United States

Department

of Agriculture

www.ers.usda.gov

Electronic Outlook Report from the Economic Research Service

AIS-78-01

March 2002

Macroeconomic Factors

Behind the Fall in Farm

Interest Rates 

Abstract

Interest rates on agricultural loans are determined by factors primarily outside of the

agriculture sector in national and international credit markets. This report discusses the

macroeconomic factors behind the fall in agricultural interest rates in 2001 and the farm

interest rate outlook for 2002. The author found that the sharp easing in monetary policy

and lower business credit demand were primarily responsible for the fall in interest rates.

The fall in interest rates was also aided in the second half of 2001 by a rise in the consumer savings rate, a moderate fall in short-term inflationary expectations, and a loosening of foreign monetary policies. 

Farm interest rates are likely to move downward in the first half of 2002. Lower farm

interest rates are expected from the following economic conditions: (1) continued low

inflation, (2) a slightly higher consumer savings rate, (3) weak overall business credit

demand, (4) slow economic growth in general, (5) gradual increased willingness of

depository institutions to lend, (6) continued foreign monetary policy easing, and (7)

possible additional Federal Reserve easing of monetary policy. In addition, farm interest

rates will be under downward pressure from the large fall in bank fund costs in 2001.

Farm interest rates are expected to rise mildly in the second half of 2002. 

Acknowledgments

The author wishes to acknowledge the helpful reviews of Matt Shane, Greg Pompelli,

Ted Covey, Joy Harwood, and Jim Ryan of the Economic Research Service and Dave

Stallings of the World Agricultural Outlook Board. 

Paul Sundell1

1A macroeconomist with ERS in the Market and Trade Economics Division. Interest rate projections and

commentary are the author’s and not the opinion of the Department of Agriculture.
Interest rates on agricultural loans are determined by

factors primarily outside agriculture in national and

international credit markets. Of the $869 billion raised

in U.S. credit markets in 2000, only 1.3 percent was

agricultural credit (Federal Reserve Board of

Governors). In the first quarter of 2000, interest rates

on non-real-estate and real-estate farm loans at commercial banks averaged 9.6 and 9.4 percent, respectively. By the third quarter of 2001, non-real-estate

agricultural loans fell to 7.3 percent while those on

real-estate agricultural loans fell to 8.0 percent. 

The two most important macroeconomic factors

behind the fall in interest rates were an aggressive easing of U.S. monetary policy by the Federal Reserve

Board in 2001 and much lower credit demand by business. The fall in interest rates also has been aided in

the second half of 2001 by a rise in the consumer savings rate, a loosening of foreign monetary policies,

and a moderate fall in short-term 1-year-ahead inflationary expectations in 2001Q4. 

The purpose of this article is to discuss factors that

influence interest rates in general and those for the

agricultural sector specifically. The first part discusses

how interest rates are determined in credit markets.

Interest rate determination and movements are analyzed using a credit market or loanable funds framework. Based on this framework, the factors causing 

the fall in interest rates since 2000Q3 are analyzed.

This is followed by discussion of the farm interest rate

outlook for 2002. The report closes with a look at why

interest rates on agricultural loans at commercial

banks adjust somewhat slowly to changes in interest

rates in the macroeconomy.

2 Economic Research Service, USDA

Introduction
The interest rate paid by the borrower is the price of

credit, as determined in credit markets by the collective actions of suppliers and demanders of credit.

Credit markets determine interest rates and risk premiums on debt that equate the overall supply and demand

for credit. The market interest rate may be broken

down into a real return (the debt instrument’s return in

terms of stable purchasing power) and an inflationary

expectations return (a return to compensate the lender

for changes in a dollar’s purchasing power over time).

The real rate of interest is the return to the lender for

forgoing the purchase of goods and services in the current period for the promise of higher consumption of

goods and services in future periods.

An increase in inflationary expectations will cause

nominal interest rates to rise. A rise in inflationary

expectations causes the supply of credit at all nominal

interest rates to fall, due to the lower expected real

return to domestic and foreign savings in the United

States. Likewise, the demand for credit on the part of

business firms will increase with a rise in inflationary

expectations, since for any nominal interest rate the

expected real cost of borrowing falls. 

