Insight on Current Interest Rates

February 17, 2023 | AgFocus-Ag Focus

We hope 2023 has started off well for you so far! These cold, snowy days will soon give way to warmer weather. Many will be paying cash rent at the end of this month, and that time always seems to mark the official start of the next growing season for many. Speaking of cash rent, we want to make sure you are aware of a free meeting being conducted by the UNL Extension pertaining to both tenants and landlords. Details can be found on the second page of this article. Be sure to mark your calendar for this meeting.

Update on Interest Rates

By Lee Potts, Vice President/Senior Credit Officer

 

A year ago, we sent out an article on the relationship between interest rates and land values. If you recall from that article, interest rates (and more specifically the capitalization rates) in a certain economic environment can and will impact land values over time. In the same way, borrowing money to buy land or other capital assets may be affected by the interest rate environment. The main point of bringing this up is the fact that the drastic interest rate increases seen throughout 2022 have seemed to level off for the time being. The frequency and magnitude of rate increases have certainly slowed. 

For additional review, when the Fed “changes rates,” it refers to the Fed Funds target rate, which is the interest rate at which commercial banks borrow and lend their excess reserves to each other overnight. The Federal Reserve (Fed) is the conduit for this activity to happen. The Fed adjusts this rate based on various economic factors. One of the factors is inflation which is expressed by the Personal Consumption Expenditures index (PCE). This affects economic growth by speeding it up to stimulate more growth (lower rates), or slowing it down so things like inflation do not grow too fast (higher rates). Generally, long-term interest rates are affected by various forces exerted by investors in the marketplace and their overall sentiment. Therefore, the Fed does not directly control long-term rates. 

In 2022, New York Prime, which is a benchmark commercial interest rate that is also not directly changed by the Fed, but does in fact tend to reflect Fed moves, went from 3.25% to 7.5% through a series of adjustments throughout the year. It increased another 0.25% on February 1st of this year also, bringing this benchmark rate now to 7.75%. This is being pointed out just to show how much the market has changed over the past 10 to 12 months. It remains to be seen exactly how this may help slow inflation down, as these moves by the Fed tend to show their affects weeks or months down the road. 

At this time, the various analysts across the country expect less drastic rate increases compared to what we saw in 2022, but there is also no guarantee because things can change in a hurry just as we’ve seen the past three years. Time will certainly tell, but overall, we remain optimistic for the 2023 growing season!

 

Lincoln, Neb., Jan. 31, 2022 — Nebraska Extension will host a workshop covering agricultural land management and leasing considerations for 2023 in Hartington from 1 to 4 p.m. on Feb. 27 at the Knights of Columbus Hall, 105 E. State St. 

It will offer updated leasing information relevant to landlords and tenants, including tips for communication and negotiating. It will address topics like equitable rental rates, managing and adjusting farmland leases, landlord-tenant issues, pasture leasing, crop share leasing and other management considerations. 

The presentation will be led by Allan Vyhnalek, an extension educator specializing in farm and ranch transition and succession, and Jim Jansen, an extension agricultural economist. Both are with the University of Nebraska-Lincoln’s Center for Agricultural Profitability. 

The workshop is sponsored by Security Bank in Hartington. 

The meeting is free to attend, but registration is required with Nebraska Extension in Cedar County at 402-254-6821.