The Federal Reserve's decision to keep interest rates unchanged on Wednesday came as a surprise after a streak of 10 consecutive meetings with rate hikes. However, officials signaled that two more rate hikes are likely to occur later this year as the central bank adjusts its strategy to combat inflation. While the Fed's decision was influenced by a slower decline in inflation and a stronger-than-expected economy, farmers are grappling with interest costs that have doubled compared to the previous year.
Scott Rueff, the regional vice president over the north region for Ag Resource Management (ARM), emphasizes the heavy impact of increased interest rates on operating costs for farmers. Over the past 18 months, interest rates have risen by 500 basis points, resulting in prime rates climbing from 3.25% to the current 8.25%. Rueff advises farmers to carefully evaluate the implications of these interest costs on their operations, as they are now facing a doubling of their interest expenses year-over-year. The significant increase in interest costs can exert significant pressure on farm operations, particularly when comparing them to gross income.
Rueff acknowledges that although today's prime rates are high compared to recent history, they are still far from the record high of 21.5% reached on December 19, 1980. He highlights the key differences between the current environment and the challenging times farmers faced in the 1980s. The availability of government support and institutional and outside investments provides a more favorable financial position for farmers today, potentially preventing a repeat of the severe crisis experienced in the 1980s.
While Rueff believes that a complete replication of the 1980s is unlikely, he urges farmers to learn valuable lessons from that era. He advises them to prepare for the future by conducting thorough research, gaining a solid understanding of the financial and budgetary aspects of their operations, and calculating their true cost of production. Farmers should have a firm grasp of their bottom line and accurately estimate their production and yields to avoid overestimating their capabilities. Understanding their farm's actual production history and budgeting accordingly will help farmers navigate the challenges ahead.