ST. PAUL, Minn. — A poll of chief financial officers for Farm Credit lenders in America’s heartland found that, after several years of low interest rates, the cost of borrowing is expected to rise as the Federal Reserve contemplates tightening monetary policy.

“The poll reflects the consensus among economists and market participants that the Federal Reserve will begin raising interest rates by the middle of 2015 or early 2016,” said Brian O’Keane, executive vice president Banking and Finance, and CFO of AgriBank. “The Fed has kept interest rates low to encourage economic activity, remove slack from the labor force and keep inflation from falling too far, or turning into deflation. Now that the economy is slowly but steadily growing, the Fed is expected to increase interest rates to help keep inflation in check.”

The Federal Funds rate, the short-term interest rate set by the Fed and upon which other short-term U.S. interest rates are based, has been effectively zero since 2009 near the end of the Great Recession. The CFOs said they expect the Fed Funds rate will be, on average, 0.46% in one year, 1.09% in two years and 1.89% in three years. The CFOs expect the 10-year U.S. Treasury yield, currently just over 2%, to increase, on average, to 2.64% in one year, 3.18% in two years and 3.82% in three years.

AgriBank District CFO Interest Rate Estimates
  Federal Funds Rate 10-year U.S. Treasury Yield
  Average Range Average Range
In one year 0.46 0.00-1.00 2.64 2.00-3.00
In two years 1.09 0.40-2.00 3.18 2.50-4.50
In three years 1.89 1.00-3.00 3.82 2.50-5.50
Source: AgriBank Poll, October 27-November 3, 2014

St. Paul-based AgriBank conducted the poll October 27-November 3, among CFOs for the Bank and its 17 affiliated Farm Credit Assns., which provide agricultural loans in a 15-state area stretching from Wyoming to Ohio and Minnesota to Arkansas. Farm Credit is a top source of loans for agriculture and rural borrowers in these states. Seventeen of 18 AgriBank District CFOs participated in the poll.

Borrowers Prepare for Higher Interest Rates

During the past several years of relatively low interest rates, many borrowers have locked in fixed interest rates on their long-term debt. In the poll, 65% of the CFOs said they expect more farmers, ranchers and agribusinesses in the territories they serve to lock in interest rates on long-term debt during the next year.

The CFOs’ outlook for investments in farm, ranch and agribusiness operations is moderate. Of those polled, 63% expect ag operations to hold steady their investment in new employees, with 25% expecting a decrease in investment and 6% expecting an increase. The CFOs were split 50-50 as to whether ag borrowers would hold steady their investment in new equipment or decrease such investment. And 60% said they expect farmers, ranchers and agribusiness to hold steady their investment in farmland, versus 33% who said they expect an increase and 7% who expect a decrease.

“Now is the time for borrowers to understand and minimize the potential effect of rising interest rates on their operations before the anticipated rate increases begin,” O’Keane said. “Farm Credit Associations offer multiple interest rate options and cash management solutions that can help them hold down the cost of borrowing.”

During the week the poll was conducted, the Fed announced it would end its $3 trillion bond-buying program, which it had been using to stimulate the economy — another signal the Fed is contemplating tightening monetary policy.