How Inflation Affects Farm Loans
Inflation leads to higher interest rates as lenders adjust to the decreased purchasing power of money. And in agriculture, where margins are often thin and capital needs are high, even modest inflation can ripple through an operation quickly. For farmers managing long-term debt or planning future borrowing, understanding how inflation affects farm loans is essential for making well-informed financial decisions.
What Drives Inflation and Why It Matters to Ag
At its core, inflation occurs when the overall level of prices in the economy increases. This usually happens when demand for goods and services exceeds supply, or when production costs like labor, fuel, or raw materials rise significantly. In recent years, inflation has been driven by:
- Supply chain disruptions, particularly following global events
- Increased energy costs affecting transportation and fertilizer prices
- Higher labor costs across agricultural and rural industries
- Expansionary fiscal and monetary policies, including stimulus spending and low interest rates in previous cycles
These macroeconomic forces push the Federal Reserve to intervene, typically by raising the federal funds rate, the benchmark interest rate that influences lending across the economy. As this rate climbs, borrowing becomes more expensive across the board, including for agricultural loans.
Impact on Existing Farm Loans
For farmers with existing variable-rate loans, inflation can have a direct, painful impact. Variable-rate loans are tied to benchmarks like the prime rate or SOFR (Secured Overnight Financing Rate), both of which tend to rise when the Fed tightens monetary policy. When inflation pushes interest rates higher, your loan payments increase, sometimes significantly, without any change in the original loan amount.
This can lead to:
- Tighter cash flow during periods when costs are already rising
- Less flexibility to invest in operating needs or emergency repairs
- More pressure to restructure or refinance, often under less favorable terms
Farmers with fixed-rate loans, on the other hand, are protected from immediate interest rate hikes. However, inflation can still affect their broader financial health through rising input costs, shifts in land values, and changes in overall lending conditions.
Impact on New Borrowing
When interest rates rise, the cost of new borrowing increases. This affects your ability to finance equipment, land, infrastructure, or working capital. Higher rates mean:
- Higher monthly payments, making large investments riskier
- Tighter debt service coverage ratios, which may reduce your eligibility for larger or more flexible loans
- More scrutiny from lenders, who must assess increased risk in a higher-rate environment
For expansion-minded operators or younger producers looking to acquire land or launch new ventures, this can be a substantial headwind. Projects that looked financially sound in a 4% interest rate environment might no longer pencil out at 7% or 8%.
“Right now, every borrowing decision feels heavier,” shares Luke Schultz at Conterra. “I like to ask: What can wait? What can’t? Can it be cut and not missed? (i.e., equipment or low return rental agreements), What is the priority? And lastly, I combine it all into a quasi “Health Report” of the operation to make a global/annual assessment of my operation”.
While inflation poses serious challenges for those already carrying debt, it also changes the math for new borrowing. Whether you’re looking to finance equipment, purchase land, or fund expansion, rising interest rates can shift what’s feasible, and what’s not. Understanding how inflation affects future lending decisions is just as important as managing the loans you already have
🔗 For a broader look at how inflation is reshaping financial strategies across agriculture,
including refinancing, diversification, and lender relationships,
explore the full article on managing farm debt during inflation.
Inflation’s Psychological Weight
It’s not just the numbers that shift during inflation, it’s the decision-making. And for farmers, that uncertainty can feel overwhelming. When input costs jump from one season to the next and interest rates keep climbing, it gets harder to make confident choices. Should you buy that piece of equipment? Lock in a loan? Expand acres or sit tight?
That kind of pressure can lead to hesitation, where good plans get delayed, or where decisions are made fast, just to stay ahead of rising costs. Not because the ideas weren’t solid, but because the timing felt too uncertain.
“Second-guessing decisions made during these times are commonplace,” continued Schultz. “We need to just slow down, look at the numbers together, and talk it through – kind of a ‘make it make sense approach.’ It’s not always about right or wrong, it’s about helping someone feel secure enough to make the next smart play.”
This kind of psychological strain, some call decision fatigue, can chip away at profitability and confidence. And in farming, where nearly every choice already involves tight margins and unpredictable weather, that extra mental weight is no small thing.
Inflation doesn’t just change the numbers; it shifts the decisions behind them. From rising interest rates to tighter margins and financial hesitation, the ripple effects are real and immediate for producers managing farm debt. But understanding how inflation works, and how it impacts your existing and future loans, puts you in a stronger position to act with clarity instead of reacting under pressure. When you combine insight with action, even a tough environment becomes navigable.
If you’re unsure how inflation is affecting your loan terms or want to explore your options for refinancing, restructuring, or new borrowing, now is the time to talk with someone who understands the ag lending landscape inside and out.
Reach out to our team at Conterra Ag Capital and start a conversation about building a more resilient financial plan for your operation.
Conterra Ag Capital is a mission-driven agricultural lender focused on delivering capital to where it matters most—on the ground, in the hands of producers. Serving farmers and ranchers nationwide, Conterra offers personalized financial tools and agricultural lending solutions that strengthen operations and support growth. With a nationwide team that understands the pressures and cycles of agriculture, Conterra is helping shape a more resilient and financially secure future for rural America.
Disclaimer: Please note that the information provided in this article is for educational and informational purposes only, and should not be construed as financial or investment advice. While we have made every effort to ensure the accuracy and reliability of the information presented, Conterra Ag Capital and its affiliates make no representation or warranty as to the completeness, correctness, timeliness, suitability, or validity of any information contained in this article. You should always consult a qualified financial advisor, tax professional, or other qualified professional for advice on your specific financial situation.
