An Urban's Rural View

The nation's unemployment rate doesn't rank high on the list of government statistics farmers follow, and that's unfortunate. It may not have much to do with the price of corn but it has plenty to do with the price of another essential commodity: money.

Interest rates are ultra-low because the Federal Reserve thinks our 7.7% unemployment rate is too high. The Fed is buying $85 billion in bonds every month, trying to bring joblessness down.

We don't have to wonder when the central bankers will reverse course and step on the monetary brakes; they've told us when. The Fed will abandon "quantitative easing" and start unwinding its bond portfolio when unemployment falls to 6.5%. The Fed expects this to happen in 2015.

At that point the party will be over. Interest rates will rise, maybe a lot. Farmers with big borrowings will experience both higher interest costs and a more skeptical reception at the bank when they seek fresh financing. Farmland prices will be heading south.

For agriculture, then, much hangs on this statistic. It doesn't make most farmers' radar screens when the labor department releases it the first Friday of each month, but it should. While the jobless rate is still comfortably (or uncomfortably, if you're unemployed) above 6.5%, and while economists aren't predicting a rapid decline, surprises can happen.

Don't let the 2015 forecast lull you to sleep. Markets have something to say about rates and they anticipate events. With rates low, bond prices are hovering near historic highs. Investors know they'll eventually plummet and nobody wants to be the last out the door. Should we get a couple of months of steep falls in the jobless rate, bonds could sell off, causing interest rates to take off even before the Fed moves.

As farmers see higher rates approaching, they can take steps to minimize the hit. Lock in financing early and try for longer loans. Hedge interest rate risk with Eurodollar futures. Rein in expansion plans. Build working capital.

The unemployment rate may seem like a remote abstraction, of interest only to economists, mutual-fund managers and policy makers. But with interest rates hanging in the balance, it's actually an early-warning signal that farmers need to heed.

(CZ)

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