Episode 84 - What Lower Interest Rates Mean for 2026 Budgets

Hunter Biram is joined by Ryan Loy to discuss the March 2026 Fed decision to hold interest rates steady and what that means for farmers. While rates have eased slightly, higher input costs mean producers are still borrowing more, keeping interest expenses elevated. They also touch on how ongoing uncertainty could shape future rate decisions and what it means for tight farm margins this season. 

Transcript

Dr. Hunter Biram 0:00

Benchmark interest rates hold steady after the March 2026 meeting of the Fed. The rate relief looks good on paper, but the savings per acre are relatively small, and input expenses continue to increase, and farmers are forced to borrow more than before. That and so much more on this episode of Morning Coffee and Ag Markets. With me in the mobile studio, I've got Dr. Ryan Loy. Ryan, how are you?

Dr. Ryan Loy 0:39

Doing great, Hunter. It's a good day. It's a nice day outside, and I'm glad we're able to do this via our mobile setup. It'll be an exciting day.

Dr. Hunter Biram 0:45

Yeah, we are actually in your uh office in Fayetteville doing it.

Dr. Ryan Loy 0:50

That's right.

Dr. Hunter Biram 0:50

It's a little bit toasty in here, but it's nice. A little toasty. So how are classes going?

Dr. Ryan Loy 0:54

Classes are going well, man. We're kind of on the downturn now. It's pretty close to the end of this semester, and so one of my classes had an exam last week. My other class had an exam week before last. So I've been trying to get all that put together and work with students and uh try to finish them out.

Dr. Hunter Biram 1:09

And so this semester you're actually teaching uh ag finance online, but that's not your first rodeo. You've done that last spring too. That's right. And then you're also teaching in-person environmental economics.

Dr. Ryan Loy 1:19

That's right. Yep, environmental economics, which you know, I'm not a classically trained environmental economist, so I've learned some things along the way as well, and I look forward to continuously building out that class.

Dr. Hunter Biram 1:28

And you know, one thing that I've learned, at least watching you and from others, it seems like when you're an economist, you should be able to teach any kind of economics. That's right. That's right. Whether or not you're ready for it.

Dr. Ryan Loy 1:39

That's exactly right. It's really, you know, applying a lot of the things we learn in general to this idea of environmental economics. And it's been an interesting ride so far. I'm really enjoying it, and uh honestly have a group of great students, so that makes it so much better.

Dr. Hunter Biram 1:51

That does make it so much better when the students actually want to engage, ask questions, um, and just really get you excited. Agreed. Yeah. So today, Ryan, we're gonna talk about the March 2026 Federal Reserve meeting. And so I'll just start off with our first question here. So, what do the recent interest rate changes or lack thereof actually mean for a farmer's day-to-day operation?

Dr. Ryan Loy 2:13

That is a great question, Hunter. And really just to kind of give some background, you know, what we're gonna be talking about today is kind of interest rate impacts on budgeting for this year. And I know we're kind of past the point of planning budgets, but it's also important to kind of keep a finger on the pulse in terms of what the Fed's doing for next year's or even if you had to go get a short-term loan in the middle of the year. So, you know, when you're thinking about it from a farmer's perspective, you know, the Federal Open Market Committee, which is that arm of the Federal Reserve that determines monetary policy, it's going to directly impact those short-term lending rates. And so while, you know, the federal funds rate is not something you see on farm, it's going to directly influence any of those short-term and in some cases those longer-term interest rates. And so to give some uh background on it, you know, following the benchmark rate reduction in 2025, which they did at the end of last year, the last three months of last year, the FOMC, the Federal Open Market Committee, left the federal funds target rate unchanged at three and a half to 3.75% at the March meeting. So, you know, what's important about that is we've been talking about this for years now. And, you know, this is not the first time we talked about interest rates or what the Fed's doing on this show. But what's important now is to look at this and say, where are we at now versus what we kind of expected to be at a couple years ago? And, you know, in no way am I assuming or want rates to go to near zero again like they were before, but it's important to know to say, hey, if I was expecting this kind of relief on the interest rate portion, we haven't gotten that as expected over the last few years. It's been a lot slower reduction, a lot more unchanged rates. And again, that's all going to boil down to that short term and what you're paying for those operating notes.

