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Will Rising Interest Rates Lead to Intensifying Risks for Agriculture?

To encourage economic recovery, the Federal Reserve responded to the Great Recession by slashing interest rates and engaging in monetary easing. Short-term interest rates were pulled down and held near zero for several years. Due to these historically low interest rates, borrowing has been inexpensive for farmers. Along with lower income, the availability of cheap debt encouraged farmers to take on more credit. According to the most recent official USDA Farm Income and Wealth Statistics data (2018), farm sector debt has grown by more than 50% since the Great Recession began. In 2018, outstanding sector debt volume is projected to reach its highest level since the early 1980s, and debt backed by farm real estate is expected to be at the highest level on record. Following historically high profitability for many farm sector participants from 2012 through 2014, prices for many commodities have declined substantially while input costs have not declined as much (Patrick, Kuhns, and Borchers, 2016). As result, net farm income, a measure of farm sector profitability, is now half of its peak in 2013. As one way to compensate for reduced income, farmers tapped into working capital built up during the preceding high-income years. As a result, farm sector working capital has declined by $100 billion since 2012. As previously mentioned, farmers also borrowed more. Multiple years of expanding farm sector debt and declining profitability and liquidity have raised concerns about the farm sector’s financial resiliency.

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