The Federal Reserve Open Market Committee (FOMC) met for the first time in 2018 on Jan. 30-31. The group unanimously voted to keep the federal funds rate steady at a range of 1.25-1.5 percent.
The FOMC noted in its post-meeting statement that the past year experienced economic and labor growth, and that inflation could reach the Fed’s long-held goal of 2 percent in the medium term. With these factors in mind, it’s safe to assume that another rate hike isn’t too far off.
The January Fed meeting also marked the end of Janet Yellen’s tenure as chair. She was replaced in February by Jerome Powell, who will hold his first FOMC meeting on March 20-21. For the most part, economists predict that Powell will continue to lead the Fed in the same direction Yellen had been for the past four years, according to Bloomberg.
In other words, it remains very likely that the committee will vote in favor of a rate hike next month. For farmers and those in the agriculture business, interest rate changes could have a number of effects.
Increases in the federal funds rate typically have an impact on loan interest rates – though possibly not immediately. The federal funds rate is the interest that banks are allowed to charge each other for overnight loans exchanged between institutions. In time, this increase will pull consumer and business loan interest rates up, too.
For farmers who use operating loans in their businesses, a rate hike could mean loans will become more expensive. The same goes for farmers who cash-rent their land. In response, farmers may want to review the loans and rentals they currently have on their balance sheets. Reducing debts where feasible could help keep operating costs at a reasonable level.
The Fed’s statement could have mixed implications for commodities prices. On one hand, the Fed noted that inflation should increase over the next year. Hoosier Ag Today pointed out that, during times of positive inflation, commodities have historically done well.
On the other hand, when interest rates increase, as they’re expected to do, crop prices could drop. Jeffery Dorfman, an agricultural economist at the University of Georgia, said to Farm Journal Media’s Ag Web that even a single percentage point increase in the interest rate could lead to between a 2 and 6 percent drop in commodities prices.
Michigan Farm News noted that increasing interest rates can lead to a stronger dollar, which isn’t necessarily good news for farmers. When the dollar is stronger, other nations’ crops are less expensive by comparison. That means if higher rates give way to a more valuable dollar, farmers may experience some difficulty in exporting their crops.
However, interest rates don’t always have a predictable effect on the strength of currency. In an article discussing the 2018 outlook for the U.S. dollar, Seeking Alpha pointed out that the dollar’s performance in 2017 was underwhelming, despite several rate hikes. How the U.S. will stack up next to other nations’ currencies remains to be seen.
When interest rates begin to increase, some investors may ease out of the agriculture space and find new areas to place their funds in hopes of higher returns elsewhere, according to the University of Illinois’s farmdoc daily, a news site dedicated to tracking trends in the U.S. Corn Belt. When interest rates were low, investors viewed farmland as low-cost, long-term investments. As a result of investors leaving agriculture, farmland prices could fall.
Low grain prices that many farmers have been experiencing have also kept some investors out of the agriculture space. When grain prices are low, so are many farmers’ incomes, CropLife explained. This leaves less cash to invest in land, encouraging lower farmland values.
Finally, high interest rates make land purchases more expensive by way of higher interest charges, which decreases the actual value of the land, Michigan Farm News pointed out. This could increase farmers’ debt-to-asset ratios, which could limit access to credit. For farmers who expanded operations by cash-renting or using loans to obtain more land, higher rates combined with lower land values could become a strain on their cash flow.
Farmers can minimize these types of obstacles by working with their lender or a financial institution to reassess debts, pay down balances where possible, or refinance loans to more favorable terms, Steve Johnson, a farm management specialist at the Iowa State University Extension, wrote in Wallaces Farmer.
To speak with a professional about your farm’s finances, contact an Ag Lender at your local Bank Midwest branch.