Will High Interest Rates Limit Expansionary Appetites?

 “Higher interest rates can be the cure for inflation, but that comes with a cost, too,” he says. “A 500-basis point increase in rates over the past two years counts as material, especially for producers looking at expansion.”

Plourd’s quick, back-of-the-envelope math shows interest costs on building a big dairy are running about 60 cents per hundredweight above 2021 levels. That could limit expansionary appetites.

Curtis Gerrits, a senior dairy leading specialist with Compeer Financial, says dairies who have had the plans in place to do improvements—whether that is to expand or enter construction—are moving forward for the most part.

“The main focus has not necessarily been on interest costs but rather what the return on their investment would be,” Gerrits notes. “These dairies typically have planned capital investment projects 1-3 years out and have built a business model to sustain these projects even if/when interest rates and material pricing are inflated compared to historical averages.”  

Chad Huyser, president of Lely North America, concurs with Gerrits, stating that while current economic factors have impacted them so far in 2023, they are working with dairies who have decided to push forward.

“Many dairies are moving forward with their plans,” he shares. “Whether rising interest rates or volatile inflation metrics, dairies and their lenders are being very practical when it comes to the investment strategy on these long-term CAPEX type investments.”

A producer told Don Mayer, district manager for the upper Midwest with DeLaval, that the first three loans he received for farming hovered around 10% interest.

“He told me that if rates go down in the next 12 to 24 months he will refinance,” he shares. “In my opinion, there is a shortage of skilled builders for dairies, many contractors are booked 12 and 18 months out.” 

Mayer adds that one major challenge producers are struggling with is finding a milk market.

“I have a customer who would like to go from 500 to 1,000 cows, however, their co-op will not take the additional milk,” he says.