5 ways for farmers and ranchers to navigate through rising interest rates

You can control the impact of higher finance costs and inputs

With five interest-rate increases this year, the Federal Reserve is hoping to curb decades-high inflation and stave off an economic recession. September’s rate hike now puts us at an almost 3% rise for 2022 after being flat for nine years.

That’s a big jump. Many expect the Fed to announce more interest-rate increases before year’s end. In fact, interest rates are likely to continue rising until inflation rates start to fall.

While there may be merit in the Fed’s strategy, it means you’ll be paying more to borrow money well into 2023 and beyond. Operating loans, equipment purchases, credit cards, mortgages—all will come with higher finance costs. Mortgage rates alone, now in the 6.7% range, have doubled in the last year.

Navigating the current environment of higher interest rates, along with surging input costs, will take a strategy of your own. Here are some ways to mitigate their impact on your farm or ranch:

1. Pay down as much non-fixed, or variable, rate debt as you can. The cost of that money is directly tied to interest changes and is getting more expensive, so do what you can to reduce your loan balance. It’s one way to cut expenses.

2. Find opportunity to switch to fixed rate from variable rate. Converting a loan to a stable rate not only will protect you from rising non-fixed rates but offer more certainty in your financial costs. Increased cost certainty will allow you to create better budgets and manage your cash over the coming months.

3. Look for efficiencies in your operation. As we’ve seen, when inflation increases, input prices rise too, shrinking margins. To keep control of your expenses, take a closer look at which areas of your business cost the most. Are there ways to streamline them? Have you shopped around for better-priced products or services? Also, it might make sense now to invest in technology—equipment, machinery, software or processes—that can streamline your farm or ranch operations. Maybe you can adopt a technology that will allow you to get more work done with the same or even fewer people and keep overhead under control. Is your accounting system as efficient as it should be? Reach out to software and technology experts to see what’s affordable for your business. Work with your financial advisor, lender or crop insurance person for ideas.

4. Look for opportunity to lock in supply costs. Whatever your farm’s necessities—fuel, fertilizer, crop protectants, feed, irrigation supplies—it’s possible to shave off some costs by negotiating with your vendor. If you can lock in a price that works for your business, it’s a good move. Make sure you actually operate from a business budget. This is a powerful tool for knowing your business costs and successfully reducing them.

5. Delay selling or pricing your crop. Let inflation work for you, not against you. If your cash flow allows it, look for ways to delay the pricing on items being sold. By delaying pricing, you are allowing inflation to work for you.

The coming year may be challenging for many United States farmers and ranchers. Understanding the financial climate, knowing your numbers and making sound decisions will help you make headway through the coming months. And, as always, reach out to an expert if you’re not sure which steps are best for your operation.

Editor’s note: Maxson Irsik, a certified public accountant, advises owners of professionally managed agribusinesses and family-owned ranches on ways to achieve their goals. Whether an owner’s goal is to expand and grow the business, discover and leverage core competencies, or protect the current owners’ legacy through careful structuring and estate planning, Max applies his experience working on and running his own family’s farm to find innovative ways to make it a reality. Contact him at [email protected].