# End of cheap money for U.S. farmers plows trouble into food production
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-11-22
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: Rising Interest Rates Strain US Farmers in 2022
Meta Description: Montana farmer Sarah Degn and others feel the impact of escalating interest rates on short-term debt, affecting crop yields and food production costs.
URL: https://financedigest.com/end-of-cheap-money-for-u-s-farmers-plows-trouble-into-food-productionhtml

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By P.J. Huffstutter and Bianca Flowers

CHICAGO (Reuters) – Montana farmer Sarah Degn had big [plans to invest the healthy profits she gleaned for her soybeans and wheat this year](https://www.financedigest.com/3-factors-to-plan-for-in-2017-a-year-like-none-other.html "3 Factors to Plan for in 2017, A Year Like None Other") into upgrading her planter or buying a new storage bin.

But those plans have gone by the wayside. Everything Degn needs to farm is more expensive – and for the first time in her five-year career, so is the [interest rate](https://www.financedigest.com/ecb-raises-interest-rates-again-cuts-bank-subsidies.html "ECB raises interest rates again, cuts bank subsidies") on the short-term debt she and nearly every other U.S. farmer relies upon to grow their crops and raise their livestock.

We [might have made more money](https://www.financedigest.com/your-money-is-safe-but-your-data-might-not-be.html "YOUR MONEY IS SAFE, BUT YOUR DATA MIGHT NOT BE") this year, but we spent just as much as we made,” said Degn, a fourth-generation farmer in Sidney, Montana. The interest [rate on her operating note doubled this year and will be higher](https://www.financedigest.com/powells-warning-on-higher-u-s-rates-pushes-dollar-to-3-mth-high.html "Powell’s warning on higher U.S. rates pushes dollar to 3-mth high") in 2023. “We can’t get ahead.”

Most U.S. farmers depend on short-term, variable-rate loans they take out after [fall harvest and before spring planting to pay](https://www.financedigest.com/uk-employers-see-slight-fall-in-pay-awards-over-2023-xperthr.html "UK employers see slight fall in pay awards over 2023 – XpertHR") for everything from seeds and fertilizer to livestock and machinery.

Farmers repay these loans after harvest with cash from their crops before repeating the process. Often, farmers seek to secure loans by year-end or early January to take advantage of suppliers’ early-pay discounts and to ensure they won’t be caught short as global [supplies of fertilizers and chemicals remain tight](https://www.financedigest.com/ceraweek-europe-gas-supplies-to-stay-tight-2-more-winters-equinor-ceo-says.html "CERAWEEK-Europe gas supplies to stay tight 2 more winters, Equinor CEO says").

Now, producers are wrestling with how to [pay for that debt as interest rates rise](https://www.financedigest.com/unicredit-shareholders-urged-to-reject-ceo-orcels-pay-rise.html "UniCredit shareholders urged to reject CEO Orcel’s pay rise") headed into the next planting season, according to interviews with two dozen farmers and bankers, as well as data from the U.S. Department of Agriculture and the Kansas City Federal Reserve.

This [rising cost of credit](https://www.financedigest.com/bank-shares-rise-after-credit-suisse-rescue-eases-crisis.html "Bank shares rise after Credit Suisse rescue eases crisis") is straining some producers’ liquidity and prompting them to look at reducing fertilizer or chemical use, or plant fewer seeds next spring. That, in turn, could reduce crop yields, and place upward pressure on the [cost of producing that food](https://www.financedigest.com/analysis-east-europeans-count-their-pennies-for-christmas-as-food-costs-soar.html "Analysis-East Europeans count their pennies for Christmas as food costs soar").

All this comes as crop prices and global demand are strong. U.S. grain and oilseed producers reaped a boon this [year when crop](https://www.financedigest.com/crop-merchant-louis-dreyfus-gets-profit-boost-in-volatile-year.html "Crop merchant Louis Dreyfus gets profit boost in volatile year") prices hit decade- or all-time highs, as the conflict in Ukraine disrupted grain exports from the Black Sea region.

