Author: Andrew Wright

Although it may be a new year, it brings many old questions, including how the Federal Reserve will manage interest rates in 2026. The Federal Reserve adjusts the federal funds rate, the rate at which banks in the Federal Reserve System lend to one another.  Their objective in adjusting rates is to 1) keep inflation low and stable and 2) maintain full employment in the economy. After swiftly raising the federal funds rate in 2022 to combat inflation, the Federal Reserve began lowering its target rate slowly in the second half of 2024. The federal funds rate held steady for most of 2025; however, the Federal Open Market Committee (FOMC), the group within the Federal Reserve that sets interest rates, resumed rate cuts at its September meeting. The FOMC implemented additional cuts at its next two meetings in October and December.

Additionally, at the December meeting, the FOMC released its latest economic projections and monetary policy expectations. These projections summarize the views of the thirteen FOMC members on economic growth, unemployment, and inflation, as well as their views on appropriate monetary policy in both the short and long term. Table 1 summarizes FOMC members’ projections for 2026. While FOMC members largely agree on how the economy will perform this year, they differ on how the federal funds rate should change.

Table 1. 2026 Economic Projections of FOMC Members as of December 30, 2025

	Median (%)	Central Tendency (%)1	Range (%)
Change in Real GDP	2.3	2.1 – 2.5	2.0 – 2.6
Unemployment Rate	4.4	4.3 – 4.4	4.2 – 4.6
PCE Inflation	2.4	2.3 – 2.5	2.2 – 2.7
Federal Funds Rate	3.4	2.9 – 3.6	2.1 – 3.9

How the FOMC manages the federal funds rate in 2026 will depend on how inflation and unemployment change. All else equal, if inflation rises again, the FOMC is more likely to maintain or raise the federal funds rate. On the other hand, if unemployment increases, the FOMC is likely to lower the federal funds rate and may do so more rapidly than it currently plans. If we take the FOMC’s median projection as its most likely course of action, we expect the FOMC to make a single quarter-point cut to the federal funds rate in 2026. While it may implement this cut early in 2026, during its January or March meeting, it’s more likely that a single cut would occur in the third or fourth quarter of 2026. This would imply a 3.5-3.75 percent federal funds rate to start the year, with a cut to 3.25-3.5 percent at some point between June and December.

Figure 1 uses data from the Dallas Federal Reserve’s Agricultural Survey to illustrate how the FOMC’s actions affect agricultural lending rates. Ag lending rates tend to move with the federal funds rate and are about 4-5 percentage points higher on average. If this relationship continues, a single quarter-point cut would imply average ag lending rates in the Dallas Federal Reserve District in the mid-to-upper 7 percent range for operating loans and in the low-to-mid 7 percent range for intermediate and real estate loans. However, the actual rate a borrower receives will depend on their relationship with the lender and their perceived creditworthiness.

Figure 1. Agricultural Lending Rates by type and the Federal Funds Rate, 2022-2025

References

Board of Governors of the Federal Reserve System (US), Federal Funds Effective Rate [FEDFUNDS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FEDFUNDS.

Board of Governors of the Federal Reserve System (US), Agricultural Survey, retrieved from the Federal Reserve Bank of Dallas; https://www.dallasfed.org/research/surveys/agsurvey.

Board of Governors of the Federal Reserve System (US), December 30, 2025: FOMC Projections Materials, Accessible Version.  Retrieved from: https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20251210.htm.

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 Wright, Andrew. “The Outlook for Interest Rates in 2026.” Southern Ag Today 6(6.1). February 2, 2026. Permalink

In May, the USDA Economic Research Service (ERS) released commodity cost and return estimates for crop and livestock products grown in the United States. These estimates are published twice a year and offer insights into the costs faced by the “average” producer at the national and regional levels across the United States. Additionally, on June 18, ERS released cost-of-production forecasts for the 2025 and 2026 production years. This article uses the ERS data to examine changes in operating costs^[1] for producers in southern states since 2022, when farm operating costs peaked, and to estimate future cost trends.

