Fed Rate Hike and Agriculture

There has been a lot of news this week about the Federal Reserve (Fed) raising interest rates. You may have even seen articles about how this affects each individual, whether it be the interest rate you pay on your mortgage or the interest rate you pay on your car loan. What hasn’t been reported on much are the affects an interest rate hike has on agriculture.

In general when we hear about the Fed raising interest rates we automatically think that all interest rates are going to rise. This is somewhat true but one must first understand what the Fed does and doesn’t control. The interest rate quoted by the Fed is the federal funds rate. This is the “rate at which depository institutions lend reserve balances to other depository institutions overnight,” according to the Fed’s webpage. Basically we can think of this as the interest rate that is used when one bank lends money to another bank. If this rate rises then the receiving bank will more than likely raise its prime interest rate, the basic rate at which that bank quotes for all of its loans. When prime interest rates go up then you can expect any variable rate loans you have to go up, such as a variable rate mortgage or a variable rate car loan. Some non-government student loans are also variable rate, so those should rise as well. On a positive note, money held in savings accounts should rise and those living off of the interest from savings accounts or money market accounts should benefit.

Rising interest rates affect agriculture in several ways. The most obvious would be any capital purchases that were made on variable rate loans. A 30 year variable rate loan on a farm purchase or a 5-7 year loan on capital improvements would likely see an uptick in rates. Likewise, low interest operating loans would also become more expensive as the Fed raises interest rates as the operating loan rate would increase.

What is not discussed much is how the federal funds rate plays into the strength of the US dollar and how that affects US agriculture. Historically when the Fed raises the target on the federal funds rate, we see an increase in the value of the dollar. While this is great for the consumer (i.e. more purchasing power), it generally translates in a decrease of commodity exports (becomes more expensive for foreign buyers as the foreign currency becomes weaker against the US dollar). The most recent two crop years, 2014 and 2015, have seen huge losses in the value of commodities. Some of this could already be attributed to a strengthening US dollar as well as a decrease in demand and an increase in overall supply of that commodity. The alternative is that domestic use/demand for commodities could rise as interest rates rise, sparked by the consumer having more purchasing power as the US dollar strengthens.

In reality no one can accurately predict how the Fed raising interest rates will affect US agriculture. Historically it has shown to reduce farm income. Only time will tell.

Here are a few articles/presentations for further reading:

Corn, Soybean Markets Absorb Fed’s Rate Hike (Agriculture.com 12-17-15)

Interest Rate Effects on the US Agricultural Sector With Emphasis at the Farm Level (Texas A&M University May 1997). An older article but its predictions proved correct as farmers did experience tough times during the late 1990s and early 2000s.

Extraordinary Monetary Policy Effects on Commodity Prices (University of Georgia 2015)

Agricultural Financial Outlook, Lending, and Land Values (Mississippi State University 2015)

House Hearing Sheds Light on Stress in Cotton Country

On Wednesday the US House Subcommittee on General Farm Commodities and Risk Management held a hearing about the cotton industry. Titled “Commodity in Focus: Stress in Cotton Country” it was appropriately named as all of the witnesses testified of the current stress felt across the cotton industry.

After all of the witnesses testified almost every congressman asked “What can we do to help?” The response from each of the witnesses was to urge the USDA to designate cottonseed as an “other oilseed” as stated in the 2014 Farm Bill.

This would “stop the bleeding” as the witnesses stated but would not be a silver bullet to fix all that is wrong with the industry, most of which the American cotton farmer has no control over (government policies in China and India).

Several ag news outlets have good summaries of the hearing. You can watch the full hearing on YouTube.

NCC: US Cotton Sector Facing Difficult Economic Conditions

Southeast Farm Press: US Cotton Left Hanging, Ag Committee Hears

Reuters: US Lawmakers Ask Obama Administration for Cottonseed Price Support

AgWeb: Is US Cotton in Trouble?

STAX Numbers Released

Dr. Don Shurley of UGA wrote an interesting article this week explaining the recently released USDA-RMA data regarding enrollment in the STAX program for 2015. The article can be viewed by clicking here.

It is very interesting to look at the different enrollment percentages by state. 40% of GA cotton acres enrolled in STAX, 53% in AL, and 57% in FL. Our friends in TX enrolled only 19% in STAX but cotton growers in AZ enrolled 66%. The national average for STAX enrollment was 28% of planted acres for 2015. STAX indemnity payments have not been made yet so it will be hard to tell what the enrollment level will be for 2016.

Shurley Stax

Also, for 2016 USDA has made some changes to STAX. Below is an excerpt from a Cotton Grower Magazine article explaining the changes.

“For the 2015 crop year, growers didn’t have the flexibility to decide if they wanted STAX on irrigated acres versus non-irrigated acres,” explained Campiche (NCC). “They could make different choices on coverage levels for each, but they still had to have at least a minimum level for one or the other. This change means that growers can now get STAX at the coverage level they want for either irrigated or non-irrigated fields.

“We had growers who were interested in that, because they didn’t want STAX for both or because the STAX expected yield for their area was not attractive. This gives them the flexibility to choose. They won’t owe premiums for the acres with zero percent coverage.”

The second change allows STAX coverage for growers in areas who can only secure cotton crop insurance through a written agreement.

“If growers are in a county where they need a written agreement policy in order to get an underlying insurance policy, they didn’t have the flexibility in 2015 to purchase a STAX policy,” said Campiche. “Now, they can.”

The final change adds STAX coverage for cottonseed in 2016 through an optional endorsement. For 2015, that endorsement could only be added to an underlying insurance policy.