But that financial windfall came as widespread drought hobbled crops in the U.S. Plains and caused cattle slaughter rates in Texas to soar. Fertilizer and fuel costs have risen, as have farmland prices and cash rents.

“\[Farming\] is a highly leveraged business, so about everything is financed,” said Casey Seymour, who manages a farm equipment dealership in Scottsbluff, Nebraska and runs the Moving Iron podcast. “There’s a lot of money out there being paid in interest.”

The U.S. farm sector’s total interest expense – the [cost of debt carried – is forecast to hit $26.45 billion](https://www.financedigest.com/australias-nuclear-submarine-plan-to-cost-up-to-245-billion-by-2055-defence-official.html "Australia’s nuclear submarine plan to cost up to 5 billion by 2055 -defence official") this year, nearly 32% higher than last year and the highest since 1990, when adjusted for inflation, according to USDA data.

That sum is double or more the amount incurred by other U.S. industries, [including the retail and pharmaceutical products sectors](https://www.financedigest.com/citi-pledges-to-cut-emissions-for-more-sectors-including-coal.html "Citi pledges to cut emissions for more sectors including coal"), where interest expense historically has been similar or higher, according to U.S. Census Bureau data.

GRAPHIC: Interest expense on farm debt to soar – https://graphics.reuters.com/FARM-INTEREST/FARM-INTEREST/znpnbekbqpl/graphic.jpg

![](https://onlineworldnews.com/wp-content/uploads/2022/11/1122.jpg)

LIQUIDITY WORRIES

Farmers are taking on bigger loans due to higher costs, despite the financial burden it puts on their operations.

The average size of bank loans for [operating a farm has surged to a near five-decade high in outright dollar terms](https://www.financedigest.com/ubisoft-vows-to-get-back-to-operating-margin-above-20-in-medium-term.html "Ubisoft vows to get back to operating margin above 20% in medium term"), according to Kansas City Fed data. The average interest rates of such loans are the highest since 2019, the data shows.

Most farm operating loans tend to be variable, rather than fixed. Variable-rate financing carries lower rates than fixed-rate financing, but exposes borrowers to the risk of [higher costs if rates](https://www.financedigest.com/dollar-advances-as-strong-u-s-data-backs-higher-rates-backdrop.html "Dollar advances as strong U.S. data backs higher rates backdrop") go up.

That’s exactly what happened when the U.S. Federal [Reserve started raising short-term rates to quell surging inflation](https://www.financedigest.com/oil-prices-dip-on-u-s-crude-reserve-release-inflation-pressure.html "Oil prices dip on U.S. crude reserve release, inflation pressure").

The short-term federal funds rate is now in a range of 3.75% to 4%, from a range of 0% to 0.25% in early March, just before [Fed policymakers began raising rates](https://www.financedigest.com/stocks-euro-gain-amid-divergent-fed-ecb-rate-hike-outlooks.html "Stocks, euro gain amid divergent Fed, ECB rate hike outlooks"). Inflation is still high, however, and demand is strong, and Fed policymakers have signaled they will continue [raising rates](https://www.financedigest.com/bank-of-england-raises-rates-to-3-5-says-inflation-has-peaked.html "Bank of England raises rates to 3.5%, says inflation has peaked") until they see broader evidence of their effect.

In agriculture, the pinch is already here: The average interest rate of all farm operating loans is 4.93%, according to the latest Kansas City [Fed data](https://www.financedigest.com/dollar-buoyant-as-robust-u-s-data-keep-fed-hawks-in-control.html "Dollar buoyant as robust U.S. data keep Fed hawks in control").

