Category: Farm Management

Interest rates and the cost of interest isn’t always the first thing on producer’s minds. However, interest expense can be a significant outlay. Headlines about historically low-interest rates, and even zero interest rates in some countries, may lead to the expectation that interest costs may be lower than what is reality. The graph shows that interest rates have come down from the near-term high in the second quarter of 2019.  While current rates are at a 20-year low, they are not that different from rates seen over the last 10 years. 

One might wonder why interest rates on loans hover around 5% when the Fed Funds Rate is currently at  0.25%. The Fed Funds Rate is set by the Federal Reserve as the rate at which banks can borrow money from each other overnight, and the rate serves as a benchmark for short-term interest rates. The answer can be found in a fairly common loan pricing strategy called cost-plus pricing. This method builds loan pricing  (interest rate) from the ground up. It starts with the cost of obtaining loanable funds which can be the price paid on deposits or other means of obtaining loanable funds. To this cost has added the cost of servicing the loan (processing, salaries, etc.), a risk premium to account for the risk of default, and a profit margin. When all four parts of pricing are taken as a whole, the market equates a near-zero fed funds rate to about 5% cost of funds for Agriculture.  

Citations:

Federal Reserve Bank of Dallas. 2021. Agricultural Survey. Octoberhttps://www.dallasfed.org/research/surveys/agsurvey/2020/ag2002.aspx#Data

Board of Governors of the Federal Reserve System. July 2021. “Open Market Operations.” Policy Tools. https://www.federalreserve.gov/monetarypolicy/openmarket.htm

Diette, Matthew D. November 2000. “How do lenders set interest rates on loans?” Federal Reserve Bank of Minneapolis. https://www.minneapolisfed.org/article/2000/how-do-lenders-set-interest-rates-on-loans

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Knapek, George. “Cost-Plus Pricing?” Southern Ag Today 1(44.3). October 27, 2021. Permalink

From 1995-2020, available products and program changes have dramatically shifted the profile of crop insurance products used by Southern ag producers.  In that time, producers in 13 Southern states have typically covered around 40 to 45 million combined acres across 7 major commodities.

In 1995, over 45 million acres across the South were covered by a limited offering of yield only type products.  Two products covered almost 91% of insured acres.  Catastrophic coverage (50% yield and 55% price) carried nearly 30 million acres with another 12.35 million under 65% APH.  As revenue products [Revenue Assurance, Crop Revenue Coverage, and Revenue Protection (RP)] were developed and incentive structures evolved, producers (and in no small part, their lenders) have come to rely heavily on revenue protection at higher buy-up levels.  By 2007, 50% of the acres were covered by a revenue type product, and by 2020 that share had grown to over 80%.  Two coverage levels, 70% RP and 75% RP, dominate all other product types/levels, accounting for over half of the acres (24.7 of 44.9 million acres) covered in 2020.

Southern Crop Acres Insured by Product Type/Level

Klose, Steven. “Revenue Protection Dominates Crop Insurance Coverage.” Southern Ag Today 1(43.3). October 20, 2021. Permalink

The emergence of developing carbon markets and programs aimed at the agriculture sector have provided farmers with the opportunity to receive payments for adopting management practices that reduce greenhouse gas emissions.  The United States Environmental Protection Agency (EPA) estimates that over half of the greenhouse gases emitted in the agriculture sector come from soil management (Figure 1).  Therefore, most carbon programs in the agricultural sector provide payments to farmers who generate carbon credits by adopting no-till or conservation tillage practices or cover crops.  The majority of current carbon programs require the concept of additionality; meaning they will only pay for new (added) carbon-sequestering practices.  Therefore, if you were an early adopter of conservation practices like no-till or cover crops and are standard practices on your farm, today you are not eligible to enroll those acres in most carbon programs.  Current contracts offer farmers a range from $15-$20 per ton of carbon sequestered, but capacity to sequester (tons/acre) and the conservation practices adopted will vary by individual farm.  It is essential to understand the costs and risks of implementing new practices and critically compare those to the potential benefits before enrolling in any carbon market program.  Furthermore, due to the complexity and nuances of current carbon market programs, it is recommended you seek legal advice before entering into any contract.

Figure 1. Percent of U.S. greenhouse gas emissions from agriculture activities (source: U.S. EPA Inventory of Greenhouse Gas Emissions)

Shockley, Jordan. “Adopting Farm Management Practices for Carbon Credit Payments?”. Southern Ag Today 1(42.3). October 13, 2021. Permalink