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The Weight of Interest Rates in 2024


Graphic showing interest rate line over farmland illustrations

When something takes place that hasn’t happened in more than two decades, it merits attention. And when it involves the impact of interest rates on farmland, it attracts even more eyeballs.

 

For months American Farmland Owner has sought out economic and policy experts on the future of interest rates. Have rates risen as high as they are going to climb? When will the Fed lower them? By how much? How many times could they lower them in 2024? And what effect could those have?

 

Ty Kreitman, associate economist, Regional Affairs Department, Omaha branch of the Federal Reserve Bank of Kansas City. Photo courtesy: Federal Reserve Bank of Kansas City.
Ty Kreitman, associate economist, Regional Affairs Department, Omaha branch of the Federal Reserve Bank of Kansas City. Photo courtesy: Federal Reserve Bank of Kansas City.

It’s like predicting the weather: meteorologists rely on numerous forecasting models and years of experience. Sometimes they get it 100%. Tomorrow’s expected 70 degrees with sunshine becomes exactly that. Other times, a dusting turns into a blizzard or temperatures drop a bit more than expected, and wet roads instead become skating rinks.

 

Ty Kreitman isn’t a meteorologist, but he is trying to predict the future. Kreitman is associate economist in the Regional Affairs Department at the Omaha branch of the Federal Reserve Bank of Kansas City.

 

And his research has spotted a potentially troubling trend that he incorporated into a visual warning.

 

For 20 years – 2002 to 2022 -- agricultural real estate values enjoyed consistent appreciation. That growth surpassed the cost of financing. That is a big reason why farmland remained so appealing for farm expansion or investors looking to diversify their assets.

 

But interest rates that had doubled borrowing costs since the economic hit triggered by COVID-19’s impacts slowly took their toll. Kreitman found that in 2023, that two-decade run of growth outpacing higher borrowing costs halted. Interest costs on new farmland loans rose higher than land value’s average yearly appreciation. Not a shocking development given how much the Fed elevated interest rates. But it is significant enough that it could make a difference for the year ahead.  


1985-2023 Interest Rates Fed

“With interest costs now above average land value appreciation, farm operating profits will determine the magnitude of returns for financed land,” Kreitman wrote.

 

NOTE: Farm profits slid in 2023 compared to the record earnings in 2022. And there are concerns about 2024’s profits. Listen to a USDA audio report on that here. 

 

Kreitman continued, “Although growth in farmland values held firm in 2023, higher interest rates and a moderation in agricultural commodity prices have cut potential returns and could dampen demand for farmland—and thus farmland values—going forward.”

 

 

Previous presidents at the Federal Reserve Bank of Kansas City, Esther George and Tom Koenig, have expressed concerns about the economic climate for the farmland sector in 2024. Neither expected rapid rate cuts by the Fed nor are they convinced the panacea of a “soft landing” is guaranteed yet where the Fed’s interest rate increases will slow the economy just enough to reduce inflation without forcing the country into recession.

 

RELATED: Former Federal Reserve Bank of Kansas City presidents Esther George and Tom Koenig explain the economic factors they will watch in the months ahead and the challenges those forces mean for federal fiscal policy makers. Read that American Farmland story here. 

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