The year 2023 marks another unique year in terms of prolonged high inflation and high interest rates. The series of interest rate hikes raised concerns, especially when Silicon Valley Bank went defunct earlier this year, and other regional banks experienced liquidity problems. With these inflation rates and interest rate hikes affecting the broad economy, how does the agricultural lending condition look?
The most recent survey of commercial banks from the Kansas City Fed shows that the average agricultural operating loan interest rate exceeded 8 percent from the first quarter of 2023, and the farmland loan interest rate also nearly reached 8 percent. Loans issued from commercial banks closely follow the movement of the effective federal funds rate. As the federal funds rate increase slowed in the last two quarters, the increase in agricultural loan interest rates also slowed down.
Loan interest rates from the Farm Service Agency (FSA) showed a unique pattern in the last few months. Throughout 2022, loan interest rates from the FSA increased with the increase in the federal funds rate. However, FSA started to lower interest rates from the first quarter of 2023. In fact, as of August 2023, the FSA loan interest rates – both the operating loans and farmland loans – are lower than the federal funds rate. This rare occurrence is expected to go away eventually, but the FSA is indeed providing very favorable rates as of today.Of course, if the higher interest rates result in increased borrower default or general economic decline, the Fed will slow down the interest rate hikes. Currently, delinquency rates on commercial bank loans still remain at a historical low. Similar findings are shown for agricultural loan default rates. While there has been a slight uptick in default loans in the Farm Credit System, the default rate is still lower than the five- or ten-year average. Default rates from commercial banks also remain at a relatively low level.
It is expected that these interest rates will still increase in the second half of 2023. With the Fed aiming for a 2 percent inflation rate, the effective federal funds rate is expected to reach 5.4 percent to 5.6 percent. This will again have an impact on agricultural loan interest rates in the foreseeable future. High interest rates, combined with lower farm income forecasts in 2023 and 2024, will be the adverse factor for stagnant farmland value in 2023 and 2024.