Farmers Urged To Eye Dollar, Not Interest Changes

WEST LAFAYETTE, Indiana-- U.S. farmers may want to pay closer attention to the rising U.S. dollar vs. any interest rate change when trying to figure the future of profitability, according to economic experts at this week’s Top Farmer Conference.

Or, put another way, a demand-driven commodities market will have a greater impact on farm operations than the impact of interest rates. As the U.S. dollar rises, U.S. ag commodities remain more expensive than other crops on the world’s export market. This results in less U.S. exports.

But, first, economic experts at the annual Purdue University conference wanted to dispel this idea that farmers should lose sleep over interest rate changes.

Nathan Kauffman, Federal Reserve Bank of Kansas City vice president, says that because interest rates have been as low as they have been and for so long, the little change that the Fed has made is not enough to seriously impact farmers. “A lot of producers have been able to lock in a low operating loan interest rate. So, a little interest rate change doesn’t bother their borrowing costs,” Kauffman says.

It’s also important to note that farmers weigh so many other aspects when it comes to figuring profitability. “So, when you think about grain marketing plans and risk management, those other factors (input costs, rent, crop prices) are important. When we see dramatic price swings from month to month, those other factors (other than interest rates) tend to be more front and center, and weigh more for profits.”

In 2016, credit conditions have gradually deteriorated, according to the Kansas City Fed District statistics. For the next three months, loan repayment rates are expected to decline further. Also, loan renewals or extensions are expected to increase, Kauffman reported to the farmer meeting here.

CAPITAL HEADWINDS

Looking forward, it’s those farmers who have taken on a lot of capital expenditures that could face the toughest financial times, Kauffman says.
“It may not be the interest rate associated with that debt, but, instead, the principal and the obligations with it that could cause the most headwinds, financially.

Naturally, producers with more debt have more obligations.

“Producers who are debt-free have more of a buffer to shocks in commodity prices. So, producers who have not been able to adjust cost structures so as to bring profit margins back into check are those who are facing more of the financial pressure. When they go to their lenders, they are having more difficult conversations on how to improve that long-term outlook.

YOUNG FARMERS FACE TOUGH TIMES

So far, the Federal Reserve Bank of Kansas City is not seeing a lot of problems with forced liquidation of assets. “If the profit margins are negative for too long, it could become part of the conversation,” Kauffman says.

The financial stresses that the Fed Reserve officials do see in agriculture tend to include younger farmers, Kauffman says. “Producers who got started after land prices had gone up and machinery costs were significant faced too much up-front capital spending. The other scenario that has gotten farmers in a financial bind is one where they tried to expand rapidly, trying to take advantage of economies of scale by buying equipment.”

If they are cash-renting most of the land that they farm, it provides just too much financial obligation.

U.S. DOLLAR OUTLOOK

The rising U.S. dollar is expected to continue that same pattern for the unforeseen future, economists say.

“There is little reason to expect the dollar to get weaker,” says Phil Abbott, Purdue University economic professor. “The United Kingdom leaving the European Union (known as Brexit) hurts the dollar’s chances of going lower. If Europe is weak and the U.S. economy is stronger, the dollar will keep going higher.”

Economic growth rates around the world have been sluggish in recent years, providing impetus for a higher dollar, Kauffman says.

“For a foreign customer, looking to import a product, exchange rates matter. You are going to look to source products where you can buy them more cheaply. So, I do think the exchange rate has been significant in the last 18 months – for any industry, not just agriculture. Time will tell what it does, going forward,” Kauffman says.

BREXIT SUMMARY NOTES

UK votes to leave EU on Thursday, June 23
—British pound depreciated 12% over the next several days; U.S. dollar appreciated 3.3% and has held its own since
—Stock markets crashed globally 
—U.S. S&P down 500 points, 5.3%
—London FTSE down 5.6%
—German DAX down 9.6%; Japan Nikkei down 7.9%
—Loss in global wealth $2-$3 trillion

“It was a huge reaction,” Abbott says. “The pressure on exchange rates will be persistent.”