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Ag economists share implications of increasing interest rates in agriculture.

Tom J. Bechman, Editor, Indiana Prairie Farmer

February 14, 2023

3 Min Read
 John Deere tractor
RATES RISE: Purdue ag economist Michael Langemeier sees interest rates on things such as farm equipment returning to 2007 or earlier levels. Long periods of extremely low interest rates are not normal, he says.Tom J. Bechman

Expect interest rates to rise in 2023 to levels more like those in 2007, before the Great Recession. This increase eventually will impact agriculture because the cost of money will increase. An upward shift in interest rates will have implications within agriculture.

These were the main takeaways from information three Purdue University ag economists shared during the Top Farmer Conference. The trio included Brady Brewer, Michael Langemeier and Jason Henderson, who is also director of Extension.

“The consensus is that interest rates are going up, and agriculture will be impacted, especially as the next loans farmers take out cost more,” Langemeier said. Based on leading indicators and past trends, he expects interest rates for operating loans could be 9% to 10% later this year. Mortgage rates for farmland typically run about 1% below operating loan rates, Langemeier noted.

“Interest rates will edge up as the Federal Reserve attempts to slow down inflation,” Henderson said. “Some people look for a recession in 2023, but I am more optimistic; I don’t see a recession, but I do see rising interest rates as the Feds try to keep a tight rein on inflation.”

The ag economists discussed the following implications of rising interest rates:

Land values. “Increasing interest rates will put downward pressure on land prices,” Langemeier said. “Until recently, low interest rates were positive for rising land values.

“However, this doesn’t mean land values will drop. There are several factors still positive for rising values. We should see land values increase in a more normal range in 2023 — say, 5% to 10%, not 30% like over the past 18 months.”

Strength of dollar. Brewer explained that rising interest rates means the value of the dollar will likely strengthen. That will make it harder to sell goods, or export, but easier to buy goods, or import, on the international market. “Higher interest rates mean the price of money goes up,” Brewer said.

Fixed vs. variable-rate loans. “I’m not saying which choice will be best, but I am saying you will not need to compare and make that decision for your situation,” Brewer said. “It will depend on length of the loan and other factors. You can make your own decision about where interest rates might be in five to eight years when a variable-rate loan rate expires.”

Foreign investors. Henderson believes the value of the dollar vs. other currencies might make U.S. ag assets like farmland even more attractive to foreign buyers. Keep an eye on this one as these trends unfold.

Return on fixed investment. As these trends play out and interest rates increase, returns on fixed assets, which have been very low for a long time, may increase.

“However, rate of return on a certificate of deposit will still likely be below the inflation rate,” Langemeier said.

More uncertainty. Henderson expects increasing uncertainty as the Feds continue a balancing act with interest rates vs. inflation.

Langemeier advised watching liquidity carefully. “It’s good for many people right now,” he said. “If you desperately need a tractor, buy a tractor. But monitor liquidity carefully. Make sure you retain enough liquidity to cover debt repayment, living expenses and depreciation of equipment.”

About the Author(s)

Tom J. Bechman

Editor, Indiana Prairie Farmer, Farm Progress

Tom J. Bechman is editor of Indiana Prairie Farmer. He joined Farm Progress in 1981 as a field editor, first writing stories to help farmers adjust to a difficult harvest after a tough weather year. His goal today is the same — writing stories that help farmers adjust to a changing environment in a profitable manner.

Bechman knows about Indiana agriculture because he grew up on a small dairy farm and worked with young farmers as a vocational agriculture teacher and FFA advisor before joining Farm Progress. He works closely with Purdue University specialists, Indiana Farm Bureau and commodity groups to cover cutting-edge issues affecting farmers. He specializes in writing crop stories with a focus on obtaining the highest and most economical yields possible.

Tom and his wife, Carla, have four children: Allison, Ashley, Daniel and Kayla, plus eight grandchildren. They raise produce for the food pantry and house 4-H animals for the grandkids on their small acreage near Franklin, Ind.

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