American banks, which do a lot of business with the agricultural sector in the United States, see the risk increasing. Providing a loan to an agricultural entrepreneur entails more risks than in the past. At least that's what the banks claim.
For example, the higher risk is immediately noticeable because it takes longer to approve a loan application. And when that happens, the conditions are a little stricter than before. The interest rate is also slightly higher.
Interest rates rise
The interest rate is usually somewhat higher, namely between 25 and 50 basis points. This was reported by the regional central bank in Kansas City. Nearly 40% of all loans granted in 2015 had an interest rate lower than 4% and only 9% had an interest rate higher than 6%. In the first half of this year, only 1 in 5 loans had an interest rate of less than 4%. The credit meter had to pay 15% or more interest on approximately 6% of all loans granted.
One of the reasons for the higher interest rates is that the Fed (US central bank) has raised the official interest rate several times since 2015. There is a lesson in this for agricultural entrepreneurs in the eurozone and in the Netherlands.
Interest rates in the eurozone
Now that the European Central Bank (ECB) is preparing to slowly loosen monetary policy, it may be advisable to ask the following question when taking out a loan: is it still appropriate to opt for the very low but variable interest rate? economical? This is compared to choosing a fixed interest rate of, for example, 5 or 10 years.
When the ECB starts to turn off the money tap, it is expected that long-term interest rates in the euro zone will continue to rise. Then committing to a low fixed interest rate could be an excellent decision. At least when a Dutch agricultural entrepreneur looks up the levels of fixed interest rates on the internet on a winter evening in 2020. These could be considerably higher than they are at the moment.
Declining incomes
An important reason why American banks assess the risk associated with lending money to the agricultural sector as higher is that the income of the American farmer continues to decline. This also reduces his ability to repay his debts. The U.S. Department of Agriculture predicts that net income in the agricultural sector will be about 10% lower this year than last year. Compared to 2013, there will even be a halving.