Navigating a Rising Rate Environment in the Ag Industry

Loan Officer Jordan Holder is an industry expert when it comes to ag lending. Lately, the questions he’s asked most frequently are about rising interest rates and what to do in an economic crisis. These issues are plaguing many Americans right now, especially in agriculture.

Why are interest rates rising in the agriculture industry?

You’ve probably heard in the news that the Federal Reserve - the central bank of the United States - continues to increase its policy interest rate after years of historic lows to battle near-record inflation. These increases make it more expensive for banks to borrow money, which in turn forces the rates on bank loans to go up, as well.

How do interest rates affect ag lending and farm income?

When interest rates are higher, the cost to operate a farm or agri-business also increases. This can tighten profit margins for these operations, but it’s not necessarily a bad thing.

According to the USDA September 2022 Farm Income Forecast, “Net farm income, a broad measure of profits, is forecast at $147.7 billion in calendar year 2022, an increase of $7.3 billion (5.2%) in 2022 relative to 2021. The 2021 value is an increase of $45.9 billion (48.5%) relative to 2020.”

Diversification is key to navigating rising ag loan rates

While these income stats are promising, the uncomfortable reality is that rates are still very likely to continue increasing, at least through the end of 2022. The key to dealing with it is diversification, Holder said.

“I recommend they focus on other areas of their operation - on areas they can control,” he said. “The biggest one that stands out is inputs. They need to take a hard look at their expenses for the next 12 months and gameplan for them. For the foreseeable future, being proactive on the things they can control around their operation will serve them much better than being reactive.”

In short, it’s important to focus on what can be controlled and not lose sleep over what can’t. Right now, it’s also more important than ever as a farmer to build working capital and limit debts to those that are necessary to the success of the farm or operation.

Efficiency matters

Operating efficiently, while it may seem obvious, is something that can sometimes be overlooked and is especially imperative in times of rising costs and inflation. This applies both to supplies, such as fertilizer and feed, and labor, such as adding or eliminating positions in your operation.

It’s also wise to evaluate your equipment and machinery. If you have old or broken equipment, it’s costing you more in maintenance and repairs than it’s worth so consider an upgrade. It might also be the perfect time to sell any idle pieces of machinery that are just sitting around collecting dirt and dust.

Plan for asset transfers

Even if you don’t think you’ll retire for years, formulating a plan early is imperative for a smooth transition when the time does come. This also ensures that whoever is taking over your operation, family or otherwise, is set up for success. Early preparation of retirement savings, creating a will and estate planning are great financial tips for anyone regardless of occupation or life stage.

Your bank is here to help

Another crucial tip that Holder emphasized was a reminder that your bank is here for you, for the good moments and the difficult ones. OMB cares deeply about the communities we serve, and that includes local farmers, their families, and their agri-businesses.

If you have an ag loan and are concerned you may be late on a payment or feel overwhelmed with the economic conditions, Holder encourages visiting with your lender about it. Those hard conversations can often uncover many important details that can be addressed.

Few industries have been impacted as deeply by recent economic conditions than farmers. So whether you’re an established member of the agricultural community needing the support of your local bank, or owning a farm is a future goal, OMB has multiple locations with lenders ready to help you today. Feel free to take a look at our online information while you’re here, too!

OMB and its affiliates do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decision.