{"id":192088,"date":"2023-06-16T11:45:00","date_gmt":"2023-06-16T15:45:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=192088"},"modified":"2023-06-16T11:27:41","modified_gmt":"2023-06-16T15:27:41","slug":"higher-interest-rates-present-new-risks-for-farmers","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/commodities\/higher-interest-rates-present-new-risks-for-farmers\/","title":{"rendered":"Higher Interest Rates Present New Risks for Farmers"},"content":{"rendered":"\n<h2 class=\"wp-block-heading\">AT A GLANCE<\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>As the Federal Reserve has raised interest rates, farmers are penciling in another variable to their operating costs<\/li>\n\n\n\n<li>Higher rates and lower crop prices are defining the ag economy ahead of the highly anticipated June 30 acreage report<\/li>\n<\/ul>\n\n\n\n<p>Ben Rand, a corn and soybean farmer in southeast Nebraska, says this year is the first time he had to take interest rates into account as he prepared for spring planting.<\/p>\n\n\n\n<p>\u201cOne of the things you have to look at is, how do I borrow the least amount of money,\u201d Rand says.<\/p>\n\n\n\n<p>As Rand compares CME Group futures prices versus cash prices, higher interest rates are another variable he must pencil in as he worked out potentially different break-evens between planting corn or soybeans.<\/p>\n\n\n\n<p>For farmers who may have to borrow a lot of money, whether it\u2019s to buy land, equipment or other inputs, loans will be much more costly than a year ago when the Federal Reserve started to raise interest rates.<\/p>\n\n\n\n<p>\u201cWe\u2019re talking about potentially having a situation where farmers are looking at double-digit interest rates for the first time in 30 years, 40 years. And that is very difficult for the heavily leveraged young farmer,\u201d Rand says.<\/p>\n\n\n\n<p>The Fed has raised interest rates ten times since it began its rate-hiking cycle in 2022, bringing the Federal Funds rate to a target rate of 5% to 5.25%. The Fed is battling stubborn inflation, which has lowered to under 5% year-over-year \u2013 still well above its 2% target.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"farmer-balance-sheets-solid\">Farmer Balance Sheets Solid<\/h2>\n\n\n\n<p>The good news is that overall U.S. farmers are in solid financial condition after two years of record net-cash farm income, says Rob Fox, director of agriculture lender CoBank\u2019s Knowledge Exchange division.<\/p>\n\n\n\n<p>\u201cTheir balance sheets are in pretty good shape. Loan delinquency rates have come down pretty dramatically over the past couple of years within the industry,\u201d Fox says.<\/p>\n\n\n\n<p><a href=\"https:\/\/www.cmegroup.com\/openmarkets\/agriculture\/2023\/Higher-Interest-Rates-Present-New-Risks-for-Farmers.html\">Click here to watch video<\/a><\/p>\n\n\n\n<p>However, evidence is mounting that 2023 won\u2019t be as bountiful to farmers as 2022 and 2021 have been. December 2022 corn futures prices traded at $8.27 a bushel in April of last year. As of early June, corn prices are hovering around $5.40 a bushel for December new-crop corn.<\/p>\n\n\n\n<p>Soybean futures hit an all-time high of $17.84 in 2022, but in early June, November new-crop soybeans were trading around $11.79.&nbsp; Soft red winter wheat futures rose to their all-time high of $14.25 in 2022, but December wheat recently traded at $6.55.<\/p>\n\n\n\n<p>With lowering prices has come a change in expectations for many ag producers. The Purdue University\/CME Group Ag Economy Barometer, which surveys 400 producers monthly, in May fell to its lowest level since July 2022. 38% of respondents said they expect weaker financial performance for their farm this year, compared to 23% who expected the same in April.<\/p>\n\n\n\n<p>Macroeconomic uncertainty has also dampened the overall outlook, Fox says. The impact of higher rates is starting to be felt in some parts of the agriculture economy, as tighter money has slowed the steep rise in farmland prices. Kansas City Fed&nbsp;<a href=\"https:\/\/www.kansascityfed.org\/agriculture\/agfinance-updates\/growth-in-farmland-values-slows-amid-higher-interest-rates\/\" target=\"_blank\" rel=\"noreferrer noopener\">data<\/a>&nbsp;show the value of non-irrigated cropland increased by an average of 15% from the previous year across all Midwest Fed regions, following growth of more than 20% in early 2022.