Interest Rates And Agriculture
Agricultural credit for farmers is a relatively small proportion of the more than $1 trillion raised in U.S. credit markets in recent years. The Federal Reserve System notes that less than 1% of this amount is debt held by farmers. But the availability of credit is an important, indeed essential, input in the production of agricultural commodities. The rate of interest, or the price of money, is an important input cost for many farms.
Interest rates in the agricultural sector closely match those charged to other borrowers in the U.S. economy. Interest rates are determined in a market setting and the interest rate or "price of money" is influenced by the availability or credit and the demand for funds. Interest rates to some degree reflect what is going on in the general economy. When the economy grows, interest rates tend to go up. When an economy slows, rates tend to decline.
Interest Rates in the Current Economic Environment
The end of "cheap" money is rapidly approaching. During the past several years interest rates have been extremely low. Reasons are many but certainly include the fact that the economy was sluggish, job growth was slow and the Federal Reserve (guardian of the value of the U.S. dollar) took a variety of steps to stimulate a sluggish economy. Consumers, the largest segment of the U.S. economy, followed suit by borrowing money for various purchases and for re-financing of home mortgages.
Currently, the U.S. economy is growing at a good clip with economic growth increasing at more than 4%. Job growth is increasing, manufacturing is recovering and the economy is simply beginning to show robust strength. Virtually all analysts expect interest rates to continue to increase as 2004 progresses. How high will rates go? No one can say with certainty. But for planning purposes, one should expect interest rates to remain under upward pressure for the coming year as the economy grows. Although higher interest are not good for agricultural borrowers, this input cost increase comes at a time when prices for many agricultural commodities are relatively strong and the financial outlook for farming is equally strong.
For More Information
For additional information, please contact Larry Jones.