Interest Rates and Their Impact on Agriculture
Learning Lounge session focuses on interest rates.
SAN ANTONIO, Texas (Feb. 5, 2015) — Some 8,100 people from all across cattle country traveled to San Antonio, Texas, for the 2015 Cattle industry Convention. A good many of them took advantage of the National Cattlemen’s Beef Association (NCBA) Learning Lounge, sitting in on one or more of the informal educational sessions hosted in the NCBA Trade Show. In each of a series of 30-minute Learning Lounge sessions, an industry expert addressed a different timely topic.
Kentucky-based Michael Smith, a regional vice president for Farm Credit Mid-America, spoke on the subject of interest rates and their impact on agriculture. He talked about the economic outlook globally and in the United States. Smith said 3.4% growth in global productivity is expected in 2015, while U.S. gross domestic product (GDP) is projected to grow by 3.4%.
Smith suggested that economic growth may be sufficient to encourage the Federal Reserve to raise interest rates. Currently, interest rates are at historical lows, ranging from 1.75% to 1.77%.
“Take advantage of it while you can,” advised Smith.
If or when interest rates rise and borrowing costs increase, said Smith, supply-side pressure on grain prices and the exit of speculative money from commodity markets could decrease commodity prices by 30% to 40%. Lower grain prices should mean lower input costs for livestock enterprises. Declining commodity prices could put downward pressure on land rental and purchase prices.
Smith advised his audience to be proactive, recommending that every operation have a five-year plan plus individual enterprise analysis and financial planning. He recommended balancing short-, intermediate- and long-term debt, and securing fixed interest rates for the latter. Smith recommend the use of risk management tools that make sense for the particular operator and enterprise. He also advised producers to build cash reserves.
“Manage your cash to make sure you are adequately capitalized,” said Smith. “Prepare cash flows for higher interest rates. They are coming.”
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