<\/p>\n\n\n\n<p>In the Ag Barometer report, farmland value expectations fell to their weakest level since August 2020, with 59% of respondents saying they expect interest rates to rise during the upcoming year and 22% citing rates as a top concern over the next year.<\/p>\n\n\n\n<p>Steve Georgy, president at Allendale, says with higher interest rates, farmers need to keep on top of their operating costs.<\/p>\n\n\n\n<p>\u201cIt is so important for the farmer to understand their break-even, and make sure that they&#8217;re selling at a profit. It\u2019s important to understand what you need to lock in from a cash side to keep those operating loans as low as you can,\u201d he says.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"hedging-risk-around-planted-acreage\">Hedging Risk Around Planted Acreage<\/h2>\n\n\n\n<p>As usual, much will be riding on the data released with the USDA Planted Acreage report on June 30. As producers weigh the impact of interest rates and lower crop prices, the report will reveal just how many corn and soybean acres were planted this spring.<\/p>\n\n\n\n<p>The report has the ability to move prices and&nbsp;<a href=\"https:\/\/www.cmegroup.com\/articles\/2023\/capturing-volatility-from-the-usda-acreage-report-with-new-crop-weekly-options.html\" target=\"_blank\" rel=\"noreferrer noopener\">create volatility in grain futures markets<\/a>.<\/p>\n\n\n\n<p>Given all the variables facing farmers today, it\u2019s important for them to hedge their risk. Products such as short-term options lower the time value and the cost to hedge new-crop positions, Georgy says.<\/p>\n\n\n\n<p>Short-dated and new crop weekly options help farmers come up with a more flexible marketing plan by dividing up price coverage in sections throughout the year, rather than locking it in at one time.<\/p>\n\n\n\n<p>\u201cIt&#8217;s a great opportunity in order to protect the price, because we&#8217;ve seen such volatility in our markets,\u201d Georgy says.<\/p>\n\n\n\n<p>Oliver Sloup, vice president of Blue Line Futures, sees a particular benefit to using new crop options for reports like June Acreage, which is slated for release on a Friday. He says farmers can both sell a corn futures contract and hedge their upside risk with an option that expires that day.<\/p>\n\n\n\n<p>\u201cThey don&#8217;t have to worry about that initial knee-jerk reaction from the market that could potentially stop them out or the market just ripping higher and not looking back. They&#8217;re protected with that new crop weekly option,\u201d Sloup says.<\/p>\n\n\n\n<p>New crop weekly options in particular have surged in popularity. Through the first half of June, average daily trading volume nearly doubled from May. Open interest \u2013 or the number of outstanding futures contracts \u2013 soared to nearly 8,000.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"826\" height=\"414\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/06\/Screenshot-2023-06-16-103703.png\" alt=\"new crop weekly options\" class=\"wp-image-192089 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/06\/Screenshot-2023-06-16-103703.png 826w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/06\/Screenshot-2023-06-16-103703-700x351.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/06\/Screenshot-2023-06-16-103703-300x150.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/06\/Screenshot-2023-06-16-103703-768x385.png 768w\" data-sizes=\"(max-width: 826px) 100vw, 826px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 826px; aspect-ratio: 826\/414;\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"profit-potential\">Profit Potential<\/h2>\n\n\n\n<p>In their 2023 crop budget forecasts, Gary Schnitkey and Krista Swanson of the department of agricultural and consumer economics at University of Illinois,&nbsp;<a href=\"https:\/\/farmdoc.illinois.edu\/handbook\/2023-budgets-for-all-regions\" target=\"_blank\" rel=\"noreferrer noopener\">estimate<\/a>&nbsp;Illinois farmers will break even on corn and soybean production, but lose money on wheat. Their budgets include all revenue and all financial non-land costs.<\/p>\n\n\n\n<p>On average, Illinois farmers who plant corn after soybeans could see a return of $58 an acre, needing a breakeven price of $3.96 a bushel when figuring in non-land costs, but $5.33 if land costs are included. Farmers who plant soybeans after corn could see a return of $51 an acre. Their breakeven price for non-land costs is $7.98 a bushel, but $12.62 if land costs are included.