Figure 1 compares operating costs for selected crops in 2022, 2023, and 2024 based on ERS data. Note that ERS divides states into farm resource regions for their estimates. The Prairie Gateway includes most of Texas, parts of New Mexico, Oklahoma, Colorado, and Nebraska, as well as all of Kansas. The Southern Seaboard consists of the easternmost counties of Texas, the northwestern counties of Louisiana, the southeastern counties of Mississippi, and most of Alabama, Georgia, South Carolina, North Carolina, and Virginia. Finally, the Mississippi portal covers the eastern parts of Arkansas and Louisiana, along with the western parts of Tennessee and Mississippi.

The data show that operating costs in the southern United States have decreased from their recent highs in 2022; however, they are still significantly above their 10-year averages. The only exception is cotton in the Prairie Gateway states, where increases in ginning costs (due to higher production in 2023 and 2024) and interest costs were enough to offset reductions in other expenses. Table 1 outlines the changes in specific operating costs from 2022 to 2024, explaining why overall costs have decreased since 2022. Unsurprisingly, reductions in operating expenses are mainly due to lower costs for fertilizer, chemicals, and fuel over the past two years.  

Unfortunately for producers, the recent decline in operating costs is likely to be temporary. Table 2 presents the ERS forecasts for corn, cotton, peanuts, and soybeans’ operating expenses in 2025 and 2026, alongside the 2024 cost estimates for comparison. The forecasts indicate that operating expenses will remain close to their 2024 level this year and are expected to rise slightly in 2026. Note that the commodity cost forecasts are reported at the national level rather than the regional level. However, regional and national trends are highly correlated in the ERS cost estimates. Therefore, it is reasonable that regional cost forecasts would resemble the national forecast provided by ERS.

Figure 1. Operating Costs ($/ac) for Selected Crops in Southern Regions, 2022-2024 and 10-Year Average

Table 1. Change in Operating Costs ($/ac), 2022-2024 

 Table 2. Estimated and Forecasted Operating Costs, 2024-2026

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^[1] Operating costs for all crops include seed, fertilizer, chemicals, custom services, fuel/lube/electricity, repairs, purchased irrigation water, and interest on operating inputs. In addition, cotton operating costs includes ginning, and peanut operating costs includes commercial drying.     

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References and Resources

U.S. Department of Agriculture, Economic Research Service. Commodity Costs and Returns data. https://www.ers.usda.gov/data-products/commodity-costs-and-returns/documentation    

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Wright, Andrew. “Recent Trends in Farm Operating Costs.” Southern Ag Today 5(28.1). July 7, 2025. Permalink

Over the last few years, producers have been challenged to balance decreasing commodity prices against high input costs. One of the major factors contributing to this challenge has been above-average fertilizer prices. In 2021 and 2022, a combination of increased demand for fertilizer and disruptions to fertilizer production and supply caused prices to double or, in the case of anhydrous ammonia (NH3), triple in a few months (Figure 1), reaching record highs. The good news is that nominal fertilizer prices decreased throughout 2023 and 2024 as these shocks were largely corrected. In the first half of 2023, prices decreased by 20%-40%, depending on the product, from their 2022 highs. Prices largely declined in 2024 until the last quarter of the year. Since then, prices for most fertilizer products have either remained stable or increased.

Of course, the cost of fertilizer depends not only on the price of fertilizer but also on the price of the commodity the fertilizer is used to grow. It’s much easier for producers to purchase fertilizer when they can sell corn for $7/bushel, as opposed to $4/bushel, regardless of the nominal fertilizer price. Figures 2 and 3 illustrate the price of urea relative to corn and cotton prices for the years 2020-2024. Fertilizer prices used to calculate these ratios come from DTN Progressive Farmer’s weekly average fertilizer price updates. Cotton and corn prices use the weekly closing price for the nearby December contract as reported in Texas A&M AgriLife Extension Economics Basis Data and by Barchart.com.  

