Effect of rate change possibly mixed for agriculture

“Reaction to the rate drop helped stock markets around the world, lessened recession fears a bit and also helped relieve concerns about the current mortgage troubles, at least for now,” Sanders said.

For the agriculture sector, Sanders said producers wanting to borrow money or extend loans may want to wait; farmers and ranchers should be wary of over-extending themselves on loans; producers should watch for inflation in input costs, including equipment; and a resulting weakened dollar should help sell more U.S. agricultural products overseas.

“The recent move to drop the federal funds interest rate one-half percent by the Federal Open Market Committee (FOMC) gives some a signal that there’s not much chance of them increasing rates the rest of this year. In fact, there’s some talk that they may drop it again,” Sanders said. “With little risk of increased costs of borrowing, producers who don’t need money immediately may want to hold off and see if they might get a better rate.”

The FOMC is comprised of the board of governors of the Federal Reserve System and 5 of 11 Reserve Bank presidents.  Its decisions determine the purchases and sales of U.S. Treasury and federal agency securities.

As for farm exports, Sanders said there has already been a weakening of the dollar since the rate drop and that gives producers an opportunity to sell more products overseas.

A weaker U.S. dollar means that products are relatively cheaper on the world market and competitors’ products are relatively more expensive.

“We’ll be more competitive in the world market, at least in the short run,” Sanders said.  “I say short run because other governments aren’t just going to sit still and let us increase our market shares. They’ll react somehow to try and make themselves more competitive, but that will take time.”

Sanders warned there is also a potential downside for producers.

“With the dollar weaker, imported inputs such as fuel, fertilizer and some equipment will increase in cost,” he said. “Depending how high that cost is, it could wipe out any advantages we get from the weaker dollar, or it could be relatively neutral and just let us keep pace with expenses. We’ll simply have to wait and see how that plays out.”

With fertilizer costs, it will not be just imported products that will go up in price.

“Even domestically produced fertilizer will cost more due to the increase in fossil fuel prices used to make it,” Sanders said. “And there’s very little optimism for fossil fuel prices. They’re expected to keep going higher and ethanol is still too small of an industry to make a significant difference for decreasing or stabilizing fuel prices.”

With cheaper credit, many producers may be tempted to borrow money for improvements and expansion.

“I’d really caution folks not to buy new land or big-ticket equipment based on the thinking that it’s cheaper to do so,” Sanders said. “Overextending in this market is risky. It’s going to be a volatile situation. There will be some opportunities for good gains but also for losses, so it’s not a good idea to become over extended.”

One other important factor for farmers to keep an eye on is inflation.

“If cost pressures wind up, costing agriculture more than it gains from better export sales from the weakened dollar, we could see inflation take off,” Sanders said.

One area where that can take place is in wages, especially for seasonal labor.

“For that reason, I can’t stress enough the importance for producers to have a risk management program in place,” he said. “Crop insurance, market options, whatever producers can do to help lower financial risk is essential, especially when there is so much room for volatility in the next few months.”

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REPORTER/MEDIA CONTACT:
Ron Dahlgren
Agricultural Communications Services
144 Agriculture North
Oklahoma State University
Stillwater, OK  74078
Phone: 405-744-3737
Fax: 405-744-5739
E-Mail: ron.dahlgren@okstate.edu

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