The Federal Reserve Flow of Funds Accounts historically track the flow of funds among households, nonfinancial business firms, financial institutions, government (Federal, State, and local), the Federal Reserve

Board, and the foreign sector in credit markets. The

Flow of Funds Accounts allow us to examine how various sectors with deficits or surpluses in their net savings (total sectoral gross savings minus investment in

real assets) finance their deficits or surpluses. The

accounts are especially useful in analyzing sectoral

behavior that causes changes in real interest rates (Van

Horne, 1994; Polakoff, et al., 1981; Teplin, 2001). 

Credit markets determine not only the level of interest

rates, but the relationship between interest rates on

various debt instruments as well. Differences in interest rates for securities or loans of comparable maturity

are determined by differences in tax treatment, liquidity, transaction costs, and default risk. Factors specific

to agricultural loans—such as loan default risk, the

quality of collateral, average loan size, and loan liquidity—influence the size of overall premiums charged on

agricultural loan rates relative to nonagricultural interest rates. In the long term, interest rates paid on agricultural debt and returns to owners of agricultural

resources must earn returns commensurate with the

risk involved in agriculture and risk-adjusted returns

available in the nonagricultural sectors in order to

attract and maintain funds to the agricultural sector. 

In addition to commercial banks, other agricultural

lenders are influenced greatly by general financial conditions and returns available in the nonagricultural sector. The Farm Credit System borrows directly in

money and capital markets at interest rates only slightly above comparable Treasury securities. Life insurance company mortgage lending to agriculture is influenced by competing yields on corporate bonds, overall

funds available for lending, and the liquidity needs of

life insurance companies. 

The primary suppliers of credit have been households

and depository institutions. Households supply funds

by lending their household savings in credit markets.

Deposit institutions expand the supply of funds

through increasing their holdings of interest-earning

debt securities and loans. Depository institutions typically expand their holdings of loans and securities by

issuing deposit liabilities, which also increases the

money supply.

Businesses are the primary demander of credit, which

is used to finance business investment not funded

through retained earnings or through the issuance of

additional equity securities. Business firms borrow

funds expecting to earn sufficient returns such that, by

undertaking the investment, stockholders’ or business

owners’ wealth increases. The government sector

(combined Federal, State, and local) is a net supplier

of credit when it collectively runs a budget surplus.

The budget surplus is typically used to retire debt or to

purchase other securities. The foreign sector is a net

supplier of credit to the United States when the U.S.

imports more than it exports, since foreign credit is

necessary to finance the U.S. trade deficit. 

Over the past 30 years, the government and foreign

sectors have been large net demanders and net suppliers of funds at various times. For example, through

most of the 1980s and into the mid-1990s, government

was a large net demander of funds in credit markets

Economic Research Service, USDA 3

Interest Rates Are Determined by Supply and Demand 

In Credit Markets
before becoming a large net supplier of funds in the

late 1990s and early 2000s. Likewise, the foreign sector has been a very large net supplier of credit to the

United States from the mid-1980s to the present after

being a net demander of funds for most of the 1970s

and early 1980s. 

When the real supply of credit available contracts relative to the real output of the economy, real interest

rates normally rise. The relative supply of credit can

contract due to (1) a fall in the household savings rate,

(2) a tightening of monetary policy (which reduces the

extension of bank credit by depository institutions), (3)

an increase in the desire of the nonbank public to hold

more money balances (instead of directly or indirectly

lending their savings in credit markets), (4) a fall in

the overall government budget surplus, or (5) a greater

reluctance on the part of foreigners to purchase U.S.

financial assets. Likewise, a rise in business borrowing

relative to the economy’s overall output will place

upward pressure on interest rates. In this case, higher

interest rates are required to encourage greater consumer or foreign savings to enter U.S. credit markets

and depository institutions to expand bank credit.

4 Economic Research Service, USDA
Interest rates fell sharply in the second half of 2000 and

in 2001, reflecting slower growth in real economic output and overall credit demand, as well as a major easing of monetary policy (fig. 1).2 Slower economic and

credit growth in the second half of 2000 put immediate

downward pressure on interest rates, by lowering interest rate expectations for 2001 and 2002. Real economic

growth slowed from 4.0 percent in the first half of 2000

to 0.8 percent in the first half of 2001, and fell 0.6 percent in the second half of 2001 (fig. 2). 