Figure 2 illustrates the total bushels of corn required to purchase one ton of urea in each month of the series. Figure 3 shows the total pounds of cotton lint required to purchase one ton of urea each month. From January 2020 until August 2021, producers needed an average of 98.02 bushels of corn or 577.80 pounds of cotton lint to purchase 1 ton of urea. From September 2021 through December 2022, when fertilizer prices reached their highest levels, one ton of urea cost an average of 135.72 bushels of corn or 836.61 pounds of cotton lint. From January 2023 through December 2024, as fertilizer prices fell, one ton of urea was worth 117.40 bushels of corn or 719.26 pounds of cotton lint on average.  

Now, what about relative fertilizer prices in 2025? For the week of January 13-17, DTN Progressive Farmer reported an average price of $492/ton of urea. During that same week, the average price for the Dec ’25 corn contract was $4.56/bushel, and the average price for the Dec ’25 cotton contract was $0.69/pound, according to Barchart.com. This gives us a urea-corn price ratio of 107.92 bushels/ton and a urea-cotton ratio of 711.25 pounds/ton. To put these values into perspective, this urea-corn ratio is similar to the June 2020 ratio and about 0.83 bushels/ton less than in January 2024.  The urea-cotton ratio, on the other hand, is about 52.32 pounds/ton higher than in January 2024, and similar to June and July of last year.  

Currently, fertilizer is slightly cheaper relative to corn prices and slightly more expensive relative to cotton prices when compared to a year ago.  Looking forward, nominal fertilizer prices have been mostly stable since July of last year.  Should this trend continue, changes in relative fertilizer prices this year will depend on how farm commodity prices change. 

Figure 1.  Weekly Retail Prices for Selected Fertilizer Products, 2020-2024

Figure 2. Monthly Urea-Corn Price Ratio, 2020-2024

Figure 3. Monthly Urea-Cotton Price Ratio, 2020-2024

Sources:

Corn Historical Prices.  Barchart.com, https://www.barchart.com/futures/quotes/ZCZ25/historical-prices?orderBy=contractExpirationDate&orderDir=asc. 

Cotton #2 Historical Prices. Barchart.com, https://www.barchart.com/futures/quotes/CTZ25/historical-prices?orderBy=contractExpirationDate&orderDir=asc. 

DTN Retail Fertilizer Trends.  DTN Progressive Farmer, https://www.dtnpf.com/agriculture/web/ag/crops. 

Texas A&M AgriLife Extension Agricultural Economics Basis Data, https://agecoext.tamu.edu/resources/basis-project/basis-data. 

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Wright, Andrew. “Fertilizer Prices: What Can We Expect in 2025?” Southern Ag Today 5(6.1). February 3, 2025. Permalink

A “triple threat” of low commodity prices, high input costs, and high interest rates creates a challenging financial environment for many producers.  This is especially true for producers with little working capital and who rely on operating loans to finance their business activities.  The good news is that one part of this “triple threat” may soon begin to ease.  

The Federal Reserve began raising the federal funds rate in the first quarter of 2022 in response to rising inflation (see Figure 1).  This started a series of rate increases that ended in August 2023.  Since, then, the federal funds rate has held steady at 5.33%.  As the federal funds rate increased, interest rates charged on agricultural loans went up from about 5% to around 9% (Figure 1). 

However, in a speech on August 23, 2024, Federal Reserve Chair Jerome Powell indicated that the Federal Open Market Committee (FOMC) would begin to lower the federal funds rate, perhaps as early as their September meeting.  As the FOMC lowers the federal funds rate, other interest rates will begin to fall as well.  This will be a welcome reprieve for producers as the cost of borrowing to finance operations decreases.  It also provides producers with opportunities to manage the debt they have incurred over the last few years at high interest rates.  Two strategies that producers might use as interest rates fall are debt refinancing and debt consolidation.

