Growth in agricultural real estate values surged during 2021 and 2022 alongside historically high farm incomes and low interest rates. In 2023, farmland values held firm while interest rates increased alongside benchmark rates. Together, strong real estate valuations and higher interest rates have pushed up interest expenses on land loans, potentially squeezing profitability for crop producers.
According to the U.S. Department of Agriculture, agricultural real estate accounts for more than 80% of U.S.
farm sector assets, and real estate debt makes up more than 70% of all liabilities for the sector. Thus, an increase in interest expenses on land debt is likely to have a substantial influence on the sector.
The steep increase in interest expenses is likely to be acutely burdensome for owner-operated farms with high leverage and may deter some farmers from refinancing or taking on new debt.
Notably, these increases in financing costs have occurred at a time when farm operational costs have declined.
Total expenses for an average corn and soybean farm without new land debt stabilized in 2023. (Scenarios assume the operation is a 50/50 corn and soybean farm that finances 50% of operating expenses at the beginning of the year and pays interest and principal on operating debt in full at year-end.)
The slight decline in farm expenses reflects a decline in the costs of many key inputs such as fuel and fertilizer after two years of substantial increases. However, total expenses for an average farm with new land debt continued to rise.
Financing costs pushed up total expenses for farms with land debt. Interest expenses per acre grew during 2023 alongside higher interest rates, particularly for operations with large amounts of new debt. A farm with new or refinanced land debt totaling 40% of the value of all operated acres
– that is, a 40% loan-to-value ratio –
saw an increase in interest expenses of nearly $100 per acre from 2022 to 2023. A farm with a 65% LTV had an increase of more than $125 per acre.
Profit opportunities thinned for all crop producers during 2023 alongside a moderation in crop prices, but those with large amounts of land debt could According to the USDA’s Agricultural Resource Management Survey, around 45% of U.S. corn and soybeans farms owned all land operated in 2022, around 40% owned a portion of land operated but rented the remainder, and about 15% rented all land operated.
Farms that own land can have varying debt levels and repricing schedules that influence exposure to higher interest costs. Farms with higher leverage and higher shares of newly financed land debt are likely to have the most pressure on their profit margins. Higher interest costs are likely to weigh on both new land purchases and the incomes of borrowers refinancing existing debt. According to the Survey of Agricultural Credit Conditions, near-term repricing schedules are common on debt secured by farm real estate at commercial agricultural banks. Commercial banks in the survey are, on average, scheduled to reprice about one-fifth of farmland loans every six months.
More than half of farmland loans will assume a new interest rate over the next 18 months. Borrowers refinancing debt secured prior to 2022 will face considerably higher interest payments than when the loan was originated.
Reducing financing costs could require producers to have sizeable amounts of cash on hand for down payments. The average interest rate on farmland loans has more than doubled since the beginning of 2022 and increased loan payments considerably.
For new land purchases, the amount of funds needed to reduce debt balances and lower loan payments has increased alongside strong growth in farm real estate values. For farms refinancing existing debt, higher interest payments could materially reduce repayment capacity and may require paying down a portion of outstanding debt.
Together, these results suggest that in the current interest rate environment, crop producers with new or newly refinanced land debt may struggle to reach profitability without strong equity positions, large cash down payments, or an improvement in agricultural economic conditions.
Considerable strength in farm income in recent years has bolstered working capital and could alleviate the debt burden for some operators refinancing existing land debt. However, high financing costs could reduce demand for newly financed agricultural real estate purchases and be especially burdensome for highly leveraged crop producers.
Ty Kreitman is an associate economist in the Regional Affairs Department at the Omaha Branch of the Federal Reserve Bank of Kansas City.