Dr. Hunter Biram 3:44

Now, you keep talking about this change from expectation. Can you give us a brief historical overview of just maybe how interest rates have changed since that zero percent during COVID?

Dr. Ryan Loy 3:54

Yeah. So during COVID, we had that near zero interest rate. And the whole idea behind that is that near zero rate is kind of a motivation, a, you know, uh incentive to invest and motivation to expand um businesses. And the idea would be that kind of create an economic boom out of it, you know, in a trivial way. That's really what it's trying to do. So we needed that coming out of COVID, right? To try to not get into a full-blown recession or a very long one at that. And so coming out of COVID, we started, they started raising the rates again to the idea would be, okay, now we've we sent out the COVID monies and we've tried to spur some economic growth and economic expansion, but let's make sure that that doesn't get too far ahead of what our economy can handle. And so we've got to dial it back a little bit more. It's all about a balance, is what they're trying to do. And like I've said before, the open market committee, the FOMCs, they're kind of like the weathermen, you know, like they're only they only know if they're going to be right after it happens, but it's a lot more of an educational and uh, you know, forecast that's that's that has a lot of data going into it. And so they raised the rates to try to reduce inflationary pressures that were occurring during that time. One, because of the extensive expansion of the money supply at that time. Of course, there's some other things, some supply chain hiccups that force some uh short-term inflation. But they've raised that rate, they raised it very high, peaking in that, you know, 2024, 2023 time frame. And right after that, they were expected to kind of come down a lot more and you know, kind of normalize as it was. And so what we've really seen is that normalization has taken a lot longer than expected. And so, you know, those near zero rates that farmers had during COVID, or at least about a 3% rate, you know, they're probably paying still seven and a half to eight percent right now. And so it's still very significant in terms of a line item on a budget.

Dr. Hunter Biram 5:30

And so, with that, can you help us understand why this rate is important and talk about just the business of money and money and banking and how this rate that we're talking about right now influences a loan that an ag lender would give to a farmer?

Dr. Ryan Loy 5:45

Absolutely. So the federal funds rate is what they call the benchmark rate. And so what it really is is a benchmark for other rates in in the business. So the federal funds rate is gonna represent the bank-to-bank lending rate to have reserve requirements. So when you think about it, again, kind of trivializing it, it gets a lot more complicated than this. But if I'm a bank and I and I need to have some reserve, I have to pay for that money I'm gonna borrow. And the amount that I'm gonna pay for at that rate is gonna be the federal funds rate. So when you think about it, it kind of builds on itself. So if I'm the bank and I borrowed it at the federal funds rate, I need to loan it out at at least a rate higher than that, right? So what that's gonna be is kind of the prime rate. So the prime rate is the one, the kind of the secondary benchmark that's set off the federal funds rate. And how I look at the prime rate and how I describe it is that on average, for somebody who maybe has been borrowing for 40 years and has, you know, a lot of assets and a good relationship with their lender, that's probably the minimum you're going to get loaned out on an on a short-term note. And the rest, you know, any any percent above that is gonna be kind of that profit margin for the bank. And I say profit margin, it's not the, that's not the reason they'll give you a higher rate. You know, that's gonna come into what can you put up for collateral? You know, how long have you been borrowing? You know, what's your age and your business plan, those sorts of things that are all gonna come into that rate? Really, that federal funds rate sets the prime rate, which is gonna set those operating loans. Now, medium-term and longer term interest is set by a little bit different. So we're just talking about those short-term interest rates here.

Dr. Hunter Biram 7:06

That's interesting. So we know that input expenses at best are remaining the same. You know, you and I, we were at the USDA Ag Outlook Forum, and uh that's what the chief economist was saying was that we're pretty much looking at about the same, maybe a little bit lower, mostly driven by livestock fee. But on the crop side of things, I see that you got the budgets pulled up here. Can you kind of walk us through the changes in input expense and then to talk about how that is impacting the cost of borrowing?

