By Michele F. Mihaljevich
WEST LAFAYETTE, Ind. – Interest rates have increased and farmers should consider refinancing or locking in a longer-term rate before they rise even higher, Purdue University agricultural economists said recently.
“I think there’s a very good chance that we could see a 2 percent plus increase in long-term interest rates in agriculture,” said Michael Langemeier, a professor and associate director of Purdue’s Center for Commercial Agriculture. “And so, you should try to lock in some long-term interest rates if you haven’t done so, even though they’re slightly higher now than they were a year ago.”
Jim Mintert, a professor and the center’s director, said producers have been asking if they should refinance now.
“If you’re on the bubble, if you’ve been thinking about doing some refinancing or locking in a longer-term rate, I don’t think it’s too late,” Mintert explained. “You can look at a chart and say, ‘I should have done it six months ago,’ but I think there’s definitely some upside risk to these rates and so that’s a very serious consideration.”
He said the rate on a 30-year fixed rate mortgage is 5 percent, the first time it has been that high since May 2010. Despite the increase, rates are low by historical standards, Mintert noted. In the 1980s, 30-year mortgage rates were above 18 percent, he said.
Langemeier said recent mortgage rates as low as 2.5 percent were outliers. “That’s the abnormally low interest rate. That’s not something we would expect to see for the next 30 years. And so, don’t expect us to return to that anytime soon. Can we live with 5 percent? Probably. But I don’t think it’s going to stay at 5 percent. I think it’s going to continue to climb and perhaps get up there to 6-7 percent at least.”
Brady Brewer, an associate professor, said attention needs to be paid to how high rates could go. “The answer that I have is, I don’t know. Maybe you guys have the golden answer to where mortgage rates are going to be in two to three years. That’s really, I think, what the concern is here. Five percent is still pretty cheap, if you think about it from a historical perspective of where interest rates have been.”
Inflation, and how it’s impacting agriculture, was another topic during the podcast. Inflation represents a decline in purchasing power of a currency over time, Langemeier said.
There are several indices that measure inflation differently. The U.S. Bureau of Labor Statistics publishes the Consumer Price Index (CPI). One version of the CPI includes all items and another excludes food, agricultural and energy products, Brewer said. The all-items index was 8.5 percent at the time of the podcast. In April 2021, the index was less than 2 percent, he said. Typically, the Federal Reserve has set a goal of about 2 percent inflation. “Some economists made some comments about this seemed more like a ceiling than a goal of what they wanted inflation to be,” Brewer stated. “Well, obviously, we have gone almost four times over that ceiling here over the past year.”
The 8.5 percent number is not the highest ever, he said, noting inflation was above 10 percent in the 1970s and 1980s. “No one wants to go back to that over 10 percent inflation,” Brewer added.
General inflation and the price for certain agricultural inputs has increased dramatically, the economists said. For example, the cost for anhydrous ammonia rose 179 percent from February 2021 to February 2022. Potash was up 107 percent, phosphorus 18-46-0 increased 51 percent, and diesel rose 47 percent.
“If you talk to producers, that’s the first thing they’ll talk about is the very high fertilizer prices,” Langemeier said. “The rate of change has been higher in agriculture than it has been in the general economy. That’s not particularly surprising. Input prices for a specific industry like agriculture tend to be more volatile than they are in terms of general price inflation. Why is agriculture so high? Well, I talked about the very large increases in fertilizer and fuel prices, but also agriculture chemicals, machinery, building materials. All of these have increased at pretty rapid rates, contributing to that relatively high change in the input price for agricultural production items.”
The most recent Purdue University/CME Group Ag Economy Barometer, released in early May, rose eight points in April to 121, but it remains 32 percent below its reading from the same time last year. The monthly barometer gauges the health of the U.S. agricultural economy. A value greater than 100 shows positive sentiment toward the economy; values lower than 100 indicate negative sentiment.
Of the producers surveyed for the April barometer, 42 percent said higher input costs were their biggest concern. Twenty-one percent chose government policies, while 19 percent said lower output prices. “It’s hard to overstate the magnitude of the cost increases producers say they are facing,” Mintert and Langemeier said in the report summary. “This month, 60 percent of survey respondents said they expect input prices to rise by 30 percent over the next 12 months. This compares to an average of 37 percent of respondents who said they were expecting a cost increase of this magnitude when the same question was posed in the December 2021 through March 2022 surveys. The war in Ukraine has added a new level of uncertainty for producers. Sixty percent of survey respondents said the biggest impact of the war on U.S. agriculture will be on input prices.”