When debt is refinanced, an existing loan is replaced by a new loan with different terms and conditions for repayment.  The new loan pays off the remaining principal plus any accrued interest that is still owed on the old loan.  The amount that is paid off becomes the principal owed on the new loan.  Payments are then made on this new loan, ideally with lower periodic payments.  Debt consolidation is a form of refinancing in which multiple debts are combined into a single loan.  The new loan pays off the remaining principal and any accrued interest on all the old loans, and the amount that is paid off becomes the principal owed on the new loan.

The primary benefit of refinancing or consolidating debt is smaller monthly or periodic payments, which occurs for two reasons.  First, refinancing or consolidating debt often involves extending the debt’s repayment period.  The amount owed is paid back over a longer period than the original loan(s) terms allowed for, so payments in each month are less.  Second, refinancing or consolidating debt as interest rates decrease means the new loan should charge less in interest monthly than was charged on the old loan(s).  The potential results of this benefit include improved monthly cash flow and an easier time making regular payments on debt.

Before a producer considers either of these strategies to help manage their debt, it is important to consider the potential pitfalls of refinancing or consolidation.  First, extending the loan payment period may incur higher total interest costs.  Although the amount owed in any single period is less, the fact that the loan principal is paid back over a longer time means interest accrues for longer as well.  Therefore, there may be a tradeoff between lower periodic payments and higher overall costs for the loan.  A second pitfall to consider is the closing costs and fees the producer must pay to initiate the new loan.  Producers should consider whether they can pay these costs, and whether incurring these costs are worth any benefits of refinancing or consolidation, before initiating either process with their lender.  Ultimately, producers will need to consult with their lenders to determine what refinancing or consolidations options are available to them and whether these options will be beneficial in the long run.

Figure 1.  Changes in the Inflation rate, the Federal Funds Rate, and the Unemployment Rate, January 2018-February 2024 

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References

Board of Governors of the Federal Reserve System (US), Federal Funds Effective Rate [FEDFUNDS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FEDFUNDS, April 1, 2024.

Board of Governors of the Federal Reserve System (US), Agricultural Survey, retrieved from the Federal Reserve Bank of Dallas; https://www.dallasfed.org/research/surveys/agsurvey/2024/ag2401#tab-report.

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Wright, Andrew. “Lower Interest Rates Create Opportunities for Managing Debt on the Farm.” Southern Ag Today 4(37.3). September 11, 2024. Permalink

In March 2022, the Federal Reserve began raising interest rates at an aggressive pace to fight rising inflation.  Now, two years later and with inflation near the Federal Reserve’s target rate, the question on most of our minds is, will the Federal Reserve begin to bring interest rates down this year?

The Federal Reserve enacts monetary policy in the United States with the dual mandate of 1) keeping inflation low and stable and 2) maintaining full employment in the economy.  To achieve these goals, the Federal Reserve’s main policy tool is to adjust the federal funds rate or the rate at which banks in the Federal Reserve System lend to one another overnight.  This rate is set by the Federal Open Market Committee (FOMC), which meets eight times each year (roughly every six weeks) to determine if any change in the federal funds rate is warranted.

Figure 1 below shows how the federal funds rate has changed in comparison to the inflation rate, measured using the Personal Consumption Expenditure index (PCE), and the unemployment rate.  From March 2022 until August 2023, the FOMC increased the federal funds rate every time they met.  Since then, they have held interest rates steady between 5.25% and 5.50%.

Figure 2 below shows how increases in the federal funds rate have impacted the cost of borrowing.  Since March 2022, the bank prime rate has increased from 3.25% to 8.50%.  Rates for variable rate agricultural loans, as reported by the Federal Reserve Bank of Dallas Agricultural Survey, have followed a similar trend.  Interest rates reported in the survey for the first quarter of 2024 were roughly 9.50% for operating loans, 9.27% for intermediate loans, and 8.88% for long-term farm real estate loans.  

