Farmers working on securing their seed and fertilizer contracts, along with potential operating loans, are carefully watching the current federal interest rate, uncertain what 2024 will bring.
Federal interest rates at the time of publication were at 5.5. percent, with the Federal Reserve mentioning it plans to drop interest rates at some point this year.
However, economists say there is both evidence for high interest rates lasting longer, as well as rates dropping soon.
During a webinar hosted by Farm Credit Services of America, economist Brent Gloy said there are reasons to believe that interest rates will remain higher for longer.
“If we look at the farm crisis in the 1980s, there was a lot of turbulence in the macro economy, as there is now. There have been a lot of changes and adjustments that have been painful,” he said. “We have inflationary pressure right now and inflation can have significant impacts on the agriculture economy. At this point, we are worried about interest rates changing rapidly.”
Gloy said interest rates have been “stickier” than he thought they would be.
“We [as a nation] are continuing to borrow more significant amounts of money and there doesn’t seem to be much appetite from our politicians to address that spending,” he said.
High amounts of government spending, coupled with trends in the labor market, are arguments for interest rates being higher for a longer period.
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“The labor market continues to be tight, and wages have increased substantially, which tends to push up price levels,” he noted.
However, there are also other factors that could signal interest rates dropping sooner rather than later.
“Although the government does have a lot of debt, we can still service the interest on the debt, so we are still one of the best houses on the block,” he said.
In addition, ag economist David Widmar said that unemployment for the last 12-18 months has been low at four percent.
“It’s the lowest unemployment since the late 1960s,” he said.
When considering how to set interest rates that affect the economy, Widmar said federal officials must be careful.
“If the interest rates are too high for too long, they risk harming the employment side of the economy, but if they are too low too soon, they risk inflation coming back,” he said.
Inflation, currently, is not back to two percent like federal officials had hoped, but it has “backed off” from its peak of seven percent in 2023.
What all this means for farmers is a shift in how they borrow money.
“Since right now it costs more to borrow money short term, we are seeing farmers locking up their long-term loans and keeping more cash for operating instead of borrowing,” he said. “Farmers are trying to find that sweet spot between viable and long-term loans.”