Increased interest rates may hurt new farmers

Aaron Lehman knows about belt-tightening.

Lehman, president of the Iowa Farmers Union and a fifth-generation farmer in rural Polk County, said the current atmosphere in agribusiness has many farmers - even well-established ones - facing tough financial decisions.

On June 13 the Federal Reserve increased interest rates, making that the second hike this year, with more expected.

Most beginning farmers must incur significant loan debt to acquire the land, equipment and crops needed to start an operation. One accountant estimated last year that the cost to get started farming at more $5 million, according to a 'Successful Farming” article.

According to estimates in the article, land alone accounts for three-quarters of the cost to start a farm.

Rising loan interest rates make that debt more expensive.

'It's something we've been watching for at least a couple years now,” said Chad Hart, Iowa State University associate professor of economics and a crops markets specialist. 'The Fed has raised interest rates four or five times …

(in recent years), with the expectation that we're going to see more increases.”

Higher short-term loan interest rates on their own aren't going to change the course of the agriculture economy, Hart said.

However, they do add to the overall existing strain that includes dropping farm incomes, a heated farm bill debate and precarious trade relations with Iowa's largest international customers such as China for soybeans, corn and pork.

'For some that might mean they're putting off investments in machinery,” Lehman said. 'For others, if they're losing equity in their farm, they're not able to pay off debts as quickly as would be normal.”

The most vulnerable farmers, Lehman said, are those who are highly leveraged financially and/or are incurring debt.

'That includes a lot of beginning farmers, farmers who have taken risks in order to get started,” Lehman said.

And any threat to beginning farmers is troubling, Lehman said.

According to U.S. Department of Agriculture data, the average age of farmers, nationwide and in Iowa, is going up. According to USDA agriculture census data, the number of farmers below the age of 35 has decreased from 9,827 in 1997 to 6,242 in 2012.

And as farmers die or age of out, many operations are being purchased by developers or larger operations, rather than being passed on to a new generation, Lehman said.

'The food system is better served by a broad network of independent producers,” he said.

That's because small- and medium-sized producers are strong contributors to rural communities, businesses, schools, churches and institutions, Lehman said.

Greg Gannon, president and CEO of DeWitt Bank Trust and Co., agreed. A shrinking number of farmers, he said, is bad for rural economies.

'We have a declining farm population, and when the communities that serve those agriculture areas (shrink) …

the businesses in those communities are going to suffer as a result,” Gannon said.

That challenging first step

Carmen Black, operator of Sun Dog Farm and Local Harvest near Solon, received her land in 2016 from a 4H mentor who retired from farming.

But as a young, new producer who didn't grow up on a farm, Black said the way she acquired her land is unusual. The high cost of land is a barrier to new producers, but 'even the first step of finding land to buy is a big issue as well that has slowed people down,” she said.

Black and her peers, including Alyssa Dunn of Crow's Creek Farm in eastern Linn County, said rising interest rates could discourage new farmers from getting started.

Higher interest rates also can be bad news for established farmers seeking to grow, Hart said.

'Established farmers that grew very quickly five to 10 years ago - they obtained a lot of loans to bulk up the operation, and just as they built the operation up those interest rate changes hit,” Hart said.

In the past four or five years, Earl Canfield of Canfield Family Farm near Dunkerton has significantly diversified the farm's products and reduced the use of pesticides and GMO crops.

Canfield, 49, has been farming his entire life and his family has been farming the same land for around a century and a half. But as he has transformed the farm, Canfield has run into some of the roadblocks new farmers face - the costs associated with acquiring new kinds of capital.

However, Canfield is determined to keep his dependence on credit low. He said rising interest rates discourage him from taking out more loans to continue growing the operation.

Black, Dunn and Canfield said they and others like them will be hurt as interest rates continue to rise. And as they suffer, so will Iowa's rural communities.

'There's social effects of having fewer farm families. It has an effect on schools, local business. There are fewer households to serve,” DeWitt Bank's Gannon said.

'If any community isn't able to grow, it's harder for businesses to survive.”

the price of land

Nick Griffieon of Griffieon Family Farm is familiar with the barriers posed by high land prices.

Griffieon is a sixth-generation farmer near Ankeny, where land prices are particularly high thanks to development pressure.

The farm recently tried to pick up a piece of land across the road that went for $66,000 an acre, he recalled.

A different patch of land Griffieon was interested in was worth about $5,000. That later piece of land ended up selling in the neighborhood of $7,000 to $8,000 an acre, which is more standard. Still, the cost was too high.

'We went to bank to look into getting financed …

. The bank was only willing to spot me $3,000 an acre,” Griffieon said.

Even if land was cheaper, he said, 'you'd probably pay more in the long run on the higher interest rate.”

'There's guys that are 85 years old that are still farming. Eventually that land is going to switch hands,” Griffieon said.

'And if we don't have some younger guys that are set up, you're not going to find somebody that isn't an established farm family that's going to say, ‘Hey I'm going to go out and start farming' because there's way too much capital to get started.”

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