Private nonfinancial credit growth (households and

nonfinancial businesses) slowed from 10.1 percent (on

an annualized seasonally adjusted basis) in the first half

of 2000 to 8.0 percent in the first half of 2001. Growth

in credit to nonfinancial business slowed from 11.9 percent to 6.5 percent over this period. Growing foreign

demand for U.S. financial assets through increased foreign capital inflows further pushed interest rates lower. 

Since January 2001, the Federal Reserve Board has

eased monetary policy by lowering its Federal funds

interest rate target (the interest rate on deposits held at

Federal Reserve banks primarily by depository institutions) by 4.75 percentage points (475 basis points) in

11 separate moves. This reduced other interest rates by

lowering the expected level of the Federal funds rate

for 2001 and 2002 and encouraged more rapid expansion in the supply of money and credit by depository

institutions. M2 (currency, depository institution transactions-type deposits, and highly liquid nontransaction

deposits) grew 8.7 percent in 2001, after growing 5.9

percent in the second half of 2000. 

The flow-of-funds data for 2001Q3 indicate that

growth in private credit demand slowed further while

household savings and the money supply expanded

sharply. Private U.S. nonfinancial credit grew 6.9 percent in 2001Q3, after growing 8.0 percent in the first

half of 2001. Credit of nonfinancial business firms

grew at a seasonally adjusted annual rate of 5.3 percent, compared with 6.5 percent in the first half of

2001. The personal savings rate increased to 3.7 percent in 2001Q3 from 1.1 percent in 2001Q2, leading

to a $203-billion increase in household savings in

2001Q3. The rise in the personal savings rate, while

influenced by the personal income tax rebates and the

economic disruptions following September 11, also

Economic Research Service, USDA 5

Credit Market Developments in 2000 and 2001

1990 91 92 93 94 95 96 97 98 99 2000 01 02

0

2

4

6

8

10

12

14

Figure 1

Farm loan rates at commercial banks are likely to fall through the first half of 2002

Percent

Source: Board of Governors.

1 year T-bond 10 year T-bond

Non-real-estate farm loan rate

Real-estate farm loan rate

2 The average non-real-estate farm loan rate series is reported in

table 1E of the Agricultural Finance Data Book and is based on

data on bank lending activity from the first full week of the second

month of each quarter. The real-estate farm loan rate is reported in

table IIID of the Agricultural Finance Data Book and is the average of the five agricultural district surveys of the most common

long-term farm real-estate loans charged in each district.
reflected the impact of a rising unemployment rate,

lower consumer confidence, and falling consumer

wealth over most of 2000 and 2001. In addition, consumer credit demand grew 1 percent slower in

2001Q3 than 2001Q2. A cut of 75 basis points in the

Federal funds rate in 2001Q3 encouraged M2 to grow

at an 11.2-percent annualized rate as bank credit

expanded rapidly. 

6 Economic Research Service, USDA

Figure 2

GDP growth slowed and turned negative

Percent

Source: Bureau of Economic Analysis.

1990 91 92 93 94 95 96 97 98 99 2000 01

-4

-2

0

2

4

6

8

10
Nominal interest rates can be divided into a real (inflation expectations adjusted) component and an expected

inflation component. Since 1999, short-term (1-yearahead) inflationary expectations have been relatively

stable. The Philadelphia Federal Reserve’s Survey of

Professional Forecasters and the Blue Chip Economic

Indicators surveys of economists showed that although

inflationary expectations for the year ahead moved significantly downward in 2001Q4, short-term inflationary

expectations have been stable over the last 3 years by

historical standards. As measured by the CPI-U from

the Survey of Professional Forecasters,3 the median 1-

year-ahead forecast for inflationary expectations has

varied over a range of only 0.55 percentage points over

the last 3 years (fig. 3). Given the relative stability of

short-term inflationary expectations, the vast majority

of the fall in nominal short-term interest rates since

2000Q1 reflects declines in real short-term rates. 

As noted above, short-term inflationary expectations

fell significantly in 2001Q4. The Survey of

Professional Forecasters and the Blue Chip Economic

Indicators showed a 0.3- to 0.5-percent drop in inflationary expectations for the GDP and CPI deflators for

2002 in their November 2001 forecasts (compared

with their August forecasts). The fall in short-term

inflationary expectations reflected actual and anticipated softening in labor and capital goods markets,

sharply lower energy and other raw material prices,

and a continued strong U.S. dollar. 

