Interest rates as a percentage of annual agricultural expenses have continued to decline reaching a low of 2.4% for U.S. farms. This marks a decrease of nearly 56% in interest’s contribution to total agricultural expenses since 2002 when, on average, interest accounted for 5.4% of total operating costs. This is due in part to the fact that input costs such as seed, chemicals, fuel, ect. have risen swiftly, and high commodity prices have allowed greater percentages of new land and equipment purchases to be paid for with cash.
However, the cost of borrowing for farmers has declined during the last two decades as well reducing interest payments both in total, and as a percentage of total operating expenses. For instance: the potential savings in interest from 8% to 5% for a 1 million dollar 12 month operating loan can be up to $30k per year.
Expectations are that interest rates cannot remain this low in the long run and rumors over changes in the Federal Reserve’s quantitative easing policy in May had a marked impact on lending rates in other arenas. However, according to the FED’s most recent press release on July 31st, the fed will continue to pump money into the economy at the previous rate. The following quote has been carried over though each of the last 5 statements going back to January.
“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.” (http://www.federalreserve.gov/newsevents/press/monetary/20130731a.htm)
The FED has three more meetings scheduled for the remainder of 2013 and a decision to slow quantitative easing soon, or at a predetermined date in the future, may put immediate upward pressure on interest rates for both short and long term agricultural loans.