In Wednesday’s newsletter, a Federal Reserve Bank article about the health of farmland in the Federal Reserve’s 10th district, economists mentioned the specter of rising interest rates coming against farmland values.
Today, Federal Reserve Bank Economist for the Kansas City Bank Ty Kreitman, expanded on that subject, saying high interest rates could challenge total farm profitability this year.
REAL ESTATE VALUE GROWTH
From 2021 through 2023, farmland values and then interest rates grew, raising expenses for crop producers, Kreitman said. These higher interest expenses could reduce returns for producers with high levels of land debt considerably. These producers may need large cash down payments to reach profitability with new or refinanced debt.
Growth in agricultural real estate values surged during 2021 and 2022 alongside historically high farm incomes and low interest rates, Kreitman said. In 2023, farmland values held firm while interest rates increased alongside benchmark rates.
Together, strong real estate valuations and higher interest rates pushed up interest expenses on land loans, potentially squeezing profitability for crop producers, he said.
According to the US Department of Agriculture, agricultural real estate accounts for more than 80% of US farm assets, and real estate debt make up more than 70% of all liabilities for the sector, Kreitman said. Thus, an increase in interest expenses on land debt likely will have a substantial influence on the sector.
The steep increase in interest expenses is likely to be acutely burdensome for owner-operated farms with high leverage and may deter some farmers from refinancing or taking on new debt, he said.
SOME OPERATIONAL COSTS DOWN SLIGHTLY
Notably, those increases in financing costs occurred at a time when farm operational costs declined, Kreitman said. Total expenses for an average corn and soybean farm without new land debt stabilized in 2023.
The slight decline in farm expenses reflects a decline in the costs of many key inputs like fuel and fertilizer following two years of substantial increases, he said. However, total expenses for an average farm with new land debt continued to rise.
Financing costs pushed total expenses up for farms with land debt, Kreitman said. Interest expenses per acre grew in 2023 alongside higher interest rates, particularly for operations with large amounts of new debt.
A farm with new or refinanced land debt totaling 40% of the value of all operated acres — that is, a 40% Loan-To-Value ratio — saw an increase in interest expenses of nearly $100 per acre from 2022 to 2023, he said. A farm with a 65% LTV had an increase of more than $125 per acre.
Profit opportunities thinned for all crop producers in 2023 alongside a moderation in crop prices, but those with large amounts of land debt could face additional pressures.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $179.00 per cwt to $182.78, compared with last week’s range of $175.15 to $182.00 per cwt. FOB dressed steers, and heifers went for $280.06 per cwt to $286.67, compared with $275.52 to $286.37.
The USDA choice cutout Wednesday was up $1.73 per cwt at $294.00 while select was off $1.28 at $284.02. The choice/select spread widened to $9.98 from $6.97 with 73 loads of fabricated product and 26 loads of trimmings and grinds sold into the spot market.
The USDA said basis bids for corn from feeders in the Southern Plains were unchanged at $1.35 to $1.45 a bushel over the Mar corn contract, which settled at $4.24 1/4 a bushel, down $0.06 1/2.
No delivery intentions were posted Wednesday for the Feb live cattle contract.
The CME Feeder Cattle Index for the seven days ended Tuesday was $246.66 per cwt, down $0.21. This compares with Wednesday’s Mar contract settlement of $246.22, down $1.77.