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Update: Fed Leaves Interest Rates Unchanged

On Wednesday, the Federal Reserve’s Open Market Committee voted to maintain status quo of its zero rate mentality developed in late-2008. This decision could be beneficial to agricultural commodity prices, analysts say.

Many believed the Fed would move interest rates higher in September. Now the thinking is the central bank might consider a rate hike in December.

Economic estimates from Fed officials indicated lower growth for 2015. 

In its report Wednesday, the Fed estimated U.S. GDP in 2015 drop to the 1.8 percent to 2.0 percent range, down from 2.3 percent to 2.7 percent.

Inflation estimated were little changed from the Fed’s March estimates, with growth still expected to fall in the 0.6 percent to 0.8 percent range for 2015.

In general, an increase in interest rates would be price-negative for the farm markets and farmland values, and it would increase the cost of a farm loan. 

In the past, a University of Illinois study suggested that capitalized farmland value declines could exceed 20% if interest rates increased 100 basis points (1 percentage point).

During this week's two-day meetings, the Fed was expected to announce its intention to raise interest rates for the first time in nine years in September.

Alan Brugler, President Brugler Marketing & Management LLC, tells the Fed's decision just delays eventual pressure on farmland values.

"Keep in mind that the Fed quit "easing" a while ago. They are just taking their time about starting to tighten. Any easing effects, in terms of creating inflation in commodity prices, are likely gone. They appear to be waiting for inflation to appear organically via a tightening labor market and eventual higher wages," Brugler says.

Brugler adds, "Farmland prices have been abetted by low interest rates but the bigger driver is farm income and operating margins. Both of those are being squeezed, if average or better crops are seen in 2015. Thus, the default mode would be for further pressure on farmland values due to limits on ROI. Rising rates would put additional pressure on incomes due to increased interest cost/debt expense and would presumably add an additional bearish nudge to farmland. The delay today defers any such impact."

Higher rates would in theory reduce the leverage of futures traders, but there is not much speculative froth in commodity markets right now anyway, Brugler says. "A slow increase in rates would likely have minimal impact on speculative activity in the markets."

Scott Shellady, TJM Investment senior vice president, says a rate hike would psychologically hurt the grain market. "Just as in 1937, a rate hike too soon could send us back into a recession. Look at what happened when the Fed preemptively raised rates back then . . . sent us on a downward path only to be rescued by the productivity of World War II.

"We are already flirting with deflation....a recession would make that a near certainty," Shellady says.

Though the general consensus of market analysts surveyed indicates a rate hike, not everyone is in that camp.

Shellady sees the Fed keeping its hands close to its chest. 

"There is a very small likelihood of it raising rates. But I personally do not think it will happen. We had one better than expected jobs number, and now all of the rate-hike hawks have come out of the woodwork."

Shellady adds, "I still can't get over the fact that the U.S. economy actually contracted (GDP was a negative) last quarter and looks to only grow at 1.7% this quarter - remember, that is after we had quantitative easing, and the best we can do is 1.7% after a negative quarter on top of that? We used to grow at 3.3% without any central bank help."

Al Kluis, Kluis Commodities, agrees that a rate hike would, long-term, put pressure on the grain market.

"A rate hike would rally the dollar and could be potentially negative for the grains."

However, the Fed announcement could be trumped by farmers not being able to plant the rest of the U.S. soybean crop, Kluis says.

"Right now, the market is more focused on the 10 million acres of soybeans that will get planted late or maybe not at all," Kluis says. 

Kluis adds, "I have talked with several farmers in Missouri that said they can make more money taking the prevent-plant check than they can gross growing soybeans this year, especially if [Tropical Depression] Bill dumps another 2 to 5 inches of rain through that area."

The International Monetary Fund as well as the World Bank have stated publicly that they would like it if the U.S. did not raise rates this year at all, Shellady says. 

"So, in a nutshell, poor U.S. data, foreign pressures, and a reluctance of the Fed to make a mistake will probably keep them quiet this time around," Shellady says. 

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