The Federal Reserve voted to keep the benchmark interest rate steady last week. The news didn’t come as a big surprise. Taming what’s been sticky inflation has proven to be a challenge, despite some promising inflation data that was reviewed during the Fed’s meeting, but agriculture is also feeling the pinch as higher input costs and high interest rates are eating into the outlook of the ag economy this year.
The Consumer Price Index (CPI) for May was also released last week, showing inflation cooled slightly in May. The CPI climbed 3.3% year-over-year, according to data released last Wednesday by the Bureau of Labor Statistics. The index was flat month-over-month.
“The most recent inflation readings have been more favorable than earlier in the year, however, and there has been modest further progress toward our inflation objective,” said Federal Reserve Chairman Jerome Powell. “We are maintaining our restrictive stance of monetary policy in order to keep demand in line with supply and reduce inflationary pressures.”
Inflation and Higher Interest Rates Pain Point for Farmers
Inflation may have cooled for at least one month, but inflation and higher costs are also a growing pain point for farmers and ranchers. Net farm income is projected to fall back to levels agriculture saw in 2020, but the difference today is higher costs are eating into balance sheets across the U.S.
Farm Journal spoke to Austan Goolsbee, president and chief executive officer of the Federal Reserve Bank of Chicago, during the Iowa Farm Bureau’s Economic Summit last Friday. It was the first day Goolsbee could speak to the press after the big Federal Reserve meeting. He acknowledged input costs are creating pain for farmers and ranchers.
“There are some parts of the ag sector really feeling the pinch. If you look at hogs, if you look at dairy, the basic dilemma is the output is sort of reduced and sales prices are down, but the input costs are not down. If anything, they’re up. Then, if you add on top of it the credit costs being as high as they are, I think that is where people are still getting squeezed,” Goolsbee says.
Goolsbee says the May inflation data was promising, but he also notes that’s only one month of data. However, he says if there is more progress on taming inflation, then the Federal Reserve could start to cut rates to what he calls more “normal” levels, but he wouldn’t comment on how many rate cuts or the size of rate cuts the U.S. could potentially see this year.
“I’m hopeful that if we can make progress nationally on inflation, and rates could come down, that might give some relief in that space. Right now, repayment rates, if you look at delinquencies, they’re rising. They’re not to levels that you would call a recession, but they are rising. So, I think that’s an area of vulnerability,” says Goolsbee.
Layoffs and Job Cuts Hit Agriculture
The impacts of tighter margins are affecting demand for everything from equipment and tires to seed and chemicals. Bayer, a global agricultural and pharmaceutical company, cut 1,500 jobs during the first three months of 2024, about two-thirds of which were management positions. More layoffs and early retirements are said to be on the way.
Just this month, John Deere announced it’s offered 103 early retirement buyouts and eliminated 650 total jobs across its Iowa operations as of June 1. More job cuts are expected from the large equipment manufacturer based in the U.S. John Deere has also announced its intention to move its production of mid-frame skid steer loaders and compact loaders from its plant in Dubuque, Iowa, to a proposed new production facility in Mexico.
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Meanwhile, Bridgestone Americas announced last week it’s laying off 118 workers at its Des Moines, Iowa, plant citing lower demand for ag tires.
“I think the ag economy is a little bit of a different story than the general economy,” Goolsbee tells Farm Journal. “And partly, we’re readjusting. We just went through three-plus years that were extremely unusual, and in many ways, very strong for the ag economy. So, part of this is getting back to a more normal set of circumstances. And we’re going to have to adjust to that part of this.”
The latest AgLetter produced by the Chicago Fed was released in May. It showed:
- District agricultural credit conditions weakened a bit during the first quarter of 2024.
- Repayment rates for non-real-estate farm loans were lower in the January through March period of 2024 compared with a year ago, and the renewals and extensions of these loans were higher.
- In the first quarter of 2024, demand for non-real-estate loans relative to a year ago was up for the second consecutive quarter, while the availability of funds for agricultural lending was down from a year earlier once again.
Goolsbee says while farmers are dealing with the impacts of high input costs and higher interest rates, it’s also important to note agricultural companies, like Deere, are also very sensitive to high interest rates, as well.
“If you look at Deere and durable goods makers, in the strongest years, a lot of farmers bought a lot of equipment. So, when you look at just the durable goods cycle, there’s not as much demand, it’s kind of slowed. And for sure, high rates don’t make that any easier. So, I think part of this is cyclical and part of this is about that trend,” he adds.
What’s Causing Sticky Inflation?
Last week, Powell said it’s a “balancing act” to lower inflation, manage the “very strong” labor market, and keep the economy growing. The Fed’s goal is 2% inflation, and Goolsbee says the Fed won’t veer off course before it reaches 2%.
There are several things that feed into the overall inflation number, including food, housing, services and energy. The food and energy portions, according to Goolsbee, are so volatile that the Fed tends to not look at those as much.
“Goods inflation is back down to what it was pre-pandemic levels. It’s still above where we want it to be, but it’s improving. The puzzle, or the hard part, has been housing. Inflation there has been down a bit, but it’s still well above what it was before the pandemic,” Goolsbee says. “I’m a closet optimistic. Over the past 18 months, we’ve made a lot of progress at getting the inflation rate down. That’s something different than saying our prices are going to go back to the level we were at pre-pandemic.”
What’s driving inflation? Goolsbee says that is a puzzle as well, but he says there are two major pieces to the sticky inflation situation that’s continuing to hang over the economy.
“One is it just got way too high, and then the second is, it’s proved more persistent and stickier than what we thought,” says Goolsbee. “I think that’s a big component. And you see that in the ag economy in Iowa with input costs and the supply-side damage. Some of it came from COVID, but that deterioration led to a lot of the inflation. As that’s been healing, that’s allowed the inflation rate to come down without a recession.”
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Goolsbee says never in history has the U.S. seen inflation fall as fast as it has without a recession. But in 2023, he says inflation came down without a recession, which was good to see.
“I think the other component is the Fed, by setting the rates higher, has put some restriction on the economy to try to reduce the amount of overheating. And that’s also, I think, contributed to getting inflation down. We’ve made a lot of progress, but there’s still a fair amount to go,” Goolsbee says.
The Future of Fed Interest Rate Cuts
With more work to do in order to get to the Fed’s target of 2%, Goolsbee has been impressed with the resilience of the general economy.
“If you look for sure, internationally, at the U.S. growth, we’ve grown a lot,” says Goolsbee. “We’re actually higher than where you would have been when people were making predictions of where just the GDP would be at this point before they had ever heard of COVID. We’re actually above where they were predicting we would be. And we’re the only economy where that’s true. So, I’ve been very impressed with that resilience.”
Goolsbee says if inflation data continues to come in lower, and the jobs growth posts strong gains, then the Fed could cut rates to more normal levels. But until then, Goolsbee insists the Federal Reserve won’t budge on interest rates.
