By Jonathan Knutson, Published December 14 2012
Low interest rates a boon for farmersBrian Eggebrecht has farmed for 30 years and remembers the sky-high interest rates of the early 1980s. That makes today’s rock-bottom rates even more attractive.
“This is huge,” says the Malta, Mont., producer. “How often in your farming career are you going to have an opportunity to lock in these interest rates and upgrade your operation?”
Yields and crop prices are the numbers that usually generate the most attention in agriculture, at least among people not directly involved with it. But quietly, behind the scenes, low interest rates are affecting most financial aspects of area agriculture.
“The low rates are a major boon,” said Robert Wishek, president of McIntosh County (N.D.) Bank, which has offices in Ashley and Zeeland.
The Federal Reserve System, the nation’s central bank, is holding down rates to stimulate the economy. Many people outside agriculture, including homebuyers, also benefit from lower rates, Wishek and others in ag note.
Farmers, ag bankers and others say low interest rates are a factor in several important agricultural trends, including:
- Rising land values. The return on investments such as certificates of deposit is extremely low, which makes buying farmland more attractive.
- Strong sales of farm machinery. Low interest rates make buying equipment easier when some or all of the money is borrowed.
- Healthier balance sheets for most farm operations. Lower rates mean less interest is paid out on farmers’ and ranchers’ loans.
- Further consolidation in agriculture. Farm operations are getting bigger and fewer, a trend strengthened by low rates that make it easier for farmers to buy all or part of neighboring farms.
- Strong U.S. grain exports. The rule of thumb is that low interest rates weaken the value of the U.S. dollar, which makes U.S. ag products more affordable to foreign customers.
Don’t overestimate the importance of low interest rates, experts say.
The combination of strong grain prices and generally good yields in recent years is the main factor in area agricultural economics today, says Dwight Aakre, North Dakota State University Extension Service farm management specialist.
But low interest rates are important, too, he and others say.
Low rates are a “positive” for farm equipment sales, says David Meyer, president and CEO of Titan Machinery, a West Fargo-based company that operates agricultural, construction and consumer products dealerships in the Upper Midwest.
Some farmers are borrowing money for as little as 3 to 4 percent, roughly a third of what they paid a decade ago, area bankers say.
That ties in with the so-called prime rate, a widely followed rate determined by the rates charged by 30 big banks across the country. The prime is used as a base rate for many types of loans.
Today, the prime rate is 3.25 percent, compared with 9.23 percent in 2000 and a stunning 18.87 percent in 1981, when rates were at their highest.
For farmers and ranchers looking to expand or otherwise improve or upgrade their operation, a loan at 9 percent might not make economic sense, while a loan at 3 or 4 percent could be economically sound, Eggebrecht says.
“The lower rates can make a huge difference in whether it pays to do something,” he said.
Low interest rates do more than make farmland easier to buy with borrowed money. They also make farmland more attractive financially and push up its price.
“The other alternatives aren’t very good,” Aakre said of buying farmland.
One example: Despite terrible drought, the average price of Iowa farmland rose 7.7 percent from March to September, according to a survey by The Iowa Farm and Land Chapter #2 Realtors Land Institute.
A number of factors were cited for the upturn, including unattractive returns in competing investments, according to the survey.
Rates on certificates of deposit and similar investments are so low that some investors prefer to buy land with money that otherwise would have gone into the bank, farmers and others say.
Say you have $100,000 to invest, money that you’re thinking about investing in, say, a six-month CD. In 2000, according to information from the U.S. Federal Reserve System, the average rate on a six-month CD was 6.57 percent, producing a return on $6,570 on the investment. In 2005, the average rate on a six-month CD was 3.73 percent, producing a return of $3,730 on the $100,000 investment.
Today, the average rate on a six-month CD is 0.34 percent, producing a measly $340 return on the $100,000 investment.
An investment in land potentially can provide higher returns than those available in CDs and similar investments, farmers and others say.
Low interest rates definitely are encouraging farmers and others to pay more for land, said Erik Younggren, a Hallock, Minn., farmer.
“You go to a (farmland) sale and it’s not just farmers bidding,” he said.
Buying farmland, however, does have its downside from an investment perspective.
Land doesn’t provide the liquidity of cash. And land can decline in value, said Wishek, the North Dakota banker.
“People say, ‘Well, we’ll still have the land’ (if land prices decline sharply.) But it would be a worth a lot less,” he said.
Wishek and others say the rising cost of farmland is making the capitalization rate increasingly less favorable to investors.
North Dakota farmland values rose an average of 14 percent in 2011, according to a survey by the North Dakota Chapter of the American Society of Farm Managers and Rural Appraisers.
By all accounts, farmland values across the region have continued to rise in 2012.
- Farmland in North Dakota’s Walsh County recently sold for $10,000 per acre, which is thought to be a state record.
- Farmland in South Dakota’s Brown County recently sold for $13,000 per acre, which is thought to be a county record.
Farming operations have been getting bigger for years, as economies of scale encourage producers to expand.
Aakre said the combination of high crop prices and low interest rates intensifies the trend toward bigger and fewer operations.
Big, established operators sometimes can borrow money at lower interest rates than smaller producers, helping the bigger farmers expand, he said.
“It’s going to make it more and more difficult for young producers to get started on their own,” he says.