A doubling of the interest rate on short-term loans means that pre-financing a new growing season has become considerably more expensive for American farmers. With rising input costs, entrepreneurs will be stuck for next season, writes Reuters news agency.
Many American farmers use seasonal loans to purchase fertilizer, crop protection products and seeds before selling their old crops. These loans are usually taken out at the end of the year or in January, but interest rates have risen sharply, making it difficult for companies to reach an agreement with their bank. This usually concerns interest rates with a variable percentage, which makes farmers susceptible to interim increases.
32% more debt
According to the USDA, the total debt in the sector this year is $26,45 billion (€25,35 billion). That is 32% more than a year ago and the highest debt since 1990, after applying an inflation adjustment. Due to the increased cultivation costs - but also the costs of machines - farmers have to go deeper into debt. According to data from the Central Bank of Kansas, interest rates are at the highest level since 2019. The average interest rate is 4,93%.
In an effort to stop inflation, the Fed is also raising interest rates on short-term loans. This now amounts to 3,75% to 4%, compared to 0% to 0,25% in March. Because inflation can hardly be curbed, the Fed will most likely continue to raise interest rates.
Sell sooner
In practice, American farmers pay even more, they told Reuters. Loans that were taken out in May with 3,3% interest have now risen to 7% or more and it is expected that this will not stop there. This ensures that arable farmers sell their crops earlier to repay seasonal loans. The higher product prices slightly offset the additional interest costs. According to the USDA, a fifth of income goes to interest costs, compared to 23% a year earlier.
Mechanization companies also notice that the high interest rates are having an impact. The purchase of new machines is often one of the items that entrepreneurs quickly cut back on. Finance lease rates tend to be lower, but companies like John Deere and CNH have also doubled their lease rates this year. At Deere you pay 7,65% in the US and at CNH it is 7,8%, the news agency writes. For Agco this is even 8,25%.
In the Netherlands, agricultural companies hardly use such seasonal loans, but elsewhere in Europe this is sometimes the case, especially for larger companies of several thousand hectares. However, here too, the higher interest rates have an impact on companies, for example on land prices.