Whether or not the FOMC begins to ease interest rates this year will depend largely on whether the inflation rate continues to decline.  As shown in Figure 1, the rate of overall inflation in February 2024 was 2.5%.  The core inflation rate, which excludes food and energy expenditures, was slightly higher at 2.8%.  The Federal Reserve’s target rate for inflation is 2.0%.  

It seems clear from the figure that the FOMC’s aggressive rate increases have been successful in taming inflation; however, inflation remains above the Federal Reserve’s target rate.  Perhaps more concerning, at least from the perspective of the FOMC, is that the rate at which inflation is decreasing has slowed over the past year.  In fact, the inflation rate essentially remained unchanged from December 2023 through February 2024.

It is unlikely that the FOMC will bring interest rates down if inflation remains above the Federal Reserve’s target rate.  However, FOMC members have given no indication that they intend to raise interest rates above their current levels to achieve that goal either.  In the short term, the safe bet seems to be to expect interest rates to hold steady at or near where they are now.  Two caveats to this prediction are unexpected changes in either the inflation rate or the level of employment in the U.S. economy.  Should the inflation rate begin to move upward, the FOMC may decide they have no choice but to resume interest rate increases.  Alternatively, signs that indicate the U.S. economy is entering a recession would pressure the FOMC to begin lowering interest rates despite greater-than-desired inflation.  

According to the Federal Reserve’s description of its monetary policy goals, the Fed does not specify a numerical goal for employment like it does for inflation; therefore, it is difficult to predict what specific economic conditions would encourage the FOMC to ease interest rates prematurely.  One employment indicator that the FOMC will pay attention to as it makes interest rate decisions is the unemployment rate.  An unexpected increase in the unemployment rate could indicate that the economy is entering a recession.

The most recent estimate from the Bureau of Labor Statistics places the unemployment rate at 3.8%, which is below the 30-year average and in line with the long-term projections made by FOMC members.  Furthermore, the unemployment rate has held steady at or near pre-pandemic levels even as interest rates have increased (Figure 1).  Based on this data, it appears that high interest rates have had little impact on employment, at least up to this point.  Should this continue, the chance that the FOMC will vote to decrease interest rates before they reach their inflation target is small.       

Figure 1.  Changes in the Inflation rate, the Federal Funds Rate, and the Unemployment Rate, January 2018-February 2024 

Figure 2. Changes in the Federal Funds Rate, Bank Prime Rate, and Selected Agricultural Loan Rates, Q1 2018-Q1 2024

References

U.S. Bureau of Labor Statistics, Unemployment Rate [UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UNRATE, April 5, 2024.

Board of Governors of the Federal Reserve System (US), Bank Prime Loan Rate Changes: Historical Dates of Changes and Rates [PRIME], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PRIME, March 27, 2024.

Board of Governors of the Federal Reserve System (US), Federal Funds Effective Rate [FEDFUNDS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FEDFUNDS, April 1, 2024.

Board of Governors of the Federal Reserve System (US), Median Personal Consumption Expenditures Inflation, retrieved from the Federal Reserve Bank of Cleveland; https://www.clevelandfed.org/indicators-and-data/median-pce-inflation.

Board of Governors of the Federal Reserve System (US), Agricultural Survey, retrieved from the Federal Reserve Bank of Dallas; https://www.dallasfed.org/research/surveys/agsurvey/2024/ag2401#tab-report.

Board of Governors of the Federal Reserve System (US), Monetary Policy Principles and Practice, Monetary Policy: What Are Its Goals?  How Does It Work.  Retrieved from: https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm

Board of Governors of the Federal Reserve System (US), March 20, 2024: FOMC Projections Materials, Accessible Version.  Retrieved from: https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20240320.htm