Interest expenses threatening farm financial health
by Bernt Nelson, Economist, American Farm Bureau
According to USDA’s 2017 Ag Census, about 97% of the United States’ 2.1 million farms are considered family farms and 88% of all U.S. farms have a gross cash farm income of less than $350,000 annually, putting them in the small family farm category. This means that most farms in the U.S. are small, family-owned businesses that rely on the availability of finance options to fund the high cost of producing the food, fiber and renewable energy our country and the world rely on every day.
According to USDA’s most recent Farm Sector Income Forecast, interest as an expense increased by about 43%, or $10.3 billion, to $34.42 billion in 2023 (Figure 1). Interest rate hikes have not only increased the cost of credit as an input but have also limited farmers’ ability to use it. This Market Intel will give you a glimpse of farmers’ credit world and explain how changes in that environment could lead to challenges with liquidity, a problem that is hard to fix.
What is Liquidity and why is it Important?
An extremely important part of farm finances, farm liquidity is “the ability of a farmer to generate cash quickly and efficiently in order to meet his or her financial obligations.” Some assets, such as corn in storage, can be sold and turned into cash quickly and are considered assets with high liquidity. Others, such as a crop that was recently planted or livestock that have not yet been born, take more time to turn into cash and can require additional input expenses to become the final product for sale, such as grain or marketable livestock. When farms get tight on cash due to the high cost of operating or from overspending, lack of liquidity can become a real problem.
According to the 2023 Ag Lenders Survey conducted by the American Bankers Association in partnership with Farmer Mac, liquidity was farm lenders’ top concern in 2023 followed by farm income. Lenders listed rising interest rates as their number one reason for liquidity concerns.