Higher Interest Rates Present New Risks for Farmers
By Debbie Carlson
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Oliver Sloup, vice president of Blue Line Futures, sees a particular benefit to using new crop options for reports like June Acreage, which is slated for release on a Friday. He says farmers can both sell a corn futures contract and hedge their upside risk with an option that expires that day.

“They don't have to worry about that initial knee-jerk reaction from the market that could potentially stop them out or the market just ripping higher and not looking back. They're protected with that new crop weekly option,” Sloup says.

New crop weekly options in particular have surged in popularity. Through the first half of June, average daily trading volume nearly doubled from May. Open interest – or the number of outstanding futures contracts – soared to nearly 8,000.

new crop weekly options

Profit Potential

In their 2023 crop budget forecasts, Gary Schnitkey and Krista Swanson of the department of agricultural and consumer economics at University of Illinois, estimate Illinois farmers will break even on corn and soybean production, but lose money on wheat. Their budgets include all revenue and all financial non-land costs.

On average, Illinois farmers who plant corn after soybeans could see a return of $58 an acre, needing a breakeven price of $3.96 a bushel when figuring in non-land costs, but $5.33 if land costs are included. Farmers who plant soybeans after corn could see a return of $51 an acre. Their breakeven price for non-land costs is $7.98 a bushel, but $12.62 if land costs are included.

Another University of Illinois ag economist, Bradley Zwilling, writes that farmers need to keep an eye on their debt levels as rates increase. His research shows since 1990, agricultural debt increased an average of 4.4% per year. Using data from the Illinois Farm Bureau, Illinois farmer’s debt per tillable acre is $735 as of 2021.

Zwilling expects interest expenses will grow.

“A 1% increase in the average interest rate on all farm debt would lead to a 35% increase in interest expense per acre based on 2021 numbers,” he says.

A New Rates Environment

Older farmers are no strangers to higher rates, but Fox says analogies to the 1980s and today don’t stand up. There’s been significant industry consolidation and operations are larger, sophisticated and more financially stable as a whole. “Farming today versus the 1980s, for a variety of reasons, is radically different,” says Fox.

At the same time, younger farmers are dealing with an interest rate environment they’ve never experienced.

“If you've only been farming for 15 or 20 years, you've never seen interest rates at the farm level of, let's say, 8%. To them, that's completely foreign,” Fox says.

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About the author

Debbie Carlson
Debbie Carlson

has focused on commodities for much of her writing career. She spent more than a decade at Dow Jones covering the Chicago-based futures exchanges. As a Dow Jones editor, she worked closely with The Wall Street Journal and Barron's in planning commodities coverage.

 

 

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