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Fed helps farmers – for now

Ag Marketing IQ: Lower interest rates are a plus but what about USDA’s next move? Rate cuts turn on the Fed’s inflation objective.

Bryce Knorr, Contributing market analyst

May 6, 2024

6 Min Read
Money flying out of a hand
Getty Images/Jeffrey Coolidge

If you’ve seen plenty enough of higher interest rates, here’s a bit of good news. Lower rates are coming – just not as soon as once expected. Election year politics, confusing economic data and persistent fear of inflation mean only relatively small reductions may be on the table next winter when you negotiate deals with lenders.

Indeed, the only clear take-away from turbulence in the wake of last week’s meeting on monetary policy at the Federal Reserve seemed to be that higher rates, at least, are not in the cards. Trouble is, that prospect also comes with an asterisk. It could also change if, for instance, a crude oil surge or other surprise disrupts conventional thinking once again.

Here’s what happened. (Warning: You may need a scorecard to keep track of all the hits, runs and errors.)

U.S. Unemployment vs. inflation rate chart


First, as universally expected, the central bank on Wednesday made no change in its benchmark short-term Federal Funds, keeping the target between 5.25% and 5.5%. Minutes after the official statement dropped May 1, Fed Chair Jerome Powell seemed to indicate at his press conference that the rate hike cycle has peaked.

That benign interpretation found support from the central bank’s concurrent decision to slow down the pace of its “tapering” of longer-term debt – that is, how fast it reduces the size of its massive holdings in longer-term debt bought during the pandemic to bolster the economy. This would keep monetary supplies from shrinking further. More money sloshing around the system in theory helps keep rates lower – except that move won’t have any real impact anytime soon.

Good news, right? Sure, except fretful investors abruptly refocused on a new sentence inserted in the Fed statement that sounded less copacetic: “In recent months, there has been a lack of further progress toward the Committee’s 2% inflation objective.”

The stock market provided one real-time play-by-play of this uncertainty, rallying initially before reversing lower. Investors cheered at hints of dovishness about rates, then abruptly jeered other suggestions of just the opposite.

After conflicting data Thursday about labor costs and productivity, the market braced for “the big one” – the monthly employment report on Friday. In the “bad news is good news department,” the nation’s unemployment rate ticked higher to 3.9%, though it remains historically quite low. And while the economy continues to create jobs, the number added in April was less than expected.

Taken together, all the data seemed to point to an economy that wasn’t threatening to overheat and spark another round of inflation, and instead was slowing enough to allow the Fed to cut rates to fulfil its dual mandate from Congress: full employment and price stability. Stocks surged once again, jumping above moving averages and appearing to break out of downturns. Investors love cheap money, which they use to buy stuff, like stocks, while also benefiting from companies boosting those stock prices with buy-backs or fatter dividends, what counts for “investing” these days.

Betting on Federal Funds futures, Wall Street’s equivalent of Draft Kings or your local casino, provided measures of what rates could do. Not long ago Fed officials looked to be backing three cuts of one-quarter of 1% in 2024, and Fed Funds futures indicated some in the market saw six – or a full 1.5% – or more. After Wednesday’s Fed meeting, this betting was down to a single baby step cut of 0.25% in September, with another similar cut possible by the end of 2024 – well after the dust settles on the November election. Conventional wisdom believes the Fed shies away from moves around elections to keep its nose out of politics – though politicians from both parties love to stick their noses under the Fed’s tent.

Friday’s jobs report changed the odds again, increasing prospects for two or more cuts by the end of the year.

Farm impact of lower interest rates

Lower rates benefit farmers borrowing money, but these gyrations also had a more immediate impact on agriculture. Higher rates in a country tend to lure investors to that currency so they can take advantage of better returns, and vice versa. All the talk of higher for longer U.S. rates boosted the dollar to its highest level since Nov. 1. That worried countries whose currencies weakened, raising costs for imported goods and threatening to reignite their own inflationary risk.

Hopes for more U.S. rate cuts weakened the greenback, and also put spark into the step of commodities denominated in dollars, like crude oil. The fallout helped grain prices. Nearby corn rallied to its best reading since the first days of 2024, with December breaking out of a trading range that’s persisted since January.  

Soybeans made a move of their own. The nearby jumped above a downtrend in place since the November 2023 contract stopped trading, while November 2024 broke out of a downtrend in place since March 21.

Those gains came just as traders prepared for the May 10 World Agricultural Supply and Demand Estimates from USDA, which feature not only 2023 crop updates but the agency’s first monthly forecasts of new crop production, ending stocks and prices. The 2024 crop year projections use March 31 acreage and the agency’s trend yields for new crop, which assume normal weather conditions and corn planting progress, with only demand and prices in play.

But recent data about old crop corn and soybean usage could see some adjustments to forecasts for how much will be left over Aug. 31, the end of the 2023 marketing year.

Ethanol strong

Weekly and monthly ethanol numbers from the U.S. Energy Administration hint usage of corn to make biofuel could be up to 100 million bushels more than the 5.4 billion bushels USDA printed in April. Such a large increase all at once seems a stretch. Maybe another 25-million-bushel boost like the one last month is more likely.

Exports are considerably stronger than during the 2022-2023 marketing year but may not be as good as USDA projected in April. Taken together, projected ending stocks could be down 50 million bushels. That’s good but not enough to move the needle much. That job seems to be the responsibility of new crop and weather uncertainty this summer from La Niña, which helped futures begin a typical move higher seasonally.

Soybean processors also seem to have been busy over the first seven months of the marketing year, with recent Census Crush and figures from the National Oilseed Processors Association putting year-date crush up 6% from last year, which would amount to a 45-million bushel increase. Again, such a bump seems too much for USDA to bite off and chew in one month’s WASDE.

Soybean export numbers are below year-ago levels, but total usage may be enough to prevent USDA from another increase in old crop ending stocks, which went up 25 million bushels last month. Bean traders instead appear to be looking at outside market gains and seasonal trends and deciding to party on, bolstered by flooding in southern Brazil that could disrupt late harvest there.

But the good message from the positive tone on Wall Street removed the possible source of chaos I mentioned last week, keeping the grain market from a downdraft. It isn’t a home run, but at least it’s not game over.

About the Author(s)

Bryce Knorr

Contributing market analyst, Farm Futures

Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and Commodity Trading Advisor. A journalist with more than 45 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.

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