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Why Farmers Are Doing Well Despite a Looming Recession

With 52,000 farms and 7.3 million acres of farmland, agriculture is one of the largest enterprises in Pennsylvania. It has an annual economic impact of $135.6 billion and employs more than 575,000 individuals in the Commonwealth.

However, ongoing inflation and rising interest rates have farmers across central Pennsylvania considering their expenses and business plan. Many farmers take out loans to help navigate the complexities of today’s business environment and they need to consider if they have loans maturing. If so, they are subject to repricing at current rates which have steadily increased so far this year and expected to continue to rise as the Federal Reserve increases interest rates. The current rising interest rate environment matched with increased expenses due to inflation makes it more important than ever for farmers and business owners work with a knowledgeable banker to find affordable solutions to help sustain their businesses long-term.

Despite rising interest rates and the higher costs due to inflation on items like fuel and fertilizer, farmers are also currently grossing higher profits from sales given the higher commodity prices on items such as dairy, beef, poultry, corn, wheat, and soybeans. With the United States no longer sourcing food, including wheat and soybeans, from Ukraine and Russia due to the war, there is more demand for those products nationwide and abroad. This demand has helped the local agricultural industry surge as commodity providers, such as Pennsylvania farmers, have a broader market to sell to. The global food supply shortages are making homegrown produce more sought-after and bringing more business to agriculturally rich places like central Pennsylvania. Farmers can capitalize on the higher demand for these commodities as other countries continue to turn to the U.S. to offset their food commodity shortages.

Historically, farms tend to do well during economic downturns. No matter what is going on economically, food is an absolute necessity and people are going to pay to eat, despite inflation. People may choose to dine out less, but food eaten at home will still have to be purchased. And while recessionary periods typically see the values of assets like stocks and bonds decline, farmlands historically increase in value. When done right, farmland can also be a relatively low-cost business to run, resulting in high return on investment and steady cash flow. Given these factors, now may be an ideal time for farmers to leverage the current environment and work with their commercial lender to support and grow their agricultural businesses to take advantage of this demand.

But the high commodity prices will not last forever, so it’s not recommended to borrow money based on today’s higher-than-average prices. It’s more prudent for farmers to borrow at average commodity prices so they can still make payments if interest rates surge. We often stress-test ag loans at higher interest rates, helping customers prepare and ensure they can manage if the economic climate changes.

Although the ag industry traditionally thrives during recessionary periods, farms as businesses have to be properly managed and financially stable in order to prosper in any market cycle. Every step of the financing process should be handled with the guidance of an ag banking professional to ensure a farmer’s business is set up to weather all economic conditions. As a general rule, farmers should create business plans and financial buffers to withstand future price increases, expenses and market volatility.

The current economic climate offers a good opportunity for farmers to expand their ag business. But navigating the nuances of higher interest rates, inflation, and shifting commodity prices can require extensive planning, so it’s critical to work with a team of professionals to help plan for long-term success and stability. Contact the Ag Lending team at Univest to see what’s possible as you navigate financial opportunities in today’s market.

Univest Bank and Trust Co. is Member FDIC, Equal Opportunity and SBA Preferred Lender.