by Noah Miller, Economic Research Service, U.S. Department of Agriculture; Jennifer Ifft, Department of Agricultural Economics, Kansas State University, and Gerald Mashange, Department of Agricultural and Consumer Economics, University of Illinois
After many years of low to moderate interest rates, producers and lenders today are voicing concern about sustained higher rates and their effect on farm businesses. Starting in March 2022, as part of an effort to reduce the inflation rate to its long-term 2 percent target, the Federal Reserve began raising the federal funds rate.
Increases in the federal funds rate increase farm borrowing costs, with year-over-year change in operator interest expenses rising 24 percent from 2021 to 2022 and 43 percent from 2022 to 2023 (USDA-ERS 2023). We begin this series on differences in interest rates across lenders, farm types and regions by examining historic trends in interest rates on newly originated farm debt by major lender groups.
Limited data are available to compare the variation in interest rates charged by different lender groups to farms. Our analysis uses data from the Agricultural Resource Management Survey (ARMS), a nationally representative survey of farm operations. ARMS collects loan-level information on outstanding farm debt for operations’ largest five loans. It captures information such as interest rates, loan duration, loan type, loan origination year, as well as lender characteristics.
For years 2008 to 2022, we apply ARMS survey weights to estimate median interest rates on newly originated real-estate and short- and long-term non-real estate debt for three groups of lenders: the Farm Credit System (FCS), commercial banks (hereafter, simply banks) and vendors. Medians are reported instead of averages to mitigate the influence of outliers in the data.
To aid in interpreting the data, we also estimated whether interest rates for each debt type in each year were statistically different across lenders. The interest rates reported in this analysis do not explicitly control for differences in borrower risk or funding costs but do provide novel insights into broad trends observed during the past 15 years.
Median interest rates for short- and long-term non-real estate debt are shown in Figures 1 and 2, respectively. Short-term non-real estate debt typically funds production expenses, while long-term non-real estate debt typically finances machinery, equipment, and breeding stock. Changes in interest rates charged by the different lender groups correlate positively with changes in the effective federal funds rate (EFFR), a volume-weighted median of overnight federal funds transactions (Federal Reserve Bank of New York 2023).
During all years, either FCS loans or vendor loans had the lowest median interest rate; the average difference in median interest rates between FCS lenders and vendors equaled 54 basis points. For FCS and banks, the average difference in median interest rates is 52 basis points. However, this difference narrowed in recent years. Interest rates were not statistically different between banks and FCS lenders for four out of six years between 2017 and 2022.
This may be related to the relatively low interest rate environment prior to March 2022. The number of vendor observations in this category is relatively low, and interest rates charged by vendors are not statistically distinguishable from rates charged by other lenders in most years.
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