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How do federal bank bailouts affect the farm economy?

Agriculture.com Staff 09/16/2008 @ 2:15pm

The Fed's trying to stop the bleeding.

Some of the largest lending institutions in the U.S. are failing and the federal government's stepping in. Riding this wave, commodities are trending sharply lower.

On Tuesday, as the federal government took up the task of whether or not to rescue another financial giant from economic destruction, the Federal Open Market Committee voted to keep its target for the federal funds rate at two percent.

"Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters," according to a Federal Open Market Committee report on Tuesday. "Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

"Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain," the report adds.

Speculation prior to Tuesday's Fed meeting was that rates would be cut, encouraging more investment and thereby creating more downward pressure on the grains. Tuesday's move -- or lack thereof -- by the Fed will likely not have much of an effect to the grain trade, analysts say.

The Fed's trying to stop the bleeding.

That's not to say the massive hits the economy's been taking lately are not spilling over into agriculture. Outside factors like the recent failures of Lehman Brothers and AIG, along with Monday's sale of Merrill Lynch, are weighing heavily on the grain markets and the farm economy. Jason Ward with Northstar Commodity Investment Co., says the financial crisis affects the U.S. farmer directly and indirectly.

Despite the potential upswing in commodity prices in the future, the federal government's actions to save some of the nation's largest banks isn't sitting well with farmers, especially those facing a winter of tumultuous grain markets and an unclear picture of just how high input costs might be when it comes time to plant next year's crop. Agriculture Online Marketing Talk members say the bailouts -- though unfortunately necessary in some cases -- send the wrong message.

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