Dr. Ryan Loy 7:31

Absolutely. So what we've been seeing is that, you know, while some of those inch input costs have stabilized, still significantly higher than what it has been, let's say over the last decade as an example. You know, some of those crop prices are what we would have received a decade ago, but what we're paying to crow those crops is is significantly higher than a decade ago, even if it is coming off of, you know, last year's highs or, you know, just kind of normalizing a little bit. And I'll say uh with full disclosure that this article was written before the Iran conflict, um, which is very important, and I can bring that up here in just a minute. But we're when we're looking at, you know, fertilizer and fuel, those two things are going to be impacted most by that. And so what we're looking at here is yes, it's a kind of in a decrease from last year in terms of our analysis for this newsletter, um, but realistically, it's probably higher than that now. And when you look at that as a whole, what this is showing is that even if interest rate expenses have uh, you know, interest percentage has declined, the overall amount of interest expense you're paying is basically the same, if not more, because the amount you have to borrow is higher, right? So that interest rate, even though it's coming down a little bit, normalizing quote unquote, the amount that you're having to borrow is higher. And so compared to a few years ago, even if it was a higher interest rate, you may be actually paying more in pure interest expense. And so just kind of looking at this, you know, on the budgeting side of things, you know, your big, your big line items that you're going to borrow for are the seed, fertilizer, pesticides, and fuel, those pre-harvest expenses. And so that's what we're looking at here. And, you know, you know, the benchmark rate reductions, you know, when applied to this year's production expenses, have provided very little relief. You know, when you look at the percentages in terms of how much it's come down, you know, about a percent and a half over the last two years is where it's come down. You know, estimated interest expenses for 2026 are really just down marginally compared to that peak of 2024. When at that time, if you were borrowing this same amount during 2024, operating costs would have generated about $4.26, $4.95, $4.58, $2.74, more interest expense per acre for corn, cotton, rice, and soybeans, respectively. So, you know, these reductions, even compared to 2024, those are reductions compared to 2024, but reductions compared to other interests, such as 2023 levels and even last year's levels, are even more modest and less than what you would expect. So to sum all that up, you know, we're looking at this and say, hey, you know, rates are coming down. It seems to be the last two years, the last three months of the year, they chose to cut rates. And you would think that would have a bigger impact than it's really having on farm. But it when you look at it on farm, it's very, very minor.

Dr. Hunter Biram 9:58

And so you brought up Iran. So I want to talk real briefly about that. So how will that impact the next quarter meeting for the FONC? Because I would expect, I think I did see a report on this. I think Agri-Pulse reported that that inflation is up just ever so slightly because of this, because of what's happening in the Gulf. And so if inflation does tick up, I mean, do you think that that's going to result in another meeting where the Fed says, hey, we're not gonna we're not gonna change the rates, we're gonna hold steady, or maybe would there be any potential for a reduction given the change in the inflation?

Dr. Ryan Loy 10:32

I would say the potential for a reduction in the near term, around you know, up to next month's time frame, you know, maybe even into the summertime. I would doubt that a rate cut is on the tape because it's so uncertain right now that the Fed is looking at this and saying, okay, inflation ticked up, but do we know that that is a short-term situation or is this going to be building up over time to where they have to respond to it? Um, but it's interesting you bring that up because uh, you know, Chairman Powell did talk about this at the end of the last meeting. And, you know, a growing number of those officials that are on the board are worried that the Iran war can further stoke inflation and you know for a longer period of time. The central bank in that case, if that were to happen and stay that way for a longer period of time, they're gonna be forced to raise interest rates, right? Because again, like we talked about at the beginning, the idea to raise the rates is to kind of, you know, deincentivize that economic growth that our economy can keep up with. And so if it looks like it's gonna be a longer term period of time, we may even be a case of a rate increase, which is something the Fed does not want to do because they really have worked their tails off to try to get it down to where it's at now. And so to do that, to raise it again because of this, is gonna be very difficult sell. The key distinction here is that the Fed's gonna look at this and say, is this is this for a short term and this something we can get through and we don't have to react to it and we can keep the rates steady and not react? Or is this gonna persist for a long time and we must react to that? And I think that's the question they're gonna be asking themselves at the next meeting. In terms of what the farmers need to know, is just pay attention to those meetings and know what they say so you can kind of keep your eyes on it while you're planning for what you're gonna do on your farm this year.

Dr. Hunter Biram 12:04

And if you can't pay attention to it, we're probably gonna pay attention to it. So at the very least, uh continue to sign in and uh check in on the podcasts and newsletters. So, you know, what does the road ahead look like then? You know, I mean, farmers, I mean, we're pretty much through renewal, loan renewal season. Although Scott Stiles tells me that, you know, his contact in the industry said like even just a few weeks ago, there were still there's a quarter of loans out there, let's just say in Arkansas, that still needed to be renewed. And so when you look at that, and you you I mean, farmers are faced with so much market uncertainty at the moment with crop prices, with the Gulf uh conflict, uh, with input prices. I mean, where do you go from here? If if there's a farmer thinking about getting a loan right now, where does that farmer go from here? What should he expect?

