Develop Strategy for Rising Interest Rates

November 26, 2012 07:28 PM

Don’t get comfortable with low interest rates

Market watchers believe interest rates will stay low until 2015, but that might not be the case.

Rates could increase quickly, and the cause is flying under many people’s radar. There’s a much stronger stock market and economy than many have factored in, says Peter Ricchiuti, professor of finance and economics at Tulane University.

"Interest rates will go up because the economy will get stronger," he says. "The recession ended in July 2009, and I think we’re in the middle of the recovery. Moreover, the stock market is up 126% since mid-2009, and it was up 16% last year alone."

Ricchiuti says corporate earnings are strong. Profits have soared but labor costs have not, as companies have been slow to hire. "Worker productivity is higher than at any time in history," he says. Furthermore, unemployment needs to be put into context. While overall unemployment is 7.9%, the 13.9% unemployment rate of high school dropouts skews the data; by contrast, the unemployment rate of married men is 4.6%.

One of the biggest positive U.S. economic stories, in Ricchiuti’s view, is the ramp-up of U.S. natural gas discoveries. "We have become the Saudi Arabia of natural gas, and it’s become  incredibly cheap," he says. That can benefit farmers through lower energy costs and keeping a lid on fertilizer prices.

Ricchiuti says the U.S. is on the cusp of a new wave of mergers and acquisitions. One reason why: U.S. corporations are sitting on $3 trillion in cash. Apple Inc. alone has $117 billion. To illustrate how cash-rich U.S. corporations are, last year they bought $400 billion of their own stock.

Seed prices going up, but so are revenues

Farmers will pay signifi cantly more for the seed they’ll plant in 2013 but make up for it with higher returns on their investment, predicts a Purdue University agricultural economist.

Prices for corn seed are expected to rise 5% to 7%, soybean seed 7% to 10% and wheat seed more than 10%, says Alan Miller, a farm business management specialist. That means a bag of corn seed would sell for somewhere between just under $200 to more than $300, depending on whether it is a conventional or biotech variety. Soybean seed would go for about $50 a bag, with wheat seed priced in the low $20s per bag.

"Seed supplies could be tight," Miller says. "This is especially a concern with soybeans because farmers might surprise the seed industry by deciding to switch to planting more beans next  spring." He urges farmers to place their orders with seed dealers in the next few weeks.

The summer drought is contributing to the projected price increases but is not the only factor. "We would have expected prices to go up even if we hadn’t had a drought," Miller says.

"We’ve seen seed prices go up year after year for many years," he explains. "There was a period in the early 2000s when producers were transitioning from nongenetically modifi ed-type seed products to GMO types of seed products, which generally are more expensive. Then we had the rise in commodity prices. Recently, we’ve had two extremely diffi cult seed corn producing years in a row in the Corn Belt."

Seed companies increased their planted acreage this year, hoping to make up for poorer production in 2011, Miller says. The drought ruined those plans and had an adverse effect on the crop that survived.

"No one could have planned for a drought of that magnitude," Miller says. "Seed quality could be a concern next year."

Fortunately for farmers, they should earn enough from their 2013 crops to more than make up for the costlier seed. "We’ve done some preliminary estimates and we’re looking at some very high levels of return, with the potential to cover all costs next year, even on our low-yield estimates," Miller says. "It’s pretty unusual to cover all costs across all three yield levels—low, average and high—in our estimates."

Miller projects that a farmer growing rotation corn on average-yield soil will generate $560 in crop returns above variable costs per acre in 2013. Rotation soybeans would bring in an estimated $466 an acre on averageyield soil, with wheat generating $372 per acre on that same type soil. If realized, those margins would represent an increase in revenue from this year of 24% for rotation corn, 17% for rotation soybeans and 51% for wheat.

"The economics at current prices for next fall are very good, even with the higher cost of seed and some of the other inputs," Miller says. "I’m expecting a good opportunity for profi ts, if we can avoid another drought."

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