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farm406 12 farm finance Interest rates have been below long-run averages for over a decade. Low rates make purchasing land and equipment a bit more manageable for agricultural producers. However, rates have started to increase. How will Montana agricultural operations be impacted by rising rates? The easy answer is that it will vary by operation. A better answer can found by examining some common situations. Some agricultural operations are fortunate enough to be debt free. For these operations rising rates may increase the interest they receive on deposits but otherwise will have little direct impact. The National Agricultural Statistics Service reports that in 2016, the average Montana farm or ranch had $258,294 of debt. If the entire amount was subject to 0.5% higher rate, interest expenses would increase by $1,300 annually. This is also a very simplistic way to evaluate rising rates for several reasons. One key reason is that most real estate and equipment loans are 5 to 30 years in length with a fixed interest rate. Current fixed rate loans will not be impacted by rising rates. New fixed rate loans will be affected. Other loans will be affected more quickly. The length of most operating loans is less than 12 months. Even if the interest rate is fixed, after the loan is repaid many producers will apply for another operating loan for the next production year. The new operating loan will reflect current interest rates. Agricultural loans can be variable rate loans. This type of loan allows the interest rate to change periodically over the life of the loan. These loans often have a fixed rate period of 1 to 3 years with annual rate adjustments after the initial fixed period. These loans will feel the impact of rising rates as soon as the first rate adjustment period occurs. A simpler way to consider the cost of rising rates might be to quantify the change in interest payments for a 1% rise in rates. Each 1% rise in interest rates will result in $1,000 of additional interest payments annually for a $100,000 loan. Operations with higher debt levels and less long term fixed rate debt will be impacted more than other operations. On the bright side, farm related interest expenses are typically deductible for income tax purposes. Therefore, an extra $1,000 interest payment will reduce profits by less than $1,000 with the actual reduction varying depending on the operation's marginal income tax bracket. Another way to look at the cost of rising rates is to examine the total interest payments by all US Farms. Interest expenses have risen steadily since 2013 for both real estate and non-real estate loans. Rising interest rates will put some downward pressure on Montana farm and ranch profitability. The impact won't be felt evenly across all operations nor will the timing of this impact be the same. Montana producers will need to continue to evaluate changing conditions to maximize profitability in the future. How Do Rising Interest Rates Affect Agricultural Operations? By Joel Schumacher • MSU Extension, Associate Specialist

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