A Warning Sign? Farm Interest Expenses Jumps 34%

While digging through the USDA’s latest estimates on the health of the U.S. farm economy, we stumbled across a trend that made us do a double-take. While we anticipated farm interest expense to increase meaningfully, the $8.4 billion jump from 2022 levels, a 34% increase, will leave a dent in farm budgets.

A Look Back At Farm Interest Expenses

Figure 1 plots real, or inflation-adjusted, farm interest expense going back to 1970. This data comes directly from the USDA’s net farm income estimates. Since 1991, the expense has averaged $22.3 billion annually (2023 dollars) and ranged from a low of $16.7b (2004) to a high of $24.9b (2022). While this timeframe was marked by rising farm debt levels and generally declining interest rates, at least until 2022, the sector-wide expense was stable for several decades.

Further back, however, interest expense was anything but stable during the 1970s and 1980s. Rising debt levels during the 1970s pushed the expenses higher long before Paul Volker chaired the Federal Reserve and farm loans peaked at 18%. It also took nearly a decade to unwind the expense through lower debt levels and lower interest rates. At the peak, farm interest expense reached $58b in 1982 (2023 dollars).

Figure 1. Real Farm Interest Expenses, 1970-2023 (2023=100). Data Source: USDA ERS.

Figure 1. Real Farm Interest Expenses, 1970-2023 (2023=100). Data Source: USDA ERS.

How Significant?

The 2023 estimate is far from final, so the USDA may very well revise the $33.3b estimate. However, let’s consider some context. First, interest expense in 2023 is estimated to be 34% higher than in 2022. It’s also 55% higher than in 2021. Additionally, interest expense in 2022 was the highest since 1991, so the trend is not isolated to 2023.

Second, the expense in 2023 is $11.2b higher than the 1991-2022 average. When we recently wrote that net farm income in 2022 hit a record, we also mentioned that farm income has averaged $101.2b. This is to say that the additional interest expense in 2023 – relative to the 1991-2022 average – is equal to 11% of the long-run farm income. Keep in mind that producers use this income to cover family living expenses and service debt. While $33b in interest expense – the additional $11b – isn’t as burdensome at current farm income levels, it will consume considerable resources when farm incomes moderate.

Wrapping It Up

As producers review 2023 performance and budget for 2024, interest expense will warrant careful attention. For several reasons, the situation is unlikely to repeat the 1980s Farm Crisis – more fixed-term debt, rates aren’t nearly as high, etc. – but the farm economy is, once again, navigating record levels of farm debt and a rising interest rate environment. This combination warrants caution, especially as producers make decisions and plans in 2023 and beyond.

If the current interest rate environment persists, one also has to wonder how farmers will adjust their crop budgets and debt usage to navigate a world with higher borrowing costs.