profitability and debt levels," Berg says. That's especially important for farmers with higher debt levels per acre. "Results from the updated projections will help producers understand how elevated interest rates will impact their operations this year (and beyond) and provide financial options to operate in the new reality of higher interest rates."

Aside from knowing how interest rates will shift the budget, Briggeman suggests farmers focus on maintaining or growing their liquid assets while maximizing their efficiency.

"Building your balance sheet is just critical," he says. "Be as efficient as you can. Pore over your operation to increase efficiency and control costs within reason."

Minding your liquidity levels also makes it possible to take advantage of opportunities to expand or improve when they arise. "If you focus on the business fundamentals, you can be ready to seize on those opportunities," Briggeman says.

**

-- Read Katie's business blog at https://about.dtnpf.com/…

-- You may email Katie at katie.dehlinger@dtn.com, or visit @KatieD_DTN on X.

[PF_1023]

(c) Copyright 2023 DTN, LLC. All rights reserved.