The Impact of Federal Reserve Interest Hikes on Your Farm

By Miguel Saviroff, Penn State Extension Educator, Somerset County

The Federal Reserve’s decision to increase interest rates in December has raised questions in the farming sector. The feds have announced at least two new hikes in interest rates in 2017. Although farm level interest rates have been too low for a long time, low agricultural prices can’t cover for any operational expense increases. The clear majority of non-real estate loans made to farmers carry floating interest rates which means the cost of credit adjusts upward if rates increase.

 A pie chart used to compare interest expense versus gross profit

The FRB increases the interest rate when there are signs of a strengthening economy but often agriculture is countercyclical to the national economy. One thing for sure is that farmers need to observe certain signals to maintain financial efficiency.

Farmers need to monitor their interest expense ratio, the relation between interest expense and gross farm income, which may indicate too much dependence in borrowed capital or high interest rate on existing debt. The Penn State “Farm$en$e” program recommends to maintain this ratio below 5%. An Interest-Expense ratio higher than 10% indicates that the farm is spending too much of its gross income paying interest on borrowed money. In this case a business or farm may want to look at ways to lower this expense, this can be accomplished in a number of ways including: selling of assets to pay down overall debt (negative ramification for this may include tax issues), refinancing some loans, and restructuring of debt.

Higher interest rates in a country increase the value of that country’s currency relative to nations offering lower interest rates. These higher interest rates attract foreign investment and the value of the dollar increases. A strong dollar makes our agricultural products less attractive to foreign buyers. One example is the reduction of cheese shipments to Europe due to the decline of the euro versus the dollar.

If there was one piece of advice to the agriculture industry, it would be to settle in. While you may want to secure a long-term loan or purchase more equipment, you will want to limit your borrowing; only do so when necessary.

Likewise, be sure to have a cash reserve on hand.

With interest rates expected to further increase, you will want to ensure you’re properly prepared for the effects no matter how many hikes and in what magnitude.

Managing Cash Flow for Your Farm

Cash flow statements are very useful – they may very well be the first place where a farmer will spot a trend in business performance that may benefit or harm the operation in the long run. Cash flow statements show the business’s liquidity, the ability to pay expenses as they come due.

In accounting, there are both active statements and reflective statements.

Active Statements

The cash flow statement, a record of the dollars that came into and went out of the farm, is considered an “active” statement because it is completed multiple times throughout the year. The cash flow statement should be regularly compared to projected cash flow budgets, estimated cash in-flows and out-flows that will occur in the business in an upcoming period. This helps the farm manager to identify how the cash in-flows and out-flows that were expected differed from or mirrored what actually occurred.

Reflective Statements

In comparison to the cash flow statement, the balance sheet and the income statement are “reflective” statements because they are completed on one particular day of the year in which the farm manager is able to see how the business has progressed. With careful management of cash, the farmer has power over his or her business dealings. Business owners and agricultural producers in particular need to take time to document all sources and uses of cash within a business to keep their “finger on the pulse” of their operation.

Updating Cash Flow Statements

To be effective, farmers should regularly update their cash flow statements. What does “regularly” mean? The answer to this question varies based on whether you have a very seasonal operation (such as selling Christmas trees) or a business that receives cash throughout the year (such as a dairy farm). It is recommended that new financial managers begin with a cash flow statement that has monthly intervals. Although there is a bit of work keeping the statement current, having monthly statements provides an early warning of cash deficits or surpluses. By using the cash flow statement and the cash flow budget the farmer can make well informed management decisions such as when to purchase new equipment, or when to open a line of credit to cover cash deficit periods.


After keeping track on a monthly basis for a while, you may find that quarterly or six-month cash flow statements and budgets meet your need because the funds don’t change that much month-to-month. On the other hand, if you grow and direct market fresh vegetables for example, you may need to use a weekly cash flow statement through the summer, because of fluctuations in the variety of produce sold and the demand for each item throughout the growing season.


Cash flow statements and budgets can be created for the entire farm operation or for a specific enterprise, or profit center on the farm. For example, a dairy farm might have several enterprises in addition to dairy production, such as custom work, hay sales, and maple syrup production. Analyzing a specific enterprise allows the farm manager to determine whether an enterprise costs more than it generates in revenue. An enterprise budget helps the farm manager determine whether a new enterprise might be feasible.

Article adapted from Farm $en$e©, Farm Management Tools for Financial Success.

Farm $en$e© farm financial management courses are offered every fall and winter in multiple locations in Pennsylvania. Contact Juliette Enfield or Miguel Saviroff  for more information.
The Farm $en$e© text will be available for purchase through Penn State Agricultural Publications in November 2016.

