Impact of Lower, More Volatile Net Farm Incomes, and Higher Interest Rates on Repayment Risk

Real returns to farm operators have been at the highest level since 1973. However, indications from the USDA and Federal Open Market Committee are that returns are not projected to remain at those levels and interest rates will rise in the next decade. This paper evaluates the potential impact on repayment risk of three interest rates, three levels of leverage, and eight deviations from a base situation. Results indicate as the level of leverage and interest rate increased, the business became more susceptible to repayment risk, but even at moderate interest rates, increasing levels of leverage should be viewed with caution. Freddie