Rising Interest Rates to Cap Dairy Farm Expansion
This year’s rising interest rates will continue to discourage expansion throughout the dairy industry as the cost to service debt soars. Since March, the Federal Reserve has hiked rates six times, lifting them by 3.75 percentage points, and another gain is likely in mid-December.
Last week, Fed Chair Jerome Powell reiterated that inflation remains above the targeted level of 2%, and the Fed will continue with its path of rate increases, but the pace of rate hikes could moderate to 0.5 percentage points in December.
Betty Berning, analyst with the Daily Dairy Report, said the current rate increases have already negatively affected dairy producers and dairy manufacturers. On a 30-year mortgage of $1 million, a reasonable amount for a small dairy, she said the rate hikes, from 3.5% in March to 7.25% as of this week, hypothetically would raise monthly payments by more than $2,300, or nearly $840,000 over the life of the loan.
With the rise in interest rates, dairy producers will also pay significantly more on operating loans,” she said. For example, a rate increase of 3.75 percentage points on an operating loan of $10 million would result in an additional $375,000 in annual interest payments.
“Whether a dairy has short- or long-term debt, this year’s interest rate increases are squeezing farm margins,” Berning said. “The result is that producers will manage short-term expenses where possible and could even reconsider building new facilities. Because of this, high interest rates will slow U.S. milk production in the near term and beyond.”
Rapidly rising interest rates and uncertainly about when the Fed will change course are also preventing processors from breaking ground on new facilities, she said, which is just another factor that will limit milk supply growth.
“In several key regions, processing capacity is full, and producers in these regions would be remiss to expand their operations,” Berning said. “This provides a considerable advantage to those who expanded earlier and who already have a home for their milk, but for those who are new or planning to grow, it creates a barrier to entry.”
Looking ahead, as farmland and other asset values increase, the obstacles to expand will only become more burdensome for many producers, she added.
By FRAN HOWARD
December 7, 2022