Interest rates are on our minds for two reasons. First, efforts to stimulate the U.S. economy in 2020 have pushed rates sharply lower. Secondly, the current farm interest rate environment couldn’t be more different than that experienced during the 1980’s farm financial crisis. This week, we review the tumble in farm interest rates in 2020, and over the last four decades.
Approaching Record Lows
The Kansas City Federal Reserve’s Ag Finance Databook tracks and reports average interest rates on farm loans. Figure 1 shows quarterly data for non-real estate farm loans since 2000. The most recent observation is the second quarter of 2020.
It’s hard to remember, but farm interest rates were briefly above 10% in early 2000. They were also above 8% from 2006 to 2008.
After spending several years near or below 4%, rates turned higher around 2017 and exceeded 5% in 2018. In the second quarter of 2019, the average interest rate on a non-real estate farm loan was 5.2%.
For the second quarter of 2020, the interest rate fell to 3.7%. Rates fell 150 basis points from the year before and 110 basis points from the prior quarter (Q1 2020, 4.8%). Only one other time in 40+ years has the Fed reported a lower average quarterly interest rate (3.6% in Q4 of 2015). Don’t be surprised if data from the third or fourth quarter of 2020 result in headlines’ noting “record low farm interest rates.” Regardless of upcoming data drops and future Fed actions, the current environment is certainly among the lowest in our careers.
Figure 1. Average Interest Rate on Non-Real Estate Agricultural Loans, quarterly data, Q1 2000 – Q2 2020. Source: Ag Finance Databook.
The Long Slide
Figure 2 shows the annual average interest rate on non-real estate farm loans since 1977. In 2014 and 2015, the annual average hit a low of 3.8%, much different than highs of 18.5% in 1981. Keep in mind these data are an average and, as such, many producers likely saw even higher rates in the early 1980s.
While the current farm economy enjoys career-low interest rates, career-high rates marked the early 1980s. At first glance, rates peaked in the early part of the decade, but on close inspection, farm interest rates were above 10% for twelve consecutive years (1979-1990). Furthermore, annual interest rates averaged more than 13% during the 1980s. For context, the average annual rate for the most recent decade was 4.4%.
Figure 2. Average Interest Rate on Non-Real Estate Agricultural Loans, 1977- 2019. Source: Ag Finance Databook.
Wrapping it Up
The headline “farm interest rates tumble” is relevant on two levels. Not only have farm interest rates declined in 2020 because of efforts to stimulate the U.S. economy, but the trend toward lower interest rates has also been underway for nearly four decades. While interest rates are likely to remain low in the near term, it’s important to realize the larger trends. Not that long ago (2006 and 2007), farm interest rates were almost double today’s levels.
Conversations about the possibility of higher interest rates in the future tend to focus on 1981-like events, which seem like a low probability. However, do not let the 1981 blip distract from the possibility of rates higher than current levels. For example, farm interest rates averaged 8.9% in the 1990s and 6.8% in the 2000s. In other words, don’t let large changes in interest rates – that are probably low likelihood events – distract us from modest movements in interest rates that could significantly affect the sector and our operations.
If anything, the data presented should serve as a reminder that interest rates are subject to frequent changes and updates, especially over 10+ years.
As additional episodes of Escaping 1980 released each week, we’ll share blog post and charts for those that want to dig deeper.
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