Bidenomics: Farmers facing high interest rates and higher costs next year
For the first time in 20 years, fast-rising interest rates have doubled the cost of short term operating notes used by farmers.
Farmers borrow short term money up front every year to pay for inputs and operating expenses. At harvest time when they sell their crops, they pay back their operating notes.
For the first time in 20 years, fast-rising interest rates have doubled the cost of short term operating notes, an impact a lot of farmers have never seen before.
“Farmers who are 40 or 50 years old have run cash flows and budget numbers for years, but they have never experienced the interest rate shock we have now,” said Brad Zwilling, vice president for data analysis with Illinois Farm Business Farm Management. “Those are the rates that have gone way up. Those are the ones that have a big impact.”
Costs in 2022 were higher than in 2021. In 2023, farmers can expect significantly higher price tags for just about everything.
“The big piece is that Increased interest rates have added to the volatility that we have already started seeing in agriculture over the last 3 years,” Zwilling said.
Run a tighter pencil. Pay down debt where it makes sense. And take a hard look at cash flow, Zwilling advised.
"Know if you can make money," he said.
In 2012 and 2013, a lot of farmers had cash and they needed tax deductions. That drove sales of tractors and big ticket equipment. Ten years later, a lot of that equipment is ready to be replaced.
Zwilling advises farmers to look carefully at their cash flow and discuss purchases with trusted advisers.
"Make sure to have a team and go over the numbers with them," Zwilling said. “Even if the team is just the farmer and the lender and the farmer’s spouse, talk to people.”
With all the expected 2023 price hikes, adding payments on a $100,000 tractor at 7% or 8% interest may not make sense, he said.
“Be proactive, not reactive,” Zwilling advises. “I know I am going to have to replace this tractor in the next two or three years; how am I going to pay for that?”
Meanwhile, when something is available for a lower price, don’t wait, he said.
"Take advantage of that," Zwilling said. "Whether it is an attractive interest rate or a load of fertilizer at a good price, take advantage of the good deals.”
Illinois Farm Business Farm Management Association is a cooperative educational service program designed to assist farmers with management decision-making and record keeping. FBFM has eight locations across the state.
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