It’s not a matter of if but rather when with regard to increasing interest rates, according to the latest survey of agricultural lenders conducted by Kansas State University’s Department of Agricultural Economics.
The fall 2014 survey, which included responses from 43 lending institutions across the country, focused on five key areas, including farm loan interest rates, spread over cost of funds, farm loan volumes, non-performing loan volumes, and agricultural land values. Within each area, farm real-estate, intermediate and operating loans were assessed as well as different agricultural sectors.
While some respondents indicated that interest rates have decreased in all three categories of loans in the last three months, the overall expectation for the short and long term as for interest rates to increase. The timing of an increase will depend on the Federal Reserve System, which, to date, has not announced future policies to increase the federal funds rate.
With regard to loan volume, respondents said total farm loan volume has increased in the past three months. Part of the increase, according to the survey results, is due to seasonality. The majority of the respondents were from the plains region where winter wheat was being planted when the survey was conducted. Another reason for the uptick could be lower liquidity in agriculture due to lower commodity prices. Looking down the road, respondents expect an increase in all categories of loans in both the short and long term. One area where lenders expect a decline in volume is equipment loans.
While survey respondents expect an increase in non-performing loans, especially due to lower commodity prices, lenders anticipate farmers will see profits for at least another year. “Great yields will help soften the losses farmers will take this year,” one respondent said.
Finally, looking at land values, there was an overall sentiment for short- and long-term land value decreases. “With lower commodity prices and eroding liquidity due to lower profitability expectations, land buyers are expected to be more cautious when buying land in the short- and long-term.”
The full survey is available on K-State's AgManager website.