As the dairy markets are showing little sign of improvement, the rest of the economy also has begun to show worrying signs. On the flip side, the Federal Reserve Bank just raised the interest rate for the fourth time this year.

And, last month, the Federal Bank reported worsening credit conditions for the agricultural sector in the Midwest. Most lenders indicated that loan repayment conditions have deteriorated in the last 12 months. They also indicated a greater demand for loans compared to a year ago.

Before this hike, the interest rates on farm operating loans across the Midwest were already 1 percent higher than two years ago . . . averaging close to 6 percent. A similar situation prevails between real estate loans and interest rates.

Small expense, big impact
Interest cost is a small share of total expenses for most dairy farms. The real impact is that higher interest rates, combined with tightening credit conditions, reduce the borrowing capacity of most farms. This potentially limits their ability to survive the current downturn in the dairy economy.

As we know too well, the number of dairy farms keeps melting through most of the Midwest and the U.S. In Wisconsin alone, the number of licensed dairy farms dropped by 660 in the last 12 months, an 8 percent loss.

The only financial anchor is that land values are still up . . . slightly. The Federal Reserve Bank reported land value rose over the last 12 months in Indiana, Iowa, and Wisconsin, with only a very small decline in average value for Minnesota and Illinois. This is encouraging news for most dairy farms in the Midwest, as land represents their primary source of equity.

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(c) Hoard's Dairyman Intel 2018
December 24, 2018
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