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The Heavy Weight of Higher Interest Rates
In 2018, an agriculture economist told me that rising interest rates were "one more brick on the load that farmers have to carry."
I wonder how much that brick weighs now?
Many market watchers have begun to ponder if the federal funds rate will stay unchanged at 5.25 to 5.5% for the rest of the year, a far cry from earlier forecasts for sharply reduced rates in 2024. The nation's post-COVID economy is still struggling to meet the Federal Reserve's 2% inflation target. The labor market, while weaker, has surprised many with its strength.
For farmers, the weight of the brick is most obvious in operating notes. The Kansas City Federal Reserve says non-real estate farm loans at commercial banks grew by 15% from the previous year, one of the sharpest increases since the 1970s.
With forecasts for another year of surplus crops, profitability becomes a game of margin management. Farmers need higher yields, lower expenses and savvy sales to come out ahead.
Farmers with robust working capital have distinct advantages. Not only are their expenses cheaper because they aren't paying for access to money, but they're also likely earning interest on their spare cash.
"Those who rely on short-term financing at variable interest rates to cover a majority of their operating expenses are bearing the brunt of the impact of high interest rates," writes Jay Parsons, John Hewlett and Jeff Tranel in a University of Nebraska Center for Agricultural Profitability blog. "For those producers, now is the time to focus on controlling expenses as short-term debt can easily turn into long-term problems."
As the calendar turns to August, and harvest nears, there are fewer expenses left for farmers to manage for the 2024 growing season. That means profit potential will rely more heavily on the markets and a farmer's chosen strategy for grain sales.
Here again, interest plays a role in the expense of storing bushels, complicating the math on how much extra you can expect to pay for storing grain until a more advantageous price arrives.
While interest is only one piece of the profitability puzzle, it's a weighty brick indeed, and one that's not likely to lessen significantly anytime soon.
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