COMMENTARY: Interested in interest rates : Generational divide exists
Years ago, when I was just getting started in journalism, my 11-year-old car became unreliable and so I needed a "new" one. I ended up buying a five-year-old car; I'd diligently saved about two-thirds of the purchase price and borrowed the rest at 15 percent.
Yes, 15 percent. It was the '80s. Inflation was rampant and interest rates were high. That's just the way things were for everyone.
The banker suggested I repay the money over two years. I actually laughed out loud and said, "Two years at 15 percent? No way. I'm going one year." (The principal was relatively small, so I didn't save a lot of money. But it was still the right thing to do, at least for me.)
I think of that decades-old experience now that interest rates are rising after being extremely low for years—so long, in fact, that younger farmers and ranchers have never experienced anything else. Ag bankers and ag economists consistently tell me that the return of higher interest rates will be a major challenge for, and require a major adjustment in thinking by, younger agriculturalists.
And why would it be otherwise? When you grow up with something—when it's all you've ever known—you're strongly and naturally inclined to consider it normal. Oh, younger agriculturalists realize intellectually that interest rates have been low, but that's not the same as real-world, know-it-in-your-gut understanding.
Younger farmers and ranchers are getting a taste of higher rates now, however. The so-called prime rate, a widely followed rate determined by the rate that 30 banks across the country charge their best customers, stands at 5 percent. That's up from 4.25 percent a year ago and 3.25 percent two years ago.
Even so, the current 5 percent is puny compared to the double-digit rates in the late 1970s and early 1980s. In 1981, the prime hit a record 18.87 percent before beginning to slowly decline.
Making it harder
Those higher rates saddled borrowers with far greater borrowing costs. Here's an example: I'll keep the math as short and simple as possible.
Say a farmer borrows $100,000 to buy land and repays the money over 10 years.
At 3.25 percent, the monthly payment is $977.19 and the total interest paid is $17,262.83.
At 5 percent, the monthly payment is $1,060.66 and the total interest paid is $27,278.62.
At 10 percent, the monthly payment is $1,321.51 and the total interest paid is $58,580.88.
At 15 percent, the monthly payment is $1,613.35 and the total interest paid is $93,601.95.
Those are huge differences for farmer-borrowers, especially in times like these when crop prices and farm profitability are poor. Every extra dollar in interest expense is a tiny burden; thousands of additional dollars are a huge one.
I'm not saying interest rates will get to 15 percent or even 10 percent; I have no idea of how much more they'll rise. Nobody really does, not even the whip-smart people with advanced degrees who get big bucks for predicting what interest rates will do. There are just too many variables and unknowns. Nor is there space here to explain why interest rates rise and fall.
But this much is safe to say: very low interest rates, which younger agriculturalists grew up with, are gone and won't be returning anytime soon.
It's also safe to say that turning a profit in farming and ranching can be difficult. Though higher interest rates don't make the job impossible, they definitely increase the challenge.
Older agriculturalists like me know that from personal experience. Now, younger farmers and ranchers—who no doubt understand it in theory—will be learning it first-hand. Let's hope their hands-on education isn't too painful.