Interest Rate Opportunities

MT. JULIET, Tenn. (DTN) -- The Federal Reserve's decision to cut interest rates by half a percentage point in September will lower the cost of borrowing money this fall, a small but welcome relief to farmers plagued by inflationary input costs and rock-bottom commodity prices.

"If you're borrowing $2 million at 8% interest, that's $160,000, assuming you have it for a whole year. That's real money," said Matt Bennett, an Illinois farmer and cofounder of AgMarket.Net, a brokerage and advisory firm.

Dan English, Farmers Business Network's head of finance, said the most immediate relief will be seen in operating notes, which is typically a smaller part of farms' overall debt load.

"It's not going to be the biggest needle-mover, but any savings they can get are helpful," English told DTN. Not all farms use operating notes, and those that might need them this year are still paying more than during the last commodity down-cycle.

English anticipates the Federal Reserve will continue to cut rates as long as inflation keeps moving toward the 2% target. "If we see a resurgence in inflation here, I think that would be very, very painful, particularly for farmers who are so dependent on debt to finance their operations relative to a lot of other industries."

Bennett said he thinks the Federal Reserve will be cautious. It will take rates much longer to come down than it took them to go up.

Many farmers were able to avoid interest expense on inputs in 2023 by paying with cash leftover from 2021 and 2022.

"Unfortunately, 2023 was not profitable for the vast majority of growers, and it looks like '24 is going to be rough. I don't know how many guys are going to be able to pay in cash" for next year's inputs, Bennett said.

English said they're seeing more interest in operating notes and short-term lending, which was also noted recently by a survey of bankers in the Kansas City Federal Reserve district.

"Cash is important," John Maman, Nutrien Financial's director of sales and marketing, told DTN. "But the management of that cash is even more critical. Where can cash be best preserved, and where can it best be utilized to gain the biggest impact on the operation?"

Farmers need to look at all opportunities for savings and weigh things like additional discounts compared to what'll be paid in interest. He thinks alternative lines of financing, like those offered by input suppliers, can be a valuable tool for farmers this year.

He expects better promotional rates on those lines of credit, a reflection of the Federal Reserve's shift. Bennett mentioned a local co-op is offering a rate just shy of 3% for chemicals, while English mentioned a 0% promotion at FBN.

Supplier financing also tends to work well with farmers' cash flow needs since repayment is often timed to harvest or a significant event.

"There are opportunities for real savings and managing the bottom dollar with complementary lines of financing that, in turn, make the operating line more impactful," Maman said.

Bennett said farmers are thinking hard about inputs this year. Typically, producers start buying fertilizer around the time of the late-summer farm shows.

"I don't think that happened near the tune of the last few years," he said. Some may apply less after multiple years of building up soil fertility, while others may be watching and hoping for prices to come down more before planting. DTN tracks retail fertilizer prices each week, and prices have been trending lower. Read more about that here: https://www.dtnpf.com/….

And rather than pay cash now, some will wait until December to decide whether to prepay for next spring's inputs.

Farmers will likely have a more immediate problem on their hands: where to take this year's massive corn crop. Elevators in south-central Illinois where Bennett lives are already running out of room because they're still holding significant amounts of old-crop corn.

Many farmers try to take advantage of the carry -- later-dated futures contracts have higher prices than issues with nearby dates -- by storing grain for sale later. But many growers never pulled the trigger on those sales and now must face marketing grain from two crops.

"For a lot of growers, it might make a lot more business sense to just cut the cord," Bennett said. There's always the option to re-own those bushels in the futures market, and paying off the operating note or other debt with sale proceeds means they pay less in interest. "Getting that interest stopped is something folks are pretty interested in."

Katie Dehlinger can be reached at katie.dehlinger@dtn.com

Follow her on social platform X at @KatieD_DTN

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