Our recent article about soaring farm interest expenses generated a lot of great questions about interest rates and expenses. While interest rates have jumped sharply throughout the entire U.S. economy, a large portion (70%) of U.S. farm debt is real estate, which has the benefit of long repayment terms and fixed interest rates. How much will this offset the rate hikes? To shed some light, this week’s post reviews charts to consider the difference between all debt and new debt in the farm economy.
All Loans
The first consideration is the interest expense across all debt in the farm economy. Using USDA estimates of total interest expense and farm debts at the end of the year, an implied interest rate can be calculated (Figure 1). It’s potentially helpful to think of this measure as the average interest rate across the entire inventory of farm debts.
For 2023, an estimated $33.3 billion of interest expense will accrue with a year-end debt balance of $520 billion, for an implied rate of 6.4%. In 2022, the implied rate was just 4.9%. Furthermore, an all-time low of 4.1% was observed just two years ago (2021). Things have changed quickly!
The last time the farm economy had similar conditions was in 2009. Furthermore, 2023 levels were quite common between 2000 and 2009, when the average was 6.7%. While rates are similar, a major difference between today and the 2000s is debt levels. Using inflation-adjusted dollars, U.S. farm debt during the 2000s averaged $316 billion, compared to $520 billion in 2023 (2023=100). This means the farm economy’s return to 2000s-era interest rates is with debt levels 65% higher than the 2000s-era.
Figure 1 also provides an interesting perspective on the 1980s. The implied rate across all farm debt peaked at 11.9% in 1982. That same year, bank data collected by the Kansas City Federal Reserve reported that the average interest rate on non-real estate debt issues in 1982 was higher than 16%.
Figure 1. Implied Average Interest Rate on all U.S. Farm Debts, 1960-2023. Data Source: USDA ERS and AEI.ag Calculations.
New Loans
The implied interest rate of 6.4% across all U.S. farm debt is well below anything producers can borrow today. Figure 2 shows the average interest rates on non-real estate and real estate loans made by banks quarterly since 1991. Most recently, non-real estate loans averaged 8.3% in the third quarter, while real estate loans were 7.7% in the second quarter. Again, conditions are considerably higher than in recent memory (2009-2021) and have returned to levels last observed in the 2000s.
Another observation is that the interest rates for non-real estate and real estate loans have been very similar over the last year. Driving this has been the inverted yield curve on U.S. Treasuries and non-real estate debt being a shorter duration. Narrowing non-real estate and real estate farm interest rates isn’t unheard of, but it’s the first occurrence in more than 15 years. In fact, non-real estate rates were an average of 135 basis points lower than real-estate debt from 2010-2019.
Figure 2. Average Effective Interest Rates on Farm Loans, Data Source: Kansas City Federal Reserve Agricultural Finance Databook.
Wrapping It Up
There are significant limitations to the argument of the farm economy being insulated from the effect of higher interest rates because most debt is real estate with long-repayment terms and fixed rates. First, total farm debt continues to increase. This means new, additional debt is being issued at the current levels (Figure 2). Second, even if total farm debts remained unchanged, some portion would retired each year and be reissued at today’s higher rates. Both factors point to higher interest rates working into the system. Admittedly, current conditions are more insulated than in the 1980s, when variable rates were more common. In other words, there is a lot of space between “immune” and “better positioned.” The farm economy in 2023 is in a better position than in the 1980s, but not immune.
Another consideration is that rate hikes have hit short-term debt hardest. For some, the bygone era of zero-percent financing options from input retailers or manufacturers may also be a source of additional interest expense.
In conclusion, interest expenses will likely continue increasing until interest rates or debt levels turn lower. This reality will have implications throughout the farm economy and will be critical for producers to consider as they make multi-year plans and projections.