Contact Information

Juliette Enfield

Extension Educator

Email: jse15@psu.edu

Phone: 814-563-9388

Miguel Antonio Saviroff, MS

Extension Educator

Email: mas60@psu.edu

Phone: 814-445-8911 x144

Mid-Atlantic Consumer Demand for Ethnic Produce is on the Rise

Why is demand increasing for ethnic produce in the mid-Atlantic?  U.S. Census data indicates New York City, Washington DC, and Philadelphia are among the top ten cities that are majority-minority in population, meaning ethnic minorities account for more than half of the population (Census 2010). U.S. Census data also shows that the mainstream population only increased by 9.7% from 2000 to 2010 as compared to 43% for Asians and 43% for Hispanics (Census 2000, 2010). With this increase in population, there certainly would be an increased demand for ethnic produce and therefore more economic opportunities for producers, wholesalers, and retailers who grow and sell these products.  

To address this increased demand for ethnic produce, researchers at Penn State, Rutgers, the University of Florida, and the University of Massachusetts along with industry members (including farmers, retailers, wholesalers, distributors, etc) gathered earlier this year to discuss research data and trends related to ethnic crops in the mid-Atlantic at the 2014 Ethnic Greens and Herbs Workshop.  One of the projects developed by the research team was the Worldcrops.org website.  The World Crops site provides information about vegetables and herbs that can be grown in the northeastern United States. The emphasis is on crops that are popular among ethnic groups living here and can be grown here.  The site is organized by country. 

Another helpful aspect of the site is the glossary which is available in English to Spanish and vice versa.  A user can easily find the English or Spanish name for a particular type of produce as well as the genus and species of more than 350 entries.  Example 1 shows that an avocado is called an “aguacate” (Spanish), “pagua” (Mexican), or “pahua” (Mexican) and the genus and species is Persea americana.

Example 1.  Screenshot of English to Spanish glossary on Worldcrops.org.

Visitors can also find ethnic crops based on the country of origin.  In the “Go to region” box on the main page, visitors can click on a region and then select a country.  In example 2, Brazil is shown.  The language spoken is Portuguese and some of the main crops used in this country are listed including cilantro, maxixe, and okra. 

Example 2.  Screenshot of "Go to region" listing for Brazil on Worldcrops.org.

If you are an ag entrepreneur and are interested in exploring ethnic crop opportunities, it's imperative that you DO YOUR RESEARCH as you would with trying any new opportunity for your business.  Good luck!

Manager - The Hardest Job!

by John Berry, Extension Educator, Lehigh Co.

I enjoy the comedy of Bill Cosby and remember his thoughts on being the boss.  His observation goes something like "I've seen the boss's job...and I don't want it!"  For many farm business managers, the tasks of effective management may not come with ease.  As we seek to more effectively utilize and grow our business skills, let's remember some of the differences between being a manager and not being a manager.

Good managers create, not consume, workplace energy.  Recall the four "classic" functions of management - Plan, Organize, Lead, and Control - that you learned in school?  Although these basic functions are fine for taking care of most of your day-to-day management duties, they fail to reflect the reality of many workplace situations, and discount the power of a valuable manager-worker partnership.

Today's manager needs an additional set of management functions that are based on forging a strong employee-employer relationship:

Energize.  Managers often need to be masters of making things happen.  You can be the best analyst in the world or the most highly organized executive on the planet, but if the level of excitement you generate can be likened more to a dish rag than to a spark plug, then you may never have what it takes to create a truly great environment.  Great managers create far more energy than they consume.  Instead of taking energy from the organization, the best managers channel and amplify energy to the organization.

Empower.  Great managers allow their employees to do great work typically by empowering them to excel.  This is a key management function because even the greatest manager in the world cannot succeed all by themselves.  To achieve organizational goals, managers depend on the skills that their employees are capable of delivering.  Effective management is the leveraging of the efforts of every member of a work group toward a common purpose.  If you are constantly doing your employees' work for them, not only have you lost the advantage of leverage that your employees can provide, but you are also putting yourself on the path to stress.

Support.  The key to creating a supportive environment is establishing openness throughout an organization.  In an open environment, employees can bring up questions and concerns - in fact, they are encouraged to do so.  When employees see their managers are open to new ideas, they are more likely to offer suggestions and new ideas.

Communicate.  Information is power, and as the speed of business continues to accelerate, information must be communicated to employees more and more rapidly.  Constant change and increasing turbulence in the business environment necessitate more and constant communication, not less.

Management is not what you do to people; it's what you do for them.  We often give short shrift to the social fulfillment components of work.  However, much research exists that shows employees value the soft aspects of their jobs just as much (and sometimes more) than economic rewards.  Managers who truly manage their employees - who energize them, empower them, support them, and communicate with them - will attract and retain key employees because of the trust and commitment they actively seek to build.