Agricultural interest rates might be going up

The decline in the commodity and equity markets, following the downgrade of the U.S. credit rating last Friday by Standard and Poor’s will certainly affect agriculture. Every farmer should determine what that will mean to his operation, and the answer will be different for everyone, depending upon his exposure to unpriced commodities, as well as his financial position.

Equity and commodity markets tumbled severely on the first trading day after the action by the rating agency, which may have had more impact on the economy than Congress, the White House and the Fed combined. For many farmers who depend on the Farm Credit System, their interest rates will likely rise because the Farmer Mac bonds that are sold by the FCS and guaranteed by the government will have higher interest rates. Unless Federal Reserve interest rates rise on money that commercial banks borrow to loan, it is conceivable that Farm Credit interest rates will rise as commercial bank rates either fall or remain stable.  However, commercial banks may try to keep pace and raise their interest rates, says economist Bob Young of the American Farm Bureau, “The impact on Farmer Mac, in particular, will be higher interest rates that folks will have to pay at farm credit system and then your local banks are going to see that and charge higher rates as well, etc. And so basically farmers and ranchers will end up having to pay higher interest rates than they otherwise would have to pay.”

The agricultural interest rates will not only affect real estate and machinery loans, but operating loans, says Young, “It’s not just credit associated with buying land at or credit associated with buying equipment. It’s credit associated with the operating costs associated with putting that crop in the ground. It’s buying the seed, it’s buying the fuel, buying the fertilizer. It’s buying the chemicals it takes to produce that crop and protect that crop. It’s all those things that farmers are going to have to pay more for as we move forward.”

Young believes the lower credit rating will lower the value of the dollar, which fosters more commodity exports because of lower prices that foreign buyers see, a situation that reverses for imported goods, “I think as the value of the dollar goes down it’s going to make U.S. commodities in general, but agricultural commodities certainly, that much more competitive in the world markets. And so you could actually talk about the ag sector, from that perspective, actually doing a little better but for the rest of us that buy stuff at the store, we’re going to have to pay a higher price for imports and recognizing the amount of stuff that we import in this country you’ll see an upward push on inflation rates as well come out of this. “

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