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June 8, 2022

Understanding Interest Rates on Land Loans 

Learn how to equip yourself for success in a rising interest rate environment.  

During times of economic volatility, it is important to be proactive in managing your finances. In contrast to 2020’s historically low interest rates, 2022 has seen accelerated increases in rates and prices across the board. When it comes to the economy, the only thing that is certain is uncertainty.  

Across the nation, American farmers, ranchers, and rural landowners are finding innovative ways to hedge against rising inflation and protect the financial health of their operation. 

Rising Interest Rates and Inflation: A Marker of the 2022 Economy  

Throughout history, the U.S. economy has gone through cycles of both high and low interest rates. The COVID-19 pandemic propelled a series of economic turbulence that we are still experiencing today. In April 2022, the 12-month inflation rate climbed to 8.3 percent. From rising input costs to surging interest rates, farmers are feeling the impact on a daily basis.  

Farm Production Expenses 

The cost to operate a farm continues to increase. Total farm production expenses are expected to increase by 5.1 percent to nearly $412 billion in 2022. Interest expenses are expected to comprise six percent of total production expenses. 

Interest Rates 

Over the past few months, the interest rate environment has changed significantly, and rates are on the rise. As a response to the COVID-19 pandemic, the Federal Reserve cut the federal funds rate—a key borrowing benchmark set by the Federal Reserve—to zero percent in 2020, along with the federal government offering unprecedented financial support to Americans. Prior to that, the rate also sat at zero percent from 2008 to 2015. Now, to curb inflation, the Fed is raising rates and has moved towards tighter policy with the first rate increase of .25 percent in March 2022 and another .50 percent increase in May with the market expecting further increases throughout the year. Additionally, the Federal Reserve has indicated that they are going to tighten up the money supply for the foreseeable future. 

The Numbers Behind Rising Interest Rates 

It is important to note that these increases are not that large in comparison to historical increases. For instance, rates increased by one percent for the twelve months ending in November 2018. From 1980 to 1981, the Federal Funds Rate increased by as much as 10 percent. 

When examining the current interest rate environment, focusing on what you can control empowers you to support a thriving operation.  

How to Protect Yourself Amid Rising Interest Rates on Land Loans 

1. Conduct a Balance Sheet Analysis 

In a volatile economic climate, it’s important to know where you stand financially. Conducting an analysis of your finances is an effective way to understand your current payments, loan structures, and overall risk areas.  

AgAmerica’s Financial Health check can help you evaluate your operational finances and explore the next steps to take.  

Once you understand the state of your current finances, you can begin to explore options for risk mitigation and to support operational longevity.  

2. Determine Whether Fixed- or Variable-Rate Is Most Effective 

When taking out a new loan or refinancing, it’s important to decide whether a fixed- or variable-rate loan fits your operation best. The benefit of fixed-rate loans is that the interest rate charged on the loan will remain fixed for the entire term of the loan, regardless of what happens with the interest rate environment. With this type of loan, borrowers will have the same payment amount for each billing period. While variable interest rate loans have a lower rate initially when compared to fixed-rate products, they are subject to fluctuation.  

3. Consider Refinancing  

If you have a variable interest rate loan, now could be an opportune time to refinance your loan into a fixed rate to keep your rate low in a rising interest rate environment. It’s important to evaluate your current financial standing and debt to determine if this course of action would benefit your operation. 

Counter Rising Interest Rates on Land Loans with a Lender You Trust 

In uncertain times, it’s important to work with a lender you trust—who has a deep understanding of agriculture and keeps your best interests in mind. Through the good times and the challenging ones, AgAmerica is committed to working with you to create flexible financial solutions that can adapt to the market and will set your operation up for lasting success. 

Be proactive in this volatile market and explore our flexible financing solutions today. 

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