Survey data indicate that long-term inflationary (10-

year) expectations have remained virtually unchanged

at 2.5 percent since the second quarter of 1998.

Therefore, the fall in long-term interest rates since

2000 is almost entirely a fall in real long-term interest

rates (fig. 4). More stable short-and long-term inflationary expectations have resulted largely from favorable energy and productivity shocks and a strong U.S.

dollar, as well as belief in the Federal Reserve’s ability

and willingness to maintain low inflation. The fall in

real lending rates for borrowers, including farmers,

should encourage increased real borrowing over time. 

Economic Research Service, USDA 7

Fall in Nominal Interest Rates Dominated by Reduction in Real

Interest Rates

1990 91 92 93 94 95 96 97 98 99 2000 01

0

1

2

3

4

5

6

7

8

9

Figure 3

Nominal and real short-term interest rates fell sharply in 2001

Percent

Sources: Philadelphia Federal Reserve's Survey of Professional Forecasters (inflationary expectations) 

 and Board of Governors (1 year T-bond).

1 year T-bond

Gap: Real short-term interest rate

1 year inflationary expectations from Survey of Professional Forecasters

(Consumer price index for all urban consumers (CPI-U))

3 The Survey of Professional Forecasters is a survey of economic

forecasters employed predominantly by large financial and nonfinancial firms. Forecasts for key real, inflation, and financial variables are prepared on a quarterly basis with median and mean

average forecasts from the survey compiled by the Federal Reserve

Bank of Philadelphia. More information on the survey can be

obtained from the Philadelphia Reserve Bank website and from the

article by Dean Croushore, “Introducing: The Survey of

Professional Forecasters,” from the Business Review, Federal

Reserve Bank of Philadelphia (Nov.-Dec. 1993), pp. 3-13.
8 Economic Research Service, USDA

1990 91 92 93 94 95 96 97 98 99 2000 01

0

2

4

6

8

10

Figure 4

Nominal and real long-term interest rates have fallen sharply since 2000

Percent

10 year T-bond

Gap: Real long-term interest rate

10 year inflationary expectations from Survey of Professional Forecasters

(Consumer price index for all urban consumers (CPI-U))

Sources: Philadelphia Federal Reserve's Survey of Professional Forecasters (inflationary expectations) 

 and Board of Governors (10 year T-bond).
Interest rates were extremely volatile in the fall of

2001, with weekly swings of 10 or more basis points

in long-term bond yields. This heightened uncertainty

in the economic outlook created extra volatility in

credit markets, especially for long-term bond yields.

Heightened economic uncertainty and volatility in

credit markets has increased the difficulty in forecasting movements in interest rates, especially long-term

interest rates. For example, the 10-year Treasury bond

rates moved up approximately 80 basis points between

early November 2001 and late January 2002, reflecting

an improving short-term U.S. economic outlook and a

continued high degree of economic uncertainty as to

the likely strength of the economic rebound.

Nonetheless, this analyst and other economists and

forecasters (such as Stephen Roach at Morgan Stanley;

Latta, Newport, and Mak at DRI; and Anthony M.

Santomero of the Federal Reserve Board) believe the

recovery in the first half of 2002 is likely to be quite

subdued. If the first-half recovery is weak, interest

rates are likely to be under downward pressure from

both supply and demand factors. 

On the supply side, six main factors are expected to

place mild downward pressure on interest rates in the

first half of 2002: (1) continued low inflation, (2) an

expected mild rise in the consumer savings rate out of

personal disposable income, (3) gradual increased

willingness of depository institutions to lend, (4) the

likelihood of continued foreign central bank easing of

their monetary policies, (5) slow economic growth in

general, and (6) possible additional Federal Reserve

easing of monetary policy. Meanwhile, given large

overall excess capacity both domestically and abroad

coupled with depressed profits, business capital spending is likely to be weak until final demand strengthens

for at least a couple quarters. Weak foreign credit

demand and continued foreign central bank easing

should encourage additional foreign credit flows into

the United States.

Inflation—as measured by the broad GDP, PCE (personal consumption expenditures), CPI, and PPI finished goods deflators—is expected to remain very low

in the first half 2002. Declines in producer prices that

occurred in the second half of 2001 were broad-based,

extending well beyond energy and food prices.

