December 15, 2015 05:00 AM
With the Federal Reserve widely expected to finally raise interest rates this week, many farmers are bracing themselves for the likely impact on their operating loans.
But they also need to prepare for how the Fed’s move will affect commodity prices.
“It’s in all likelihood is not going to be a big rate increase, but it’s going to be a game changer in that we haven’t seen a rate hike in a long time,” said Joe Vaclavik of Standard Grain, speaking on U.S. Farm Report this week. “Interest rates (and) the (federal) funds rate have been essentially next to zero for a long, long time.”
As a result, even this week’s predicted small uptick will be closely watched.
In addition to making it more expensive to borrow money, such a shift could also affect currency prices, although it’s predict how the dollar will react this time.
“I think as (the Federal Reserve’s interest rate decision) relates to farmers and people in agriculture, the biggest thing will be any impact on the currencies,” Vaclavik said. “Fundamentally, a rate hike should be a little friendly to the dollar, but historically the dollar has actually backed off after major rate hikes in the past. A softer dollar would be the best thing that a farmer could ask for right now given poor exports of corn, soybeans, and wheat.”
Historically, though, increases in interest rates have typically pushed crop prices down, at least temporarily.
According to Jeffery Dorfman, an agricultural economist at the University of Georgia, some researchers have found that one percentage point rise in the interest rate can translate into as much as a 6% drop in commodities prices. On the low end, such a move could push prices down by 2%, which translates into “a dime or so per bushel for corn and wheat and maybe a quarter for soybeans.”
As painful as that sounds, Dorfman says farmers should stay calm. “Given the relationship between interest rates and commodity prices is well known, the futures markets for agricultural commodities have already partially priced in those impacts,” he says, writing in farmDoc Daily. “I would not expect the inevitable increase in interest rates to be positive for commodity prices, but the magnitude of the negative impact should be relatively small and fairly evenly spread across the major row crops.”
Does it mean the grain and soy markets won’t react on Wednesday after the Fed releases its decision? Hardly. “There is some evidence of overshooting when prices adjust, meaning that prices might drop sharply in the next few months and then recover some of the losses over the next year as everyone adjusts to the new level of interest rates,” Dorfman says. “…If you see a big move in commodities futures prices after the Fed’s first announcement of a rise in interest rates, do not panic; things should settle down.”