Getting Real with Rates
The overall low interest rates in the U.S. economy have resulted in low farm level interest rates. Today’s rates are among the lowest seen in many decades. This has reduced the cost of borrowing funds to operate farms as well as to finance capital investments such as equipment and real estate.
We frequently talk about the nominal level of interest rates but we thought it would be useful to look at the real rate of interest, or the price of credit after subtracting inflation. It is important to consider the impact of inflation when evaluating interest rates because debt is paid back with dollars impacted by inflation. For instance, if a farmer were to borrow money at 5% and the rate of inflation were 2%, the real rate earned by a lender (and paid by the farmer) would be 3%. In other words, the real rate of interest is a measure of the effective cost of borrowing money. (more…)