How is Agriculture Affected by Rising Interest Rates?

Right before the holiday season, the U.S. Federal Reserve decided to increase the benchmark interest rate for the first in time over a decade. The slight increase was widely expected and came when the economy was regularly adding jobs and in much stronger condition than during the depths of the Great Recession.

Even with the hike, rates still remain historically low. More so, a hike represents the start to a return to normalcy, after interest rates were pushed down to near zero roughly seven years ago.

The average American will be affected by hikes in ways different than industries, including agriculture. Federal Reserve Board Chair Janet Yellen advised that future interest rate hikes are likely, although when is uncertain. With that in mind, those in the agriculture industry will want to know how those decisions will affect them.

Farms have to make the necessary preparations to account for interest rate hikes.Farms have to make the necessary preparations to account for interest rate hikes.

Market Volatility and Commodities
In the short term, you should expect to experience some uneasiness in the market. The market will quickly react – and it did in December – but eventually settle a bit as trade adjusts to the new information.

However, it remains to be seen if current economic conditions will have an effect on future hikes. The global economy got off to a rough start at the beginning of 2016, fueled by uncertainty in China and low oil prices.

These low oil prices, while beneficial to the average driver, are hurting agriculture. Low diesel and fuel costs have led to traders pulling money out of commodities to invest it elsewhere. As a result, corn prices have declined, according to the U.S. Department of Agriculture Statistics Service. The price of a bushel of corn in the month of November was $3.28. As a comparison, in November 2012, the price was $7.39 and represented a five-year high.

Additionally, low oil prices mean ethanol demand has also decreased, which in turn drives down corn demand.

In an interview with AgWeb, Virginia Tech professor, Dr. David Kohl, laid out five macro factors that will impact the agriculture industry:

  • Weather in the U.S. and throughout the rest of the world
  • Central banking at home and abroad
  • Duration of the dollar’s strength
  • Technology and oil, including biofuels
  • Developing nations in light of slow economic growth worldwide

Take Advantage of Low Rates
While future hikes are hard to predict due to the many factors the Fed must consider, those within the industry may want to use these low rates to their advantage.

For example, these low rates will help secure good rates for long-term loans. Acquiring equipment is also ideal, as your monthly payments won’t be nearly as high.

If you do decide to lease or buy equipment, be sure to explore all your options for deductibles, such as Section 179. This will allow you to claim livestock, machinery and vehicles as a full business expense.

Buckle In
If there was one piece of advice to the agriculture industry, it would be to settle in. While you may want to secure a long-term loan or purchase more equipment, you will want to limit your borrowing; only do so when necessary.

Likewise, be sure to have a cash reserve on hand.

With interest rates expected to further increase, you will want to ensure you’re properly prepared for the effects – bad and good.

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