<\/p>\n\n\n\n<p>Another University of Illinois ag economist, Bradley Zwilling, writes that farmers need to keep an eye on their debt levels as rates increase. His&nbsp;<a href=\"https:\/\/farmdocdaily.illinois.edu\/2023\/03\/increasing-agricultural-debt-and-impact-on-illinois-grain-farms-2.html\" target=\"_blank\" rel=\"noreferrer noopener\">research<\/a>&nbsp;shows since 1990, agricultural debt increased an average of 4.4% per year. Using data from the Illinois Farm Bureau, Illinois farmer\u2019s debt per tillable acre is $735 as of 2021.<\/p>\n\n\n\n<p>Zwilling expects interest expenses will grow.<\/p>\n\n\n\n<p>\u201cA 1% increase in the average interest rate on all farm debt would lead to a 35% increase in interest expense per acre based on 2021 numbers,\u201d he says.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"a-new-rates-environment\">A New Rates Environment<\/h2>\n\n\n\n<p>Older farmers are no strangers to higher rates, but Fox says analogies to the 1980s and today don\u2019t stand up. There\u2019s been significant industry consolidation and operations are larger, sophisticated and more financially stable as a whole. \u201cFarming today versus the 1980s, for a variety of reasons, is radically different,\u201d says Fox.<\/p>\n\n\n\n<p>At the same time, younger farmers are dealing with an interest rate environment they\u2019ve never experienced.<\/p>\n\n\n\n<p>\u201cIf you&#8217;ve only been farming for 15 or 20 years, you&#8217;ve never seen interest rates at the farm level of, let&#8217;s say, 8%. To them, that&#8217;s completely foreign,\u201d Fox says.<\/p>\n\n\n\n<p>&#8212;<\/p>\n\n\n\n<p>Originally Posted June 14, 2023 &#8211; <a href=\"https:\/\/www.cmegroup.com\/openmarkets\/agriculture\/2023\/Higher-Interest-Rates-Present-New-Risks-for-Farmers.html\">Higher Interest Rates Present New Risks for Farmers<\/a><\/p>\n\n\n\n<p>OpenMarkets is an online magazine and blog focused on global markets and economic trends. It combines feature articles, news briefs and videos with contributions from leaders in business, finance and economics in an interactive forum designed to foster conversation around the issues and ideas shaping our industry.<\/p>\n\n\n\n<p>All examples are hypothetical interpretations of situations and are used for explanation purposes only. The views expressed in OpenMarkets articles reflect solely those of their respective authors and not necessarily those of CME Group or its affiliated institutions. OpenMarkets and the information herein should not be considered investment advice or the results of actual market experience.&nbsp;Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract\u2019s value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade.&nbsp;BrokerTec Americas LLC (\u201cBAL\u201d) is a registered broker-dealer with the U.S. Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (<a href=\"https:\/\/www.finra.org\/\">www.FINRA.org<\/a>), and is a member of the Securities Investor Protection Corporation (<a href=\"https:\/\/www.sipc.org\/\">www.SIPC.org<\/a>). BAL does not provide services to private or retail customers..&nbsp;In the United Kingdom, BrokerTec Europe Limited is authorised and regulated by the Financial Conduct Authority.&nbsp;CME Amsterdam B.V. is regulated in the Netherlands by the Dutch Authority for the Financial Markets (AFM) (<a href=\"https:\/\/www.cmegroup.com\/www.AFM.nl\">www.AFM.nl<\/a>).&nbsp;CME Investment Firm B.V. is also incorporated in the Netherlands and regulated by the Dutch Authority for the Financial Markets (AFM), as well as the Central Bank of the Netherlands (DNB).<\/p>\n","protected":false},"excerpt":{"rendered":"<p>As the Federal Reserve has raised interest rates, farmers are penciling in another variable to their operating costs.<\/p>\n","protected":false},"author":288,"featured_media":192089,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[21,6,8,9,26,3],"tags":[429,147,9146,850],"contributors-categories":[13577],"class_list":{"0":"post-192088","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-commodities","8":"category-north-america","9":"category-region","10":"category-securities","11":"category-text-articles","12":"category-traders-insight","13":"tag-agriculture","14":"tag-commodities","15":"tag-farming","16":"tag-interest-rates","17":"contributors-categories-cme-group"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v27.5) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ 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