Therefore, most economists surveyed in the January

2002 Blue Chip Economic Indicators expected increases in producer prices to be very small in the first half

of 2002, which should keep increases in final goods

prices low. In addition, growth in employment costs—

as measured by the employment cost index—slowed in

the second half of 2001. Given excess capacity in most

industries, business profit margins will continue to be

squeezed. Very low inflation in late 2001 and early

2002 should keep short-term inflationary expectations

low for the remainder of 2002. 

An expected upturn in the personal savings rate is an

additional factor expected to put downward pressure

on interest rates in early 2002. The consumer savings

rate is likely to rise significantly in the first half of

2002. Consumer spending will be constrained by less

pent-up demand for auto-and housing-related consumer durable goods, high consumer debt burdens, rising unemployment, and smaller holiday bonuses due

to lower business profits and lower stock prices in

2001. A higher personal savings rate will increase the

consumer purchases of financial assets and push interest rates lower. 

Expected negative growth in real business capital

spending in the first half of 2002 should also place

downward pressure on interest rates. Given substantial

excess capacity in most industries, along with

depressed profits, business capital spending is likely to

continue to decline until final demand strengthens substantially. Business confidence has improved much

less than consumer and investor confidence (Roach,

2002). Subdued business confidence is an additional

factor likely to slow the rebound in business capital

spending and inventory rebuilding in 2002. Business

capital spending for higher risk firms continues to be

constrained by tight credit standards in credit markets. 

Over the course of 2002, risk spreads on business

loans and corporate bonds over comparable Treasury

securities should narrow, in response to increased bank

liquidity, which gradually increases the willingness of

banks to expand business lending. Lower real interest

rates and gradually improving corporate balance sheets

and liquidity should also put downward pressure on

risk premiums in credit markets

Economic Research Service, USDA 9

Nominal and Real Interest Rates Likely To Fall in First Half of

2002, but Rise Slightly in the Second Half
When the Federal Reserve eases monetary policy,

depository institutions have more nonborrowed

reserves with which to expand their asset holdings of

loans and leases, security holdings, and cash balances.

In response to increased holdings of bank reserves,

depository institutions normally increase their holdings

of securities much more rapidly than loans and leases.

Higher security holdings increase overall bank liquidity and help cushion bank income in the event of

increased loan defaults. Bank security holdings rose

7.7 percent in 2001, after increasing 3.1 percent, on a

seasonally adjusted annualized basis, in the second

half of 2000. In contrast, bank loan holdings rose just

5.8 percent in 2001, after increasing at a 9.1-percent

annualized rate in the second half of 2000. Typically,

after increasing their holdings of securities, banks

gradually increase their willingness to make loans,

thus lowering both interest rates and qualifying standards. Empirical evidence indicates that it takes

approximately three quarters for an easing in monetary

policy to promote stronger loan growth (Bernanke and

Blinder, 1992).

Since the end of August 2001, most developed country

central banks have eased their monetary policies and

lowered their short-term interest rate targets. For

example, from the end of August 2001 to the end of

January 2002, the European Central Bank (ECB) lowered its major short-term interest rate target to 3.25

percent from 4.25 percent while the Bank of England

lowered its key short-term interest rate to 4.00 percent

from 5.00 percent. Over this time period, the Canadian

Central Bank lowered its short-term interest rate target

to 2.00 percent from 4.00 percent. Japan maintained its

short-term interest rate target near zero and has tried to

increase bank liquidity. Easing of monetary policy by

most large foreign central banks is expected to continue through the first half of 2002. Continued easing of

monetary policy in the United States or abroad will

increase the supply of credit worldwide and put downward pressure on worldwide interest rates.

Overall foreign demand for funds raised either

abroad or in the United States will continue to be

weak. Specifically, credit raised in U.S. financial

markets by foreign firms fell at an 8.4-percent annualized rate in the first three quarters of 2001. Real

foreign growth is expected to remain slow in 2002,

with most of the pickup in world growth occurring in

the second half of the year. Slower foreign and U.S.

growth, and the sharp easing of U.S. monetary policy

in 2001, has allowed significant easing of monetary 

policy by foreign central banks. 

