The Farm and the Fed

By Barb Baylor Anderson, Contributing Editor

Jonathan Miller checks the CNBC app on his phone every day, tracking what's happening with the Dow, oil prices and the economy. He says the exercise is a good way to stay on top of business costs. He is also never more than a click away from Federal Reserve rate actions, a key for cost management.

"I spend more time watching the oil and stock markets, and interest rates than I do the grain markets," the Island, Kentucky, farmer notes. "We only make two or three grain sales a year. The oil and stock markets are much more volatile. With the ongoing trade war and being part of a global economy, it is important to me to be up-to-date on these economic indicators."

Miller and his father, Fletcher, grow corn, soybeans and wheat over 2,350 mostly owned acres. The pair also has some sharecrop and cash rent contracts. With his own son close to finishing high school and a daughter in college, Miller says more than ever, he is thinking about the farm's future.

"My son may want to farm," he says. "After I bought my first farm, someone commented that I didn't know how lucky I was to have cheap interest. The rate then was 6.25% on a 15-year fixed-rate loan. That person was remembering the 10 to 12% interest rates he had borrowed against in the 1980s. But, he wasn't accounting for the $1,500 more an acre I had to pay for the land."

Miller adds land buyers today may see a lower return on that investment, because low interest rates generally bump up land prices.

"Land is sensitive to interest rates," he says. "Low interest rates bring back cash buyers looking for a higher return from that investment rather than using a CD in the bank. If anything, a fed funds rate cut probably makes it harder on young farmers borrowing to compete for higher-priced land. I think that trend will continue for a while since we are probably heading back to a zero percent fed funds rate."

SETTING THE RATES

The Federal Reserve is tasked with setting the federal funds rate, which is used by lenders to set local interest rates. If federal funds rates go up, banks pay more to borrow, and they charge borrowers more to lend. The opposite is also true.

At the end of October, the Federal Reserve cut its target range for the federal funds rate, bringing it to a range of 1.5 to 1.75%. This was the third cut in a three-month period. The Federal Open Market Committee attributed the decision to a view that the action would support "sustained expansion of economic activity, strong labor market conditions and inflation near the Committee's symmetric 2% objective."

Cortney Cowley, an ag economist with the Federal Reserve Bank of Kansas City, adds that conversely when the fed funds rate goes up, there tends to be a parallel shift up on ag loan interest rates as well as impacts on ag credit.

Monitoring interest rates is at the top of Kyle Kirby's to-do list. He grows corn, soybeans and wheat in partnership with his brother, Scott, near Liberal, Missouri. They also have a cattle backgrounding business.

Because they purchase cattle headed to western operations, a lot of capital is required to make those transactions happen. This puts them in a position where even small changes in rates can impact annual profitability. The Kirbys also want to be ready for expansion should a buying opportunity present itself.

"We have the land and the manpower, and we have been adding equipment and irrigation for diversification," says Kirby, noting they own two-thirds of the land they farm and rent the rest. "I absolutely watch the Fed, because everything triggers off of that. It impacts our decisions."

LOCAL LENDING DECISIONS

Tim Koch, chief credit officer for Farm Credit Services of America and Frontier Farm Credit in Omaha, Nebraska, believes the Fed's stance on
easing rates is a positive for farmers from a short-term cash-flow standpoint.

"It impacts variable rates for operating money," he explains. "The market is signaling short-term rates will move down perhaps two more times this year."

While actions taken by the Fed are out of agriculture's control, Koch encourages farmers to pay attention, because ag interest rates move in tandem with federal rates. He also advises keeping the cost of interest in perspective with other farm expenses.

USDA's Economic Research Service reports interest paid on farm debt remained relatively stable from 1990 through 2013. Interest expenses in 2019, however, are forecast to increase 38%, or $6 billion, compared to 2013.

Koch advises that while interest rates remain on the low end, farmers should consider locking in fixed rates for long-term investments where it makes sense for their individual operations.

Economist Cowley adds it's important to remember actions by the Federal Reserve are not the only influencers on interest rates at the local level.

"The Fed rate cut has an impact, but so does competition among lenders," she points out. "Banks manage risk with interest rate adjustments, so watch what impact the Fed's activity has on various local interest rates. It is always good to monitor and be informed of Fed actions so you make better business decisions. But, don't make decisions based only on interest rates."

Missouri farmer Kirby agrees. "It has to fit your operation and not just be based on interest rates. Make moves that make sense and balance with workload. You have to manage all of it."

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