The usual optimism farmers carry into spring planting shouldn’t overlook growing economic concerns this season.

The Federal Reserve’s latest interest hike — the ninth consecutive increase since last year — pushed borrowing costs to the highest level since 2007 amid persistent inflation.

With the benchmark federal funds rate up another 25 basis points in March to a range of 4.75-5 percent and inflation still at 6 percent, Fed Chair Jerome Powell warned the process of getting inflation back down to 2 percent has a long way to go and will likely be a bumpy ride.

David Kohl, professor emeritus of agriculture and applied economics at Virginia Tech University, believes the federal funds rate could eventually reach 5.5 percent with a prime rate near 8.5 percent, which could put a strain on many industries – including agriculture.

“I think the Fed will start reducing interest rates when headline inflation drops below 4 percent. We have a long way to go,” Kohl said at the Illinois Society of Professional Farm Managers and Rural Appraisers farmland values conference in Bloomington.

“One of the things we’ll see not only in ag, but we’re also seeing in the banking industry, is a flight to liquidity,” he told RFD Radio Network at the event. “Financial liquidity is a buffer to preserve wealth.”

The ag economist is encouraging farmers to become as financially liquid as possible this year and build resiliency to the mounting economic pressure.

“It’s not about equity. It’s about looking at the balance sheet from working capital to expenses,” Kohl said. “Liquidity is that choke point that if you don’t have it, then you have to sell assets. You build it through either profits or refinancing.”

The economic issues also will likely lead to a tightening of credit across all sectors, according to Kohl.

“A lot of our lenders don’t want to be the first ones to face that adversity,” he said. “And, we’ve got a whole set of regulators who have never experienced a downturn. One of the things they tend to do is panic.”

Kohl said two regional bank failures in the U.S. and one in Europe were “lucky” to be rescued.

The combination of rising costs and interest rates along with the possibility of lower farm returns this year is also changing the dynamics of the farmland market.

“I can see farmland leveling off,” Kohl said. “Who’s buying farmland? Baby boomers like me. I think they’ll be more selective.”

The recent escalation of farmland values helped many in ag — farmland represents about 82 percent of assets on ag balance sheets nationwide, according to the economist. But it also leads to higher real estate taxes.

“It’s a fixed cost per acre,” Kohl said. “It’s one of the things that hits you in this margin squeeze.”

A key for farmers moving forward is to recognize the changing financial atmosphere and prepare for it rather than react after the fact.

“The problem is the last two to three years (of general profitability in ag) made us very complacent,” Kohl said. “You’re going to have to be vigilant and do projected cash flows and monitor it. You can’t just manage your finances once a year for tax reasons.

“The reality is we’re going to see extreme volatility,” he said. “But volatility creates opportunity, not just challenges. Good managers and landowners position themselves well to take advantage of volatility.”

The energy markets and energy policy will also play a big role in how farmers fare in the changing economic environment. About $8 out of every $10 of farm expenses is connected to oil, Kohl added.

 This story was distributed through a cooperative project between Illinois Farm Bureau and the Illinois Press Association. For more food and farming news, visit FarmWeekNow.com.