CHICAGO — Montana farmer Sarah Degn had big plans to invest the healthy profits she made from her soybeans and wheat this year into upgrading her planter or buying a new storage bin.
But these plans fell 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 on the short-term debt she and almost every other U.S. farmer depend on to grow their fields and raise their livestock .
“We may have made more money this year, but we spent as much as we made,” said Degn, a fourth-generation farmer in Sidney, Montana. The interest rate on their operating note doubled this year and will be higher in 2023. “We do not get any further.”
Most U.S. farmers depend on short-term, adjustable-rate loans, which they take out after the fall harvest and before spring planting, to pay for everything from seeds and fertilizer to livestock and machinery.
Farmers repay these post-harvest loans using cash from their crops before repeating the process. Farmers often try to secure credit through the end of the year or early January to take advantage of suppliers’ early payment rebates and ensure they don’t miss out as global supplies of fertilizers and chemicals remain tight.
According to interviews with two dozen farmers and bankers, as well as data from the US Department of Agriculture and the Kansas City Federal Reserve, producers are now wrestling with how to pay off that debt as interest rates rise toward the next planting season.
These rising borrowing costs are taking a toll on some producers’ liquidity, prompting them to reduce their use of fertilizers or chemicals, or plant fewer seeds next spring. This, in turn, could reduce crop yields and drive up the cost of producing these foods.
All of this is due to strong crop prices and global demand. US grain and oilseed producers reaped a boon this year as grain prices hit decade or all-time highs as conflict in Ukraine disrupted grain exports from the Black Sea region.
But that financial windfall came as widespread drought hampered crops in the US plains and sent beef slaughter rates soaring in Texas. Fertilizer and fuel costs have risen, as have farmland and bar rent prices.
“[Farming] It’s a heavily leveraged business, so almost everything is funded,” said Casey Seymour, who runs a farm equipment dealership in Scottsbluff, Nebraska and runs the Moving Iron podcast. “There’s a lot of money out there that’s paid for with interest.”
According to USDA data, total US farm interest expense — the cost of the debt it carries — is expected to reach $26.45 billion this year, up nearly 32 percent year-on-year and the highest since 1990, adjusted for inflation.
That amount is at least double the amounts incurred by other US industries, including retail and pharmaceutical products, where interest expense has historically been similar or higher, according to US Census Bureau data.
Farmers are taking on larger loans because of the higher costs, despite the financial strain it places on their operations.
The average bank loan amount needed to operate a farm has soared to a nearly five-decade high in dollar terms, according to data from the Kansas City Fed. Average interest rates on such loans are the highest since 2019, the data shows.
Most farm business loans are variable rather than fixed. Variable rate financing carries lower interest rates than fixed rate financing, but exposes borrowers to the risk of higher costs if interest rates rise.
This is exactly what happened when the Federal Reserve began raising short-term interest rates to quell rising inflation.
The short-term federal funds rate is now in a 3.75 percent to 4 percent range, from a 0 percent to 0.25 percent range in early March, just before Fed policymakers began raising rates. However, inflation is still high and demand strong, and Fed policymakers have signaled that they will continue to hike rates until they see broader evidence of their impact.
In farming, the dilemma is already here: the average interest rate on all farm loans is 4.93 percent, according to the latest data from the Kansas City Fed.
Many farmers pay more. Ohio corn and soybean farmer Chris Gibbs signed a $70,000 working loan May 1 at a 3.3 percent variable interest rate with his local lender, the Farm Credit System, a government-sponsored company.
Rising fertilizer and chemical prices forced him to borrow more to meet those expenses, even as Farm Credit kept increasing costs every time the Fed hiked interest rates. Now his interest rate is 7.35 percent, and he expects it could reach 8 percent by the end of the year — an increase of 142 percent in eight months.
Gibbs rushed to repay most of his loan by liquidating his crop rather than storing it and selling it at potentially higher prices the next summer. Machine purchases are on hold and he tries to pay for the upfront costs with cash.
“I have the highest gross crop value in my history as a farmer,” said Gibbs, 64. “If I didn’t, I would have to make tough decisions and see what I can sell.”