Over the course of 2002, U.S. economic growth is

expected to accelerate, with most economists expecting moderate to strong growth in the second half of

2002. Stronger second-half growth is expected from

the combined effects of lower interest rates, increased

stability in equity markets, the working down of

excess business inventories, the gradual reduction of

business excess capacity, higher defense spending,

lower tax rates, and slowly accelerating foreign

growth. Furthermore, the balance sheets of businesses,

consumers, and financial institutions were far better at

the beginning of this economic downturn than at the

beginning of the previous U.S. recession in 1990Q3.

The United States represents about one quarter of total

world GDP. The U.S. recession has significantly

reduced foreign growth, especially for those countries

that are heavily dependent upon U.S. imports. The

U.S. recession has reduced foreign growth by not only

lowering the U.S. demand for imports but by depressing foreign equity prices and raising credit concerns

for higher risk foreign borrowers. The dollar’s large

appreciation in the late 1990s and in the early 2000s

raised the burden of dollar-denominated debt for for10 Economic Research Service, USDA
eign firms. Since the U.S. recession has been most

pronounced in the manufactured capital goods and

electronics areas, Asia and Western Europe—as major

suppliers to the United States of capital goods and

their components—have been especially hard hit. 

Against an expected backdrop of low real growth and

very low inflation, additional Federal Reserve Board

easing is possible in the first half of 2002. A further

lowering of the Federal funds rate would tend to push

other money market yields and, to a lesser extent,

bond market yields lower. The sharp decline in bank

fund costs (as represented by the rate on large bank

CDs) has led to large declines in loan rates on farm

and nonfarm business loans (fig. 5). 

Economic Research Service, USDA 11

1980 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 2000 01

0

5

10

15

20

25

Figure 5

Sharply lower bank fund costs have pushed downward farm and nonfarm business loan rates

Percent

Average interest rate on 

non-real-estate farm loans

Average interest rate on 6-month large CDs

Average interest rate on commercial 

and industrial loans (31-365 day maturity)

Source: Board of Governors.
Both nonfarm and farm loan rates are expected to fall

further in the first half of 2002, with interest rates on

non-real-estate and real-estate farm loans projected to

fall to 5.9 and 7.3 percent respectively by 2002Q2,

(see footnote 2). Typically, interest rates on farm loans

at commercial banks fall less than most nonfarm interest rates and adjust more slowly. Thus, when interest

rates in the open market reach their low point, interest

rates on farm loans normally continue to fall somewhat. However, in the long term, interest rates charged

on farm loans must earn competitive risk-adjusted

returns for lenders that are comparable to risk-adjusted

returns from nonfarm loans and other financial assets. 

In the downward phase of the interest rate cycle, numerous factors prevent farm loan rates from falling as much

or as quickly as interest rates in general. Rural banks are

heavily dependent on consumer deposits (checking and

savings accounts, plus time deposits of less than

$100,000) for the bulk of their loan funds. Rates paid on

consumer deposits typically lag changes in open-market

interest rates. In addition, changes in deposit interest

rates typically affect loan rates at rural banks relatively

slowly. Banks prefer to keep their small business loan

rates more stable by determining their loan fund costs on

an average cost-of-funds basis. Average cost-of-funds

loan pricing helps stabilize interest rate margins between

the expected return from lending and the average interest

rate paid to depositors (Brady, 1985; Goldberg, 1982,

1984). Finally, because of the uncertain farm income

outlook in 2002 and the tighter credit standards on general business lending in 2001, some mild increase in risk

premiums on agricultural loans is likely through at least

the first half of 2002. In times of economic slowdowns

and borrower financial deterioration, it is more difficult

to obtain loans from new creditors (Nakamura, 1991).

Thus, borrower options are reduced, further driving up

loan spreads.

Fortunately, for agriculture, recent agricultural loan performance has held up well in relation to nonagricultural

business loans. Loan delinquency rates for agriculture

have been relatively stable since 1998 while delinquency rates for non-real-estate business loans have moved

upward during this period, especially during the current

economic slowdown and recession (fig. 6). Given the

Federal Government’s commitment to supporting farm

income and the likelihood of some overall improvement

in export market conditions for U.S. agricultural products in 2002, a large rise in agricultural loan delinquency rates is not expected over the next year.4 However, a

small increase in the delinquency rate on farm loans in

late 2001 and 2002 is likely, given the continued outlook for relatively low commodity prices. 

