Agricultural interest rates might be going up
Standard & Poor’s Monday issued further downgrades of its credit ratings on government-backed bonds, and commented more about its action on August 5, saying, “We have also lowered the ratings on the senior debt issued by the Federal Farm Credit Banks to ‘AA+’ from ‘AAA’. The ratings on the individual farm member banks are not affected.
“The downgrade of the senior debt issued by the Farm Credit System reflects a one-notch reduction in the U.S. sovereign rating. Under our GRE criteria, the Farm Credit System is classified as having a very high likelihood of receiving support from the government if needed. The Farm Credit System’s stand-alone credit profile is ‘aa’. Thus, under our criteria, the notches of uplift that we factor into the ratings on debt issued by the System decrease to one notch from two notches when the sovereign has a ‘AA+’ rating rather than a ‘AAA’ rating. The issuer credit ratings on the four Farm Credit System Banks that we rate are unaffected by the downgrade of the U.S. sovereign given their ‘a+’ stand-alone credit ratings and high likelihood of support classification under our GRE criteria. The implicit government support that we factor into our ratings for the Farm Credit System debt and the four rated banks considers the system’s mission to provide stable and reliable funding to the U.S. agricultural and rural sectors.”
The Farm Credit Administration has not issued a public response to the Standard & Poor’s action. The FCA Board has its regular monthly meeting scheduled for Thursday, Aug. 11. The agenda has been posted, and one item for action is entitled: “Capital Adequacy Risk Weighting Revisions: Alternatives to Credit Ratings – Advance Notice of Proposed Rulemaking”
The lowering of Farm Credit System bond quality ratings by Standard & Poor’s will mean a rise in production costs for agriculture. Not only will interest rates increase on Farm Credit Loans, but commercial banks may also raise their rates, and input costs throughout agriculture will rise as a result. The rating agency indicated it believed the Farm Credit bonds would get government support if needed.