How Rising Interest Rates Impact Farmers
On Wednesday, the U.S. Federal Reserve raised interest rates for the third time in 2018. With second-quarter GDP sitting at 4.2% and jobless claims falling to multi-decade lows, the U.S. economy has been expanding and consumer confidence is sitting at the highest levels in 18 years.
The Fed has moved to raise rates as a way to keep the economy from overheating and to stave off inflation. Here are several ways that higher interest rates will affect U.S. farmers moving forward.
Grain Price and Land Pressure
The simple rule is a stronger U.S. dollar negatively impacts local prices on commodities ranging from oil to gold, from corn to winter wheat.
This inverse relationship between interest rates and commodity prices is well-documented. Traditionally, higher interest rates will also weigh on the value of land. Higher borrowing costs can deter new buyers.
Export Pressures Persist
That rising dollar has an negative impact on the global export markets too. A strong U.S. Dollar makes American exports more expensive on the global market. Grain buyers in Europe, China, Argentina, and Canada now require more of their currency to afford the exchange rate fueled by a stronger greenback. The laws of economics say that a higher price stifles demand (unless it’s a high-demand, inelastic product).
Given that the world is awash in soybeans, corn, and wheat, the stronger dollar can impact demand from foreign markets and push export levels lower. When comparing export numbers from the USDA on a year-over-year basis, it’s important to consider the value of the dollar against global currencies during both periods.
Higher Borrowing Costs
Higher interest rates mean higher borrowing costs for future loans or existing loans with variable rates. (If you’re locked into an existing fixed-rate loan, a rate hike isn’t going to impact your cash flow).
But if you’re a buyer in the market and you’re borrowing cash, expect to pay more for operating, machinery and real estate loans. The same goes for financing stockpiles of crops.
What Happens Next
Moving forward, the markets expect that the Federal Reserve will raise interest rates one more time in 2018.
With that said, any significant shock to the market or downward pressures on the economy could halt the Fed’s actions. In fact, there is a case to be made that if the U.S. were to fall into a recession in the next 18 months, the central bank would take the opportunity to loosen monetary policy and potentially lower rates again.
That said, two critical factors remain in focus. The ongoing trade spat with China is expected to push consumer goods pricing higher, which could fuel additional inflation.
In addition, central banks elsewhere in the world may continue to raise interest rates, a factor that would weaken the U.S. dollar compared to the affected currencies.
The combination of lower commodity prices, ethanol policy changes, and trade disputes with China and NAFTA partners is bearish for farmers’ bottom lines.
Navigating the supply and demand factors that impact grain prices can be a difficult process. That is why we’ve created GrainCents. Each day, FarmLead’s agricultural economists and analysts tackle the markets and identify the best selling times for farmers in today’s market.