The post-pandemic surge of face-to-face programs with producers, lenders, and agribusinesses has been in high gear since the first of the year. Traveling in the current environment with flight issues and a wave of storms from coast to coast makes me realize that I am not 30 years old anymore! However, the engagement over the past 15 weeks with people who have the desire to be lifelong learners has provided many timely viewpoints from the road.

Finishing our 300th webcast since the beginning of the pandemic has provided another dimension of networking, both domestically and internationally. With this perspective, anxious and cautiously optimistic are the words that I would use to describe the agriculture industry heading toward midyear.

High on the list of concerns is the possibility of price declines while costs remain elevated due to inflation and interest rates remaining stubbornly high compared to the last decade. This scenario is a classic example of an economic flip, resulting in compressed or negative margins that can last up to 12 to 24 months.

From a historical context, when the previous correction occurred post commodity super cycle in 2013 the drop was steep, followed by the grinder years until just prior to the pandemic. This current economic cycle correction is setting up with a slower decline in prices. However, this correction has the possibility of long-term consequences due to inflated costs and the doubling of interest rates.

Interest rates

When it is all said and done, expect the federal funds interest rate to settle in the range between 5 and 5.5 percent. This would equate to a prime interest rate between 8 and 8.5 percent. However, as an economist, I caution that some inside the Federal Reserve would like to see the federal funds rate as high as 7 percent, which would put the prime rate in double digits. This would be a psychological barrier for both consumption and investment decisions and would slow the economy, including agriculture, dramatically.

Some of you have inquired where interest rates will land in the longer term. The central banks in the U.S. and globally have been implementing the concept of zero bound since the Great Recession. This was to counter a possible deflationary spiral in assets. The zero bound policy combined with the expansion of the central banks’ balance sheet and government and fiscal stimulus have resulted in stubbornly high inflation.

The guide to where the Federal Reserve would like the short-term federal funds interest rate would be between 2 and 3.25 percent, which equates to a prime interest rate between 5 and 6.25 percent. This allows the Federal Reserve to be in a position to lower interest rates in the event of a negative economic shock. The Board of Governors of the Federal Reserve System feels this range of interest rates is not over stimulating or under stimulating the economy.

Stay tuned for more real-time recon in the next article.