Farmers welcome lower interest rates, but await impact

KUNA, Idaho — Dave Reynolds was almost as pleased about a recent cut in interest rates as he was about the good crop of silage corn he and teammates harvested as September waned.

"Every quarter point is going to create that much more profit," he said.

The Federal Reserve Board's Open Market Committee on Sept. 17 reduced its target range for the Federal Funds Rate, which banks charge each other overnight and which impacts other rates, by a quarter percentage point to 4-4.25% annually. Two more quarter-point cuts are expected this year.

The Federal Funds Rate was 4.1% Oct. 10, 4.33% a month earlier and 4.83% a year earlier, according to MacroTrends LLC.

Lower interest rates promise some benefit to agricultural producers, many of whom face ongoing high input costs and low crop prices.

Rate cuts matter

Reynolds has a variable-rate farm operating loan, which is impacted by changes in the Federal Funds Rate. An increase in rates by 3.5 percentage points over the last three years reduced the farm's profit by 28%.

"We are working on about a 5% margin — which most people never believe, but that's the way it is," he said.

In deciding to reduce the Federal Funds Rate, the Open Market Committee said in a post-meeting statement Sept. 17 that unemployment edged up, inflation moved up and remains somewhat elevated, and uncertainty about the economic outlook remains elevated. The committee targets maximum employment and a long-term inflation rate of 2%.

The all-items Consumer Price Index rose 2.9% for the 12 month-period ending in August after rising by 2.7% in the 12 months ending in July, the U.S. Bureau of Labor Statistics reported.

"From a farm standpoint, this has the potential to have major impacts across the board," American Farm Bureau Federation economist Bernt Nelson said of recent and anticipated Federal Funds Rate cuts.

Many farmers have lost money three years in a row on a combination of low crop prices and high input costs, which include interest rates that increased, he said. The Fed's rate increases "occurred at a time when farmers were relying on credit."

Tough times

"The cashflows are drying up, and the outlook from here through '26 is that it's going to get really tight financially, with less income," said Ben Marshall, who farms near Jerome, Idaho. "We're still getting paid for our crops. It's just that the payments are significantly less."

South of Nyssa, Ore., Frank Ausman raises crops and some cattle. He's about 95% self-funded, having borrowed some money to finish his 2025 corn harvest.

"Even when you have everything paid for, basically, you can only creep backwards so long and pretty soon you're done," he said.

Following the Sept. 17 quarter-point cut to the Federal Funds Rate, the Prime Rate lenders charge their best customers stood at 7.25%. An ag borrower may pay up to 9% or 9.5% or higher depending on assets and bankability, the Farm Bureau's Nelson said.

"Balance-sheet-wise, this should help some," he said. "The question is if we have an increase in inflation," which could reduce or eliminate the benefits of lower interest rates.

Larger impacts

The Federal Funds Rate reduction is "significant, as it reduces the cost of credit for farmers and ranchers who rely on operating lines of credit," said Doug Robison, AgWest Farm Credit Idaho president. Rates on these lines tend to follow the Fed Funds rate closely.

The recent quarter-point cut to Fed Funds "will benefit growers, but the future trajectory of Fed rate cuts is even more important to markets — including commodity markets — given the substantial influence interest rates have on financial conditions," he said.

Comments from Federal Reserve chairman Jerome Powell and forecasts from Open Market Committee members indicate the Fed is resuming its easing cycle after a nine-month hiatus, Robison said.

Lower interest rates generally increase market liquidity and correlate with a weaker U.S. dollar, which supports commodity prices, he said.

"However, there is growing concern among market participants about whether the Fed might be too late in resuming the rate-cutting cycle, especially considering the recent weakness in the labor market," Robison said. "If U.S. consumer strength continues to deteriorate, it could negatively impact commodity prices."

But the Fed "still has some room to maneuver given the relatively high Federal Funds rate," he said. "They are likely to accelerate the pace of rate cuts to counterbalance consumer weakness if the labor market weakens further."

When interest rates are cut, a new Treasury note or bond pays the lower rate. In the secondary market, older notes and bonds with higher annual interest rates are priced above face value, which reduces net yield.

Treasury yields reported daily or in real time reflect demand. Increased buying raises prices and reduces yields, for example.

Institutions and hedge funds have been buying Treasuries to use as collateral for loans to buy other assets, said Bob Coleman, CEO of Idaho Armored Vaults and Profits Plus Capital Management in Nampa, Idaho. Loans are repaid with investment proceeds, such as from a shorted Treasury futures contract used as a hedge.

"Collateralization is the key to the whole system," he said.

Spreads, or differences between interest earned and paid, have been favorable.

"The problem is when you get into a liquidity dislocation, someone becomes a forced buyer or seller, and the pricing begins to work against them," Coleman said, "The spread turns from a profit center to a potential loss. Or, they are so collateralized that they get a margin call that they may be forced to sell assets to unwind."

Spreads and liquidity would be hurt by increased inflation, a risk if the Fed decreases short-term rates too much, too soon, he said.

Gold prices are high and rising.

"Gold is a barometer of fear and a barometer of confidence in the system," Coleman said. "The system is levering up higher and higher every year. Gold is just a representation of the worry that's been building."

Rate memory

Reynolds and his family and crew grow a dozen crops on about 2,200 acres. They milk 700 cows and feed about 1,000 steers and pigs.

He started the farm in 1985 and began borrowing in 1987 — at an interest rate in the 14-15% range, about half what he pays on his current operating loan.

"Low money makes everything so much easier," Reynolds said.