From AgriBank’s May 2015 Insights newsletter
Another potentially significant cost for ag producers is the cost of borrowing. The cost of borrowing money for equipment, home mortgages, farm real estate and operations is substantially lower today than in the 1980s.
In 2012, approximately 4% of U.S. farmers held 68% of total U.S. farm debt. This contrasts with the time period just prior to the farm crisis years (around 1979) when approximately 30% of U.S. farmers held approximately the same share (70%) of U.S. farm debt. While a smaller share of the total farm population, the 4% of U.S. farmers holding most of the debt in 2012 produced a larger share of aggregate net farm income (approximately 48%) when compared to the 30% of farmers in 1979 (approximately 42%). In 2012, approximately 75% of U.S. farming operations were debt-free compared to just 32% in 1979. Note, however, that the USDA counts small hobby farms as farming operations and these are a more significant portion of the U.S. farm population total when compared to 1979.
In contrast to the double-digit rates of the 1980s, interest rates remain near historically low levels today. Also, there is greater availability of fixed long-term rates on agricultural loans today, which allows borrowers to lock in current low rates. Total aggregate farm interest expense, which exceeded aggregate net farm income in 1983 by $6.3 billion (150% of NFI), was just 14% of aggregate net farm income in 2012.
As producers look for ways to drive down input costs such as land, fertilizer, machinery and seed, they can also look for ways to lower their cost of financing.
|In 1979, 70% of the farm debt was held?by approximately 30% of the farming operations. This 30% of the farming operations produced approximately 42% of the net farm income.*||In 2012, 68% of the farm debt was held by approximately 4% of the farming operations. This 4% of the farming operations produced approximately 48% of net farm income.*|
In 1979, the percentage of farming operations with no debt was approximately 32%*
|In 2012, the percentage of farming operations with no debt was approximately 75%.*|
|Historically high interest rates. Prime rate in 1981 was 21%, and Fed Funds rate in 1981 was as high as 19%.||Historically low interest rates. Prime rate is 3.25% and Fed Funds rate is 0.25%.|
|Most loans had variable interest rates.||More use of fixed interest rates, with many borrowers having already locked in record-low rates.|
|In 1983, total farm interest expense was approximately 150% of net farm income.*||In 2012, total farm interest expense was approximately 14% of net farm income.*|
Source: USDA Ag Census (1979 data) and Agricultural Resource Management Survey (2012 data), financial data and AgriBank internal calculations.
AgriBank is one of the largest banks within the national Farm Credit System, with more than $90 billion in total assets. Under the Farm Credit System’s cooperative structure, AgriBank is primarily owned by 17 affiliated Farm Credit Associations. The AgriBank District covers America’s Midwest, a 15-state area stretching from Wyoming to Ohio and Minnesota to Arkansas. About half of the nation’s cropland is located within the AgriBank District, providing the Bank and its Association owners with expertise in production agriculture. For more information, visit