22 September 2022, US: As inflation continues to skyrocket, the Federal Reserve met once again to try to stabilize the economy. And as many analysts predict a possible recession, consumers are once more bracing for a rate hike of at least three-quarters of a point.
This is the third increase in less than 4 months as we saw a rate hike of 0.75% back in June and July. And as FBN’s Chief Economist Kevin McNew predicted, the Fed is raising interest rates once again.
With inflation at the highest it’s been in over 40 years, the Fed has to continue to try to curb this escalating situation. But the global market has been impacted by external factors like the ongoing conflict in Eastern Europe.
By increasing interest rates, the Fed is actively slowing down the economy which leaves the risk of recession higher than ever. And as the economy continues to shift, we turned to the experts to better understand this overwhelming issue.
What should farmers focus on
We previously advocated for farmers to refinance and take advantage of the lower interest rates when they were available. If you locked in a lower rate but still need cash, we suggest you consider our Farmland Capital product. This program is similar to a second mortgage in that FBN will take a second lien position to whatever lien currently exists, which means that you won’t lose that low rate interest loan.
Another option in an increasing rate environment is for farmers to consider locking in rates with longer terms. Farmers who can lock in rates for the next 10-30 years may have some certainty that they’ll continue to remain profitable. And if rates drop, they can prepay and refinance at lower rates. Locking in for the long term may be the right thing to do now for many. Review our great land loan rates across a variety of term options.
With farm costs not going down anytime soon due to the cost of both inputs and fertilizer, it’s good to look at ways to effectively run your operation. While the cost of fertilizer is likely to be elevated for some time, it’s worth looking at adopting technology to make input usage more efficient. Thinking about strategic alternative investments to improve your ROI is a sound option.
Is U.S. farmland at risk?
Farmland real estate has been a good long-term investment but with the uncertainties of the current economic climate, you might be wondering how this recent market turbulence will impact farmland values.
Farmland real estate is still holding value and there is strong confidence that it will continue to do so. Interest rates will have to get well above inflation rates and hold for a very long time before farmland values would be affected negatively.
Fortunately, farmland as an asset class is somewhat insulated from the turbulent U.S. economy. Recent data from the USDA shows U.S. farmland values actually increased 12.4% between June 2021 and June 2022, but the future of such values still remains uncertain.
[Learn more about how the economic shocks of 2022 are affecting farmland values in our recent FBN Research report. Unlock the free report today.]
While the ‘80s brought high inflation rates to the country due to energy and food price shocks that started in the ‘70s, the outlook for farmland values is not as dire as it was back then.
With interest rates well below current inflation rates and farmland valuations trending around fair value based on projected cash flows, there is still strong confidence in farmland values nationwide. Near-term global grain shortfalls from weather and war should further support farmland values even as the underlying investment calculus changes based on shifting interest rates.
And with the Federal Reserve now trying to get ahead of the curve, they risk creating a situation where rates are higher for longer than expected, causing longer term economic impacts. Finding the right balance is a precarious position for the Fed at the moment.
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