Another important indicator for when a new business cycle for agriculture could be in the offing is rising interest rates. Low interest rates have been in effect for such an extended period of time, many consumers take for granted that they’ll always be low. For many consumers today, extremely low borrowing rates have become the new norm.
This could all change if U.S. Federal Reserve determines that economic growth is on solid footing and begins to unwind its program of quantitative easing (QE), which is currently under discussion. How would rising interest rates impact farm equipment sales?
“I think just a couple of percent rise would send shockwaves through the industry,” says Brian Carpenter, owner of Champlain Valley Equipment, a four-store dealership in Vermont.
“Customers are so used to these ridiculously low interest rates that a lot of today’s buyers don’t remember how it was to buy equipment when rates were at what we used to consider modest levels. They don’t understand how it changes their buying power, their cost of operation or their bottom line.”
Carpenter is concerned that with the level of debt that farmers have taken on in recent years, rising interest rates could preclude farmers from buying new equipment until some of it is retired. “I know some people have operating lines that are on a variable rate basis. An increase in interest rates can dramatically change what they’re paying on those notes. That’s going to impact their cash flow, but the biggest impact will be on people’s psyche. Consumers have become accustomed to zero percent financing and if it goes up very high, manufacturers won’t have enough margin to be able to buy it all the way down to 0%.”