Agricultural interest rates are going up
The decline in the commodity and equity markets following the downgrade of the U.S. credit rating by Standard and Poor’s will certainly affect agriculture. Every farmer should determine what that will mean to his operation, and the answer will be different for everyone, depending upon his exposure to unpriced commodities as well as his financial position.
Equity and commodity markets tumbled severely on the first trading day after the action by the rating agency, which may have had more impact on the economy than Congress, the White House and the Fed combined. For many farmers who depend on the Farm Credit System (FCS), their interest rates will likely rise because the Farmer Mac bonds that are sold by the FCS and guaranteed by the government will have higher interest rates. Unless Federal Reserve interest rates rise on money that commercial banks borrow to loan, it is conceivable that Farm Credit interest rates will rise as commercial bank rates either fall or remain stable. However, commercial banks may try to keep pace and raise their interest rates, says economist Bob Young of the American Farm Bureau. “The impact on Farmer Mac, in particular, will be higher interest rates that folks will have to pay at farm credit system and then your local banks are going to see that and charge higher rates as well, etc. And so, basically, farmers and ranchers will end up having to pay higher interest rates than they otherwise would have to pay.”
The agricultural interest rates will not only affect real estate and machinery loans, but operating loans, says Young. “It’s not just credit associated with buying land at or credit associated with buying equipment. It’s credit associated with the operating costs associated with putting that crop in the ground. It’s buying the seed, it’s buying the fuel, buying the fertilizer. It’s buying the chemicals it takes to produce that crop and protect that crop. It’s all those things that farmers are going to have to pay more for as we move forward.”
Young believes the lower credit rating will lower the value of the dollar, which fosters more commodity exports because of lower prices that foreign buyers see, a situation that reverses for imported goods, “I think as the value of the dollar goes down, it’s going to make U.S. commodities in general, but agricultural commodities certainly, that much more competitive in the world markets. And so you could actually talk about the ag sector, from that perspective, actually doing a little better. But for the rest of us that buy stuff at the store, we’re going to have to pay a higher price for imports, and recognizing the amount of stuff that we import in this country, you’ll see an upward push on inflation rates as well come out of this. “ Standard & Poor’s issued further downgrades of its credit ratings on government-backed bonds, and commented more about its action on Aug. 5, saying, “We have also lowered the ratings on the senior debt issued by the Federal Farm Credit Banks to ‘AA ’ from ‘AAA.’ The ratings on the individual farm member banks are not affected.
“The downgrade of the senior debt issued by the Farm Credit System reflects a one-notch reduction in the U.S. sovereign rating. Under our GRE criteria, the Farm Credit System is classified as having a very high likelihood of receiving support from the government if needed. The Farm Credit System’s stand-alone credit profile is ‘aa.’ Thus, under our criteria, the notches of uplift that we factor into the ratings on debt issued by the system decrease to one notch from two notches when the sovereign has a ‘AA ’ rating rather than a ‘AAA’ rating. The issuer credit ratings on the four Farm Credit System Banks that we rate are unaffected by the downgrade of the U.S. sovereign given their ‘a ’ stand-alone credit ratings and high likelihood of support classification under our GRE criteria. The implicit government support that we factor into our ratings for the Farm Credit System debt and the four rated banks considers the system’s mission to provide stable and reliable funding to the U.S. agricultural and rural sectors.”
The Farm Credit Administration (FCA) has not issued a public response to the Standard & Poor’s action. The FCA Board had its regular monthly meeting scheduled for Thursday, Aug. 11.
The agenda had been posted, and one item for action is entitled: “Capital Adequacy Risk Weighting Revisions:
Alternatives to Credit Ratings—Advance Notice of Proposed Rulemaking.” Summary:
The lowering of FCS bond quality ratings by Standard & Poor’s will mean a rise in production costs for agriculture. Not only will interest rates increase on Farm Credit Loans, but commercial banks may also raise their rates, and input costs throughout agriculture will rise as a result. The rating agency indicated it believed the Farm Credit bonds would get government support if needed. — Stu Ellis, University of Illinois Extension