The Fed raised interest rates today and is expected to do so at least twice more this year. There’s a lot of talk about how this is necessary to offset fiscal stimulus from the tax bill and to prevent unemployment from falling too low.
What doesn’t get as much attention is the direct, harmful impact interest rate increases will have on active farmers and ranchers. Farm income has fallen along with commodity prices. Combined with expensive inputs, including essential seed genetics, record land cash rents, and large debt loads, rising debt service costs will hammer farmers like myself.
Each 1 percentage point increase in the interest rate is another approximately $5,000 in debt-servicing costs.
As a fourth-generation farmer and rancher in northeast South Dakota I operate an average-sized family farm. Roughly 4,500 acres of land is adequate to support my family and we raise corn, soybeans, spring wheat, and alfalfa, along with grass pasture for grazing 230 head of beef cow/calf pairs.
Our corn is all marketed at the local ethanol plant, the soybeans are loaded on unit car trains headed for export markets and our wheat is sent by railcar to the Twin Cities for milling. My cattle enjoy the nutrient-rich alfalfa hay produced on our land that has been in our family for over 75 years.
Each year I renew an operating line of credit that allows me to pay my landlord’s upfront for cash rent. In addition, I use the operating line of credit to prepay seed, fuel, fertilizer, and equipment repairs. Margins are extremely tight on farms and ranches today. Last year while renewing operating notes many producers showed a loss on their farm based on the market prices and it looks very similar this year as well.
For our farm, each 1 percentage point increase in the interest rate is another approximately $5,000 in debt-servicing costs, which would add to the losses we already expect given the diminished commodity prices.
My parents suffered through the farm crisis of the 1980s. They were forced to pay upwards of 18% operating interest to plant their crops at prices much less than we see right now. Land prices plummeted, which made any farm balance sheet look like it was ripped apart. Today land prices have remained steady and recent auction sales of farmland show that there still is a lot of optimism in the production of agriculture.
Each time the interest rate increases, it has a direct impact on the price paid for land. Many of the buyers of farmland are active producers who are mortgaging that land for 15, 20 or 30 years and the interest payment is a big deal to them. The farm crisis was devastating to this part of the country and we need to be careful not to repeat that painful history.
Of course, the Federal Reserve has to think about full employment and inflation but even those measures suggest that the Fed doesn’t need to raise interest rates. Inflation has been running below 2% for years and while unemployment is low, the percentage of prime-age workers in the labor force still has not recovered to 2007 levels, which suggests more people can be drawn back to work.
Moreover, the so-called “dual mandate” is actually three mandates. As the Fed says on its website, “The Federal Open Market Committee sets U.S. monetary policy in accordance with its mandate from Congress: to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy.”
We ignore the third part of that statement but it is crucially important. Advocacy for moderate interest rates traces back to William Jennings Bryan and the rural populist movements. With rural America facing many headwinds, the new chairman would be wise not to ignore this aspect of the mandate.
My 5-month-old daughter Elizabeth is the fifth generation of our family to live on the farm. I want her to have the option to take over our family farm and ranch operation someday, provided that the interest rates remain affordable for us to continue to operate.
Jason Frerichs is a fourth-generation farmer and rancher, and a South Dakota state senator.