Farm Management Tips for Navigating a Hight Interest Rate Environment

Nate Bruce, Farm Business Management Specialist,

The Federal Reserve increased interest rates by a quarter point this past week. Interest rates are now at a 16 year high. This is the 10th straight consecutive interest rate hike over the past year. The Federal Reserve chair, Jerome Powell stated that they do not anticipate any more interest rate increases but will make future decisions based on incoming data. Below is a 62 year historical chart of the federal funds rate. Recessions are shown in the gray areas of the graph.

Figure 1: Federal Reserve History of Interest Rates

Producers that farmed during the farm financial crisis of the 1980s remember the high interest rates of that time. Any long-term debts you currently have could be at a cheaper rate than the rates you can borrow money currently. There is less of an incentive to pay off long term debts that can benefit your operation over the long run. Let your money work for you and minimize your operations interest cost. During the current economic environment, consider holding onto cash reserves. Cash reserves can be used to offset any shortfalls in being able to pay back expenses, particularly when high input costs and low commodity prices put pressure on a crop’s ability to cash flow. Holding a cash reserve will potentially limit, or prevent, the need to refinance operating expenses over a long period of time. Although interest rates have risen tremendously over the course of the past year, the 1980s have taught us lessons on how to navigate an environment with high interest rates.