How Rising Interest Rates Impact Agricultural Businesses

Interest rates affect nearly every part of an agricultural operation, from land and equipment purchases to operating lines and long-term expansion plans. When rates rise, the cost of borrowing increases, and financial decisions that once appeared manageable may require a closer review.

Agricultural businesses often carry significant debt because of the capital needed to operate. Understanding how higher rates affect cash flow, profitability, and future investment can help producers make more informed decisions.

Higher Costs on Operating Lines

Many agricultural businesses rely on operating lines of credit to cover seed, fertilizer, feed, fuel, payroll, and other seasonal expenses. These loans are often tied to variable interest rates, which means borrowing costs can increase as market rates rise.

Even a modest rate increase can create a meaningful expense when balances remain high for several months. Producers should review:

• Current interest rates
• Average outstanding balances
• Loan renewal terms
• Interest expense compared with prior years
• The timing of expected cash receipts

Monitoring these items can help management estimate the true cost of financing the upcoming production cycle.

Greater Pressure on Cash Flow

Higher interest payments reduce the cash available for other business needs. This can be especially challenging when commodity prices are uncertain or input costs remain elevated.

Cash flow pressure may affect the operation’s ability to:

• Make equipment repairs or replacements
• Purchase inputs early
• Maintain working capital
• Fund family living expenses
• Pay down other debt
• Build cash reserves

A cash flow forecast can help owners identify periods when borrowing needs may be highest and determine whether current financing arrangements remain sustainable.

More Expensive Equipment Purchases

Farm machinery and equipment often require substantial financing. As rates rise, the monthly or annual payment on a new purchase also increases.

Before financing equipment, consider the full economic impact of the decision. Questions may include:

• Is the purchase necessary for current operations?
• Can existing equipment remain in service?
• Would leasing provide a better short-term option?
• Will the equipment reduce labor, repair, or custom-hire costs?
• Can the operation support the payments during a weaker production year?

The tax benefits of depreciation should also be considered, but a tax deduction alone does not make a purchase financially sound. The equipment should support an operational need and fit within the business’s cash flow.

Changes in Land Purchase Decisions

Higher rates can significantly affect the cost of purchasing farmland. A larger interest expense may reduce the amount a buyer can reasonably afford, even when the land itself appears to be a strong long-term investment.

Owners evaluating a land purchase should consider:

• The required down payment
• Annual debt payments
• Expected rental or production income
• Property taxes and other carrying costs
• The impact on working capital
• Whether the purchase remains affordable under lower commodity prices

Land decisions should be evaluated using realistic assumptions rather than relying only on recent yields or market conditions.

Refinancing May Be Less Attractive

When rates are low, refinancing can reduce payments or provide additional working capital. In a higher-rate environment, replacing existing debt may increase total interest costs.

Before refinancing, compare:

• The rate on existing debt
• The proposed new rate
• Remaining loan terms
• Closing costs and fees
• Prepayment penalties
• Changes in collateral requirements
• The total interest paid over the life of the loan

A lower payment does not always mean a lower overall cost. Extending the repayment period may improve short-term cash flow while increasing total interest expense.

Variable-Rate Debt Creates Additional Risk

Variable-rate debt can be useful because it may offer flexibility or lower initial borrowing costs. It can also expose the operation to changing payments.

Agricultural businesses should understand which loans have fixed rates and which can adjust. Management may also want to estimate how future rate increases would affect annual debt service.

This type of review can help owners decide whether to convert some debt to a fixed rate, pay down certain balances, or maintain additional cash reserves.

Capital Investments May Require a Higher Return

When borrowing costs increase, a new investment must generate more income or savings to justify the expense. Projects that appeared profitable under lower rates may no longer produce an acceptable return.

This may apply to investments such as:

• Grain storage
• Irrigation systems
• Livestock facilities
• Renewable energy projects
• New machinery
• Land improvements
• Expansion into additional acreage

Financial projections should include the current cost of financing, reasonable operating assumptions, and the possibility of lower-than-expected revenue.

Loan Covenants Can Become More Difficult to Meet

Higher interest expense can reduce net income and affect financial ratios used by lenders. Depending on the loan agreement, this may create challenges with debt-service coverage, working capital, or debt-to-equity requirements.

Owners should review loan covenants before year-end and communicate with lenders if the operation may have difficulty meeting them. Addressing concerns early generally provides more options than waiting until a covenant has been violated.

Tax Planning Becomes More Important

Interest paid on business debt may generally be deductible, subject to applicable tax rules and limitations. However, the deduction only offsets part of the cost. The business still needs enough cash to make the payment.

Tax planning may help owners evaluate:

• The timing of income and expenses
• Equipment purchase decisions
• Depreciation options
• Debt restructuring
• Entity-level tax considerations
• Estimated tax payments

Financing and tax decisions should be reviewed together because a strategy that improves taxes may not always improve cash flow.

Preparing for Higher Borrowing Costs

Rising interest rates do not necessarily mean an agricultural business should stop borrowing or investing. They do mean that owners should evaluate debt more carefully and use realistic assumptions when making long-term commitments.

At DBC, we help agricultural businesses review cash flow, assess financing decisions, and understand the tax impact of major purchases and investments. Regular financial planning can help owners manage borrowing costs while protecting the operation’s long-term stability.

This article provides general tax and accounting insights and is not intended as advice specific to your organization or a substitute for personal consultation. We do not provide legal advice. Because every organization’s circumstances are unique, we encourage you to consult with your legal, tax, or accounting advisor regarding your specific situation.