If you think you only needed to pay attention if the Federal Reserve raised rates Thursday, you’re wrong. While rates may have stayed the same for now, the financial and economic environment for farmers is changing fast.
Here’s what you need to know about the Fed’s decision to keep the federal funds rate alone, at a target of 0% to .25%.
- Your cost to borrow money will remain relatively low, at least for now. “Farmers will be able to keep borrowing at low interest rates,” notes Tommy Grisafi of Advance Trading. That’s critical for many producers, who are finding themselves caught between low commodity prices and flat-to-rising production costs. The solution for many? Operating loans, which are becoming both larger and more important to many growers at this point in the cycle, according to Chris Barron of Ag View Solutions. “When interest rates go up, it’s going to be a big hit to those who have an operating line of $500,000 or $1 million,” says Barron, who advises grower customers on margins and profitability. “And it’s not that hard to find a operation who are big enough to need a line of credit that size." Farmers who are struggling may already be feeling the pinch of higher rates, though.
- You will see market volatility in the short term. With many expecting the Fed to raise rates Thursday for the first time in nearly a decade, “the market had a vicious reaction” to the decision that rates would stay the same. Why did the Fed hold its position? They’re worried not about the U.S. economy, which Fed Chairman Janet Yellen praised in her remarks, but the global economy, specifically China. “The situation abroad bears close watching,” she said. However, the short-term impact of the Fed decision on the market should quickly fade as the trade adjusts to the new information. “By the end of this week, it will be old news,” Grisafi said.
- The impact on commodities could be complicated. Today’s news did bring the dollar down, making higher-priced U.S. grains more affordable in the global market. Grisafi worries that continued access to cheap debt will lead to a deflationary situation. “We’re closer to deflation than inflation,” he says. “Deflation is a really horrible thing for a commodity grower,” because it drains demand and pushes prices even lower. “If I were a farmer, I’d be disappointed by this decision,” Grisafi says. “But I don’t think the Fed cares about commodity growers. I think they care about the Dow Jones Industrial Average and what that number on your phone is at the end of the day.”
- You need to plan for higher rates. Yellen said in her remarks that the expectation is that the federal funds rate will rise to 1.5% by late 2016, 2.5% in late 2017, and 3.5% in 2018, so increases are coming. You can manage those hits by improving your efficiency and productivity in your fields and in your financials, which will allow you so to provide detailed cost projections and yield estimates to your banker. “Those farmers who are dialing those numbers in will be able to negotiate a better interest rate, simply by virtue of all that information,” Barron says.
What do you think about the Fed's decision to leave rates alone? Are you relieved or concerned? Let us know in the comments.