How Sensitive is the Farm Sector’s Ability to Repay Debt to Rising Interest Rates?

Recent farm sector trends, including rising debt and declining income, have led to comparisons between agriculture’s current economic environment and the period leading up to the farm financial crisis. Between 1970 and 1980, inflation-adjusted farm sector debt grew rapidly, expanding by 5.6% annually. Over the most recent decade, inflation-adjusted farm sector debt was still climbing an average of 4% per year, and the USDA currently projects inflation-adjusted debt to be at its highest level since the early 1980s. After inflation-adjusted net farm income declined nearly 50% between 1973 and 1979, a sharp rise in interest rates in the late 1970s—as well as other factors—led to a wave of financial stress in many agricultural sectors. As of 2016, net farm income has also declined by 50% from its 2013 peak, and a rising interest rate environment is expected as the Federal Reserve transitions toward tighter monetary policy. In the 1980s, the concurrent trends of higher debt, lower income, and rising interest rates combined with other factors to increase farm debt repayment challenges. This article considers whether today’s rising interest rate environment could also lead to increased farm sector repayment risk. Analyzing the impact of several interest rate path scenarios on farm repayment risk suggests that the sector remains well positioned to handle interest rate increases within a likely range. However, farmers starting from a worse financial position and farmers with a larger share of variable-rate debt may face greater financial stress.