12 Economic Research Service, USDA

Farm Interest Rates Should Continue To Fall in the First 

Half of 2002 

1987 88 89 90 91 92 93 94 95 96 97 98 99 2000 01

1

2

3

4

5

6

7

8

9

Figure 6

Farm loan delinquency rates have been quite stable since the mid-1990s

Percent

Source: Board of Governors.

Non-real-estate farm loans

Commercial and industrial loans

4A loan is delinquent if interest payments are more than 30 days

past due and is still accruing interest, or if the loan has been moved

to nonaccrual status.
Expected weaker overall growth in the demand for

credit and increased overall supply of credit in domestic and foreign economies should place downward

pressure on farm interest rates in the first half of 2002.

The fall in farm interest rates since 2000 has been less

than most interest rates due to the more sluggish

adjustment in consumer deposit interest rates, the

desire of banks to keep small business loan rates more

stable, and an expected mild increase in risk premiums

on farm loans.

The fall in interest rates represents almost entirely a fall

in real interest rates, which has lowered real borrowing

costs for farmers. Farmers with desirable investment

projects and strong overall cash flows may want to take

advantage of favorable credit terms in 2002. 

Economic Research Service, USDA 13

Conclusion
Bernanke Ben S., and Blinder Alan S. “The Federal

Funds Rate and the Channels of Monetary

Transmission,” American Economic Review Vol. 82

No. 4. (Sep. 1992), pp. 901- 922.

Board of Governors of the Federal Reserve System.

Flow of Funds Accounts of the United States (Dec.

2001), Washington, D.C.

Brady, Thomas F. The Role of the Prime Rate in

Pricing Business Loans. Board of Governors, Staff

Paper No. 146. Washington, D.C., Nov. 1985.

Croushore, Dean. “Introducing: The Survey of

Professional Forecasters,” Business Review, Federal

Reserve Bank of Philadelphia (Nov. / Dec. 1993),

pp. 3-13.

Goldberg, Michael A. “The Sensitivity of the Prime

Rate to Money Market Conditions,” Journal of

Financial Research Vol. 3, No. 4 (Winter 1984),

pp. 269-280.

Goldberg, Michael A. “The Pricing of the Prime Rate,”

Journal of Banking and Finance, Vol. 6 (1982),

pp. 277-296.

Latta, Cynthia, Patrick Newport, and Wendy Mak.

“United States Overall Economic Outlook,” DRIWEFA, Lexington, Mass., Jan. 2002.

Moore, Randell E. (ed.). Blue Chip Economic

Indicators. Panel Publishers, Frederick, Md.,

July 2001 - Jan. 2002, various issues.

Nakamura, Leonard I. “Lessons on Borrowing and

Lending in Hard Times,” Business Review, Federal

Reserve Bank of Philadelphia (July / Aug. 1991),

pp. 13-21.

Polakoff, Murray E., Thomas A. Durkin, and Others.

Financial Institutions and Markets. Houghton

Mifflin Company, Hopewell, N.J., 1981.

Roach, Stephen. “Global: Debating the World—Davos

Comes to New York,” Global Economic Forum,

Morgan Stanley, Feb. 4, 2002.

Santomero, Anthony M. “The Economic Outlook for

the United States and Southern New Jersey,” Speech

presented at The Business Outlook of the Rutgers

School of Business at Camden, Jan. 16, 2002.

Sinkey, Joseph F. Commercial Bank Management,

(Third Edition). Macmillan Publishing Company,

New York, N.Y., 1989.

Slovin, Myron, and Marie Elizabeth Sushka. “A Model

of the Commercial Loan Rate,” Journal of Finance,

Vol. 38, No. 5 (Dec. 1983), pp. 1583-1596.

Strongin, Steve. “International Credit Market

Connections,” Economic Perspectives, Federal

Reserve Bank of Chicago (July / Aug. 1990),

pp. 2-10.

Teplin, Albert M. “The U.S. Flow of Funds Accounts

and Their Uses,” Federal Reserve Bulletin, July

2001, pp. 431-441.

Walraven, Nicholas A. Agricultural Finance Data

Book (Third Quarter 2001). Board of Governors of

the Federal Reserve System, Aug. 2001.

Van Horne, James C. Financial Markets Rates and

Flows. Prentice Hall, Englewood Cliffs, N.J., 1994.

14 Economic Research Service, USDA

Bibliography