46 JULY / AUGUST 2023 Brady Brewer, Ph.D. Assistant Professor, Agricultural Economics Purdue University Brewer94 @Purdue.edu AG BANKING Rising interest rates and inflation increased costs for farmers. However, at the same time, agricultural commodity prices have increased, keeping farm incomes elevated. The agricultural credit markets have been resilient during this time, since farm loan repayment rates have remained low and demand for agricultural credit has increased as farms have made investments. However, some of these trends are either already reversing or uncertainty looms over how healthy the agricultural credit markets will remain over the next couple of years. Interest Rates and Inflation At the May 3 Federal Open Market Committee (FOMC) meeting, voting members raised the Federal Funds Rate by another 25 basis points, making the target Federal Funds Rate between 5% and 5.25%. This Federal Reserve has consistently increased the Federal Funds Rate during each FOMC meeting for more than a year. While the increases have been historical in terms of how fast the Federal Reserve has increased the Federal Funds Rate – 5 percentage points in a little over a year – we are still below where we were in February 2007. “The economy is likely to face further headwinds from tighter credit conditions,” Chairman Jerome Powell said at the May 3 meeting. There have been reports of banks pulling back on lending to many of their customers, and while Chairman Powell does not specify the data backing up this claim, there have been numerous reports of banks across the country tightening credit constraints along with having less money to lend overall. This reduces the amount of funding for investments and growth across the board. Uncertainty Looms for Ag Credit Markets The implications from the higher interest rates and inflation are twofold. First, if you are an agricultural lender that provides credit to farmers for inputs or other operating expenses, you may see increased demand for credit in the near future. I expect much of the tightening credit Chairman Powell mentioned has not been in the agricultural sector. If banks are looking at their deposits and the amount of funds they have available to loan, though, there could be a tightening across the board and agriculture would not be an exception. While many farmers have used working capital to offset the increased cost of borrowing for the 2023 growing season, that may not be possible if working capital is depleted as we move into the fall. Secondly, if you are a food and agribusiness looking to expand or invest in your business, credit conditions are only going to get tighter here in the near term. Not only will they be tighter, but there could also be additional increases in the Federal Funds Rate, further increasing the cost of borrowing. Agricultural lenders who work with agribusinesses need to impress upon their clients the importance of having a capital asset purchasing plan. Having a strategic plan in place for asset replacements and investments will ensure the cost of debt is minimized in the new interest rate environment, which will help with cash flows. Demand for Loans and Repayment Rates The latest data from the Federal Reserve Bank of Kansas City from the first quarter of 2023 shows that agricultural lenders expect farm income to remain fairly steady for the 2023 growing season. This expectation that farm incomes will remain steady is what is driving farm loan demand as bankers are reporting lower expectations for the demand of non-real estate farm
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