Many farmers are paying more. Ohio corn and soybean farmer Chris Gibbs [signed up for a $70,000 operating loan](https://www.financedigest.com/10-signs-of-loan-scams.html "10 Signs Of Loan Scams") on May 1 with a 3.3% variable interest rate with his local lender at the Farm Credit System, a government-sponsored enterprise.

Rising fertilizer and chemical prices forced him to borrow more to cover those expenses, even as Farm Credit continued to increase costs each time the Fed [hiked rates](https://www.financedigest.com/uk-economys-unexpected-bounce-spurs-more-boe-rate-hike-talk.html "UK economy’s unexpected bounce spurs more BoE rate hike talk"). Now, his interest rate is 7.35%, and he expects it could reach 8% by year’s end – a 142% increase in eight months.

Gibbs raced to pay off the bulk of his loan by liquidating his crop, rather than store it and [sell for potentially higher prices](https://www.financedigest.com/3-tricks-to-get-a-better-price-when-selling-your-car.html "3 Tricks To Get a Better Price When Selling Your Car") next summer. Machinery purchases are on hold, and he’s trying to pay for inputs with cash.

“I have the highest gross value for my crop in my history of farming,” said Gibbs, 64. “If I didn’t, I would have difficult decisions to make and looking at what I can sell.”

GRAPHIC: U.S. farmers take on bigger debt – https://graphics.reuters.com/FARMERS-DEBT/klvygeomqvg/chart.png

![](https://onlineworldnews.com/wp-content/uploads/2022/11/111.jpg)

MACHINERY WORRIES

The [financial hit](https://www.financedigest.com/uk-consumer-mood-hits-one-year-high-but-financial-gloom-persists.html "UK consumer mood hits one-year high, but financial gloom persists") is being felt on equipment dealers’ lots, where farmers are forgoing buying equipment on credit, according to interviews with four dealers.

Dealers said they are seeing [banks tightening underwriting standards](https://www.financedigest.com/first-abu-dhabi-bank-reiterates-not-eyeing-offer-for-standard-chartered.html "First Abu Dhabi Bank reiterates not eyeing offer for Standard Chartered"), which can be a hurdle for newer and smaller farm operators seeking capital to purchase equipment.

“It’s easier to get financing when interest rates are cheap because \[banks\] are willing to take more risk,” said a CNH Industrial dealer representative, who declined to be named.

Authorized dealers from equipment manufacturers Deere & Co., AGCO, and CNH Industrial told Reuters that financing [rates that the machinery manufacturers themselves offer also have more than doubled](https://www.financedigest.com/bank-of-englands-mann-doubles-down-on-backing-for-rate-hikes.html "Bank of England’s Mann doubles down on backing for rate hikes") in six months.

Farm equipment machinery loans currently have interest rates up to 7.65% at Deere, 7.8% at CNH Industrial, 8.14% at AGCO and 8.25% at Ag Direct, according to [industry sources](https://www.financedigest.com/german-new-passenger-car-registrations-up-3-in-august-industry-source.html "German new passenger car registrations up 3% in August – industry source"). The industry average nationwide is 5.86%, according to Kansas City [Fed data](https://www.financedigest.com/stocks-sag-as-hawkish-fed-cools-china-rally-awaits-us-jobs-data.html "Stocks sag as hawkish Fed cools China rally; awaits US jobs data").

In separate statements, Deere and AGCO said interest rates they offer depend on loan terms, borrower creditworthiness and equipment type. CNH Industrial said interest rates for larger equipment are [lower](https://www.financedigest.com/how-insurtech-is-helping-to-lower-car-insurance-rates.html "How InsurTech is Helping to Lower Car Insurance Rates") than rates for smaller machinery.

GRAPHIC: Financing the farm Financing the farm – https://graphics.reuters.com/US-FARMS/mopakmzwrpa/chart.png

![](https://onlineworldnews.com/wp-content/uploads/2022/11/1.jpg)

(Reporting By P.J. Huffstutter and Bianca Flowers in Chicago; Editing by Andrea Ricci)


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