The Federal Reserve’s 25 basis point hike this week marked the ninth consecutive rate increase aimed at battling inflation over the past year. It brought the benchmark federal-funds rate to a range between 4.75% and 5%, the highest level since September 2007.
Fed Chair Jerome Powell said officials had considered skipping a rate hike after banking stress intensified last week. He hinted that Wednesday’s increase could be their last one for now depending on the extent of any lending pullback that follows a bank run earlier this month, according to Jim Wiesemeyer, Pro Farmer policy analyst.
These rate increases can put a squeeze on farm profitability. Have you factored in how these cost-of-money increases affect your storage costs? It can add up quick.
To determine the financial considerations of on-farm storage, first look at the range of the underlying cost of the commodity, says Jon Scheve, president of grain for Superior Feed Ingredients. There’s a big difference between n$5 corn and $7 corn in these equations.
“The next thing we look at is the cost of interest on a short-term interest rate note to borrow money for the previous crop or the crop that will be planted this spring,” he says. “A year ago it was costing farmers about 4% and this year its 7%.”
That means that with today’s values of $6.50 cash corn at 7% interest divided by 12 months, it is costing farmers 3.8¢ per month to store grain in the bins.
“If we look back at last year with the lower interest rates that same $6.50 corn at 4% divided by 12 months was just over 2.1¢ cost per month,” Scheve says.
The interest cost alone is an increase of 1.7¢ per month.
“As farmers, a lot of us are guilty of just thinking of grain costs 1 to 2 cents per bushel per month to store,” adds Chris Barron, national financial consultant for Ag View Solutions and Iowa farmer. “But does it cost us per day or per month?”
Once you determine your exact costs factor in how much those costs grow each month you don’t sell grain, Barron says.
“As a farmer, I like having grain in the bin,” he says. “But I like money, too. Do the math to understand your cost of carry and make informed decisions. There’s a big-time cost to ignorance.”
Listen in as Todd Horwitz of bubbatrading.com explains the banking situation along with the status of inflation and the Federal Reserve on AgriTalk:
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