Efforts to stimulate the U.S. economy during the COVID-19 pandemic pushed interest rates to record lows in 2020. Annualized rates on non-real estate farm loans were 3.7%, beating out the previous annualized low of 3.8% in 2014.

In the last quarter of 2020 interest rates dipped to 3.1%. In the first quarter of 2021, they turned up a little bit but were still historically low, said David Widmar, co-founder of Agricultural Economic Insights.

The last few years have seen a positive farm economy pushing interest rates lower, he said.

“There’s a lot of uncertainty in the macro economy, but it’s largely positive,” he said.

Low interest rates have benefited the farm economy for nearly a decade, he said.

“The most obvious way people think about low interest rates is it costs less to borrow money,” he said.

Low interest rates with longer repayment terms made the cost of servicing debt historically low in 2020, he said.

Low interest rates also impact the farm economy by increasing the value of capital investments such as farmland.

“Lower interest rates prop up those asset values,” he said.

When interest rates are low, buyers are willing to pay more for a certain asset. For example, investors will pay more for an asset at a 1% interest rate than they will at a 10% interest rate, he said.

Farm profits and lower interest rates make purchases of farmland more attractive. As long as lower interest rates continue, farmland values will continue to increase. That creates a lot of enthusiasm, he said.

Two things to keep and eye on are interest rates and farm profits, he said.

Farmers’ costs of borrowing money got lower in 2020 due to a combination of low interest rates and higher profitability, which improved the creditworthiness of the farm economy, he said.

“Looking ahead, it’s important to watch what’s going on at the Federal Reserve,” he said.

The agency has been saying it doesn’t expect to increase interest rates until 2022 with sort of a gradual increase over the next few years, he said.

But given the current low interest rate, any adjustment could be substantial — for example, a return to 5% would be a big shock, he said.

The economy is leaving the uncharted territory of the pandemic to a new unknown — no one’s sure what’s ahead for economic growth, unemployment and inflation, he said.

If it’s a sluggish economy, interest rates might not rise as fast as the Federal Reserve expects. On the other hand, if the economy recovers quicker and stronger than expected, the Federal Reserve cold raise interest rates sooner than 2022, he said.

He likens the economy to a car on a road that’s uphill or downhill, straight or curvy. The Federal Reserve either gives it gas or stimulus to keep it accelerating or applies the brakes to slow things down and keep them safe, he said.