An Urban's Rural View

In the last few years, even as farmers' costs for most of their inputs -- seed, fuel, fertilizer, land rents -- have risen, the cost of one important input has defied the trend: money.

Thanks to an accommodative Federal Reserve, interest rates on farm mortgages and operating loans have been so low so long that many farmers take cheap money for granted.

Are they right to? The Fed promises to keep interest rates low through at least mid-2015. Financial markets could countermand the Fed and force rates up if they lost faith in Uncle Sam repaying the $16 trillion he owes. But there's been little sign of that.

So far, at least. Now looming on Washington's immediate calendar are delicate negotiations over taxes and spending with huge implications for future government debt levels. Markets are on edge.

An opinion piece in the Financial Times, "Think the Unthinkable on U.S. Debt" (http://tiny.cc/…), suggests some have already gone over the edge. The author, Robert Jenkins, a "former fund manager and current external member of the Financial Policy Committee of the Bank of England," says he isn't predicting Armageddon. But he begins by asking if the U.S. will request a bailout, and never really rejects the possibility.

Jenkins sketches seven factors to keep in mind. One is the behavior of "sophisticated investors." Jenkins says they're already asking investment firms to devise packages of securities that would give them as much protection against risk as Treasuries used to.

Another factor: "By some estimates, the Federal Reserve now owns all but some $750bn of U.S. debt issued with maturities of 10 years or greater. This suggests the Fed is running into limitations on how much more it can buy while preserving dealing depth; that friendly foreigners have used the Fed's market interventions to shorten the duration of their U.S. holdings; and therefore that America's creditors are less vulnerable than imagined to the threat of market losses -- should they wish to exit."

One lesson of the euro crisis, Jenkins writes, is that unthinkable possibilities, like investors fleeing in fright from U.S. debt that was once considered risk-free, are now thinkable. "Another is the speed with which complacency can convert to crisis."

Too pessimistic? Probably. But reading Jenkins reminds us that farmers have a stake in the fiscal-cliff negotiations. If politicians handle them irresponsibly they could frighten markets into selling off U.S. debt. Borrowing costs would rise -- suddenly and dramatically.

At our Ag Summit in Chicago in December you will have an opportunity to ask an expert about the timing of future interest-rate increases. Terry N. Barr, a nationally recognized agricultural economist who serves as senior director of the knowledge-exchange division of Co-Bank ACB, will be discussing the fiscal and monetary pressures on the U.S. and Europe and their implications for demand for agricultural products and for interest rates.

I'll be introducing Terry, and having chatted with him recently, I know you'll find his views interesting.

Just another reason you should go to the Ag Summit website (http://tiny.cc/…) and sign up for this event, which last year attracted nearly 700 ag professionals.