Interest Rates and Agriculture Interest rates significantly impact agricultural markets in a number of ways. An interest rate is the cost of a loan, or the amount a lender will charge for a loan. In general, when interest rates are high, loans are more expensive, and when interest rates are low, loans are cheaper. As this analysis will demonstrate, interest rates are a macroeconomic factor that can have a significant impact on the microeconomics of agricultural businesses in three major areas of operations: cost of storing inventory, business investments, and general operating risk. First, the cost of storing inventory increases when interest rates increase. If instead of holding inventory, the inventory is sold, the income from that sale would lower the burden of increased interest rates on small businesses. Therefore, the opportunity cost of storing inventory increases when interest rates increase. Second, whether a business invests in land, machinery, or other resources is determined in part by interest rates. Investments are only made if the investor can expect to get a return on the investment that is higher than the costs associated with the interest rate. For agricultural businesses, which rely heavily on investments in land, the interest rate is a crucial consideration. Third, there is the general risk associated with interest rates that, if they rise, farm businesses might suddenly lose value, land investments might become more expensive than planned, or operating costs might increase (Pearson, 2005). The impact of interest rates on agricultural businesses is significant. However, agricultural businesses can avoid some of the risks posed by fluctuating interest rates by taking a fixed rate loan instead of a variable rate loan when interest rates are low. A further discussion of strategies to offset the risks associated with macroeconomic interest rates is warranted.
References
Pearson, C. (2005, August 15). How Interest Rates Affect Agricultural Markets. Retrieved from http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/sis10122