Farmers adjust plans, budgets to handle high interest rates

Editor's Note: BankBeat spoke with five Midwest ag bankers in March, including Darla Sikora, Dave Yahnke, Nate Franzén, Heather Malcolm and Gary Mueller. This story includes a portion of the Q&A. Additional portions will be posted the next two Wednesdays. .The U.S. Department of Agriculture has predicted a drop in farm income of 25 percent, and that decrease won't be offset by lower input costs. While down from its peak in the summer of 2022, inflation's effects are still being felt throughout the industry. High rates are also having an impact, as short-term loans come up for renewal..While not as direct an impact as fertilizer prices or potential drought, the political climate is on everyone's mind. The uncertainty of an election year is hovering like a thunderhead on the horizon. The Farm Bill sitting in Congressional limbo is another source of concern..Knowledge of the cyclical nature of ag has provided a certain amount of psychological buffer for many in the industry. Even if some sectors have down years, and high rates and inflation squeeze margins, ag bankers know that the wheel will come around again. Most customers are well-positioned to withstand some belt-tightening, and their lending partners stand by ready to assist with budget planning..The fresh beginnings of spring bring optimism as well, according to Gary Mueller at Havana National Bank in Illinois: "It's springtime, which always brings with it sunshine and smiles. Planters are sitting at the edge of the field like jets on the runway.".Here's what our correspondents had to say about the state of ag from their vantage points..CONTRIBUTORS.Darla Sikora.SVP – Agricultural Banking.Citizens State Bank of Loyal.Loyal, Wisconsin.Dave Yahnke.Senior Vice President/Chief Credit Officer.Iowa Trust and Savings Bank.Centerville, Iowa.Nate Franzén.President – Ag Banking Division.First Dakota National Bank.Yankton, South Dakota.Heather Malcolm.Vice President of Ag Banking.Bank of the Rockies.Livingston, Montana.Gary Mueller.Vice President/Farm Manager & Trust Officer.Havana National Bank.Havana, Illinois.As rates remain high, have farmers adjusted their plans or budgets in response?.I have been an ag banker for 22 years, and the first time I ever had producers tell me they were reconsidering a purchase or expansion due to interest rates was the summer of 2022. Although we all know that present interest rates do not compare to historical highs, the industry got so used to low rates for so long that the near doubling of those rates is certainly painful. To add insult to injury, these rate increases came close behind increases in nearly all other farm operating expenses. Plans and budgets have had to change to account for the higher cost of money..— Darla Sikora.Obviously the 5 percentage point or so rapid increase that happened is going to be a drag on the economy, and it will be a shock to some of our producers. There's no doubt about it. One of the things I think everybody has to remember when it comes to rising interest rates, is the effect lags. A lot of our producers, for example, have their real estate loans locked in. We were really aggressive with our customers on that, to make sure all of their long-term debt was fixed for 15 to 25, 30 years. The rising interest rates have virtually no impact on that portion of their loans. But certainly operating loans are variable, and a lot of the intermediate loans for livestock or machinery and equipment may have been fixed for three to five years, but they're going to adjust here soon if they haven't already. As that happens, the impact will be greater and greater to our producers..We've certainly been talking very proactively with our producers about looking at the cash flow more closely than normal. Really planning ahead, really thinking about what that higher interest number will mean to them. If they can make some adjustments sooner rather than later, they should be doing that..— Nate Franzén .We helped customers bridge the gap last year by doing some fixed rate operating type money. But now at this point we're getting into renewal season and we're going back to looking at the variable rate options instead of fixed rate. So obviously farmers are seeing rates that are higher than what they experienced last year. Building those into the cash flow projections is a little bit of a shock, quite frankly, with input prices continuing to be fairly elevated — although they've come down a little bit in some cases — but still the interest cost is a lot bigger component of the cashflow projection this year than it's been in the past several years. .Our portfolio is mostly focused in corn and soybean production and beef cattle production.That's most suited to the type of soils we have in southern Iowa..— Dave Yahnke.With the higher interest, and input costs, some producers are more carefully monitoring their costs. Though in some operations, it is more of a consideration than a necessity. They weigh decisions to purchase or repair equipment more carefully now. Most producers are more cost sensitive and make changes in suppliers or products more often now. They are looking at supplier financing more as well. They are also looking for additional income sources to offset these higher costs. We have seen an increase in non-production income such as ranch stays, ranch adventures like bird watching, fishing, camping, etc..— Heather Malcolm.Somewhat. The current interest rate is a necessary move, but it will be felt by borrowers. Fertilizer and chemicals have come down slightly, it doesn't completely offset the interest rates, but it helps. Farmers have held onto grain longer trying to find a better price, and we've had a delay in our renewal season. Usually they liquidate grain to pay off old operating loans before taking out new ones, and it's caused some backlog in planning because they try to do that before planting, and not all of them have paid off last year's loans yet..— Gary Mueller