Dr. Ryan Loy 12:48

That's a great question. And I think that right now it all depends, right? Depends on where this is gonna head, depends on how much these high input costs sustain for. When you look at this, you know, we were already getting that margin, that's a very thin margin they were already operating on before the Iran conflict and with the expectation of maybe some rate reductions. But, you know, margins are gonna be very tight. And I think that lender conversations are gonna boil down to what's the shallowest loss you can guarantee. And I think that's a big motivator for that big significant shift into soybeans, right? Um, when you look at that, what's the least cost to grow something right now? And I think that's going to be the motivation, at least for this growing season and at least until next renewal season, I would imagine.

Dr. Hunter Biram 13:24

Well, thanks for keeping up with all this for us, Ryan. Any other comment?

Dr. Ryan Loy 13:27

No, I think that's it, Hunter. I really appreciate you having me today.

Dr. Hunter Biram 13:29

Happy to have you. All right, folks, y'all stay tuned for the market report. Thanks.

Dr. Ryan Loy 13:33

Hello, everyone. This is Ryan here with your market report. May 2026 corn is currently pricing in at $4.49 a bushel. That's down 1% from a month ago and down 7% from a year ago. December 2026, corn is currently priced in at $4.77 a bushel. That's down one percent from a month ago and up two percent from a year ago. May 2026 rice is currently priced in at $10.84 a hundred weight. That is down five percent from a month ago and down twenty percent from a year ago. September 2026 rice is currently priced in at $11.52 a hundred weight, that is down four percent from a month ago and down fifteen percent from a year ago. May 2026 soybeans are currently priced in at eleven dollars and sixty-four cents a bushel, that is up one percent from a month ago, and up twelve percent from a year ago. November twenty twenty-six soybeans currently pricing in at eleven dollars and fifty-six cents a bushel, but that is up three percent from a month ago, and up twelve percent from a year ago. May 2026 cotton is currently priced in at 75 cents a pound, that is up 11% from a month ago, and up 14% from a year ago. December 2026 cotton is currently priced in at 79 cents a pound, and that is up 10% from a month ago, and up 15% from a year ago. July 2026, wheat is currently priced in at $6.07 a bushel, that's down 0.2% from a month ago, and up eight percent from a year ago. The US weekly average for peanuts are currently priced in at $434 a ton, that's down 10% from a month ago, and down 17% from a year ago. The Mississippi River at Memphis is currently reading at 13 foot, and a year ago that was 37.45 feet. Arkansas Highway diesel is currently priced in at $5.15 a gallon. A month ago that was $4.52 a gallon, and a year ago, three dollars and twenty-seven cents a gallon. Arkansas Farm Diesel is currently priced in at four dollars and one cents a gallon. A month ago that was four dollars and four cents a gallon, and a year ago two dollars and thirty-five cents a gallon. Weekly fertilizer prices are currently coming from an unpublished survey of Arkansas Ag Input suppliers. Urea currently is priced in at $850 a ton, and a month ago that was $764 a ton. Three months ago $530 a ton, and a year ago, $548 a ton. Ammonium nitrates currently priced in at $575 a ton. A month ago that was five hundred and thirteen dollars a ton. Three months ago, four hundred and forty-eight dollars a ton, and a year ago four hundred and eighty dollars a ton. Ammonium sulfate is currently priced in at $550 a ton. A month ago that was five hundred and thirteen dollars a ton. Three months ago $456 a ton. And a year ago, $541 a ton. Adap is currently priced in at $890 a ton. A month ago that was $778 a ton. Three months ago, $812 a ton. And a year ago, $762 a ton. Triple Superphosphate is currently pricing in at $776 a ton. A month ago that was $676 a ton. Three months ago, $686 a ton. And a year ago, $686 a ton. Potash is currently pricing in at $457 a ton. A month ago, that was $418 a ton. Three months ago, $431 a ton. And a year ago, $449 per ton. That's been your market report this week. Have a great day.

Dr. Hunter Biram 17:08

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