The latest Federal Reserve quarter of a percent interest rate hike may seem insignificant, pushing the federal funds rate to a still relatively low 2.25 percent, but the increase comes on top of other hikes since January and likely will be followed by another .25 percent in December with others to follow in 2019.
The target range set at the Federal Reserve September meeting is 2 percent to 2.25 percent.
“It’s hard to estimate the magnitude of the latest increase on farm budgets,” says Keith Coble, department head, Mississippi State University agricultural economics at Starkville.
“The effect on individual farmers will depend on the amount they borrow, but most farmers will do some borrowing, making things that much tighter.”
The interest rate increase also “is one more thing to make bankers more nervous,” Coble adds. And they have been nervous enough already, “especially with the trade situation and low prices. Those factors are weighing heavily on the agriculture economy.”
He says an interest rate increase affects more than just the cost of borrowing money. “It drives up unit costs and farm valuations.”
The increase will play into enterprise budgets, he adds, when farmers complete harvest and begin looking to next year’s crop mix. “We’re still working on 2019 budgets,” he says, “putting on some final touches.”
Those budget projections likely will suggest more belt tightening is in order. “It’s easy for us to tell farmers that they need to be more efficient,” Coble says. He recognizes that the process of trimming what has already been cut poses significant challenges for farmers.
“But we are looking at lower price projections. Budgets were tight last year; they likely will be tighter for 2019.”
Adding to the dilemma is the unfinished farm bill, which, if it is completed, will be late. “The programs will not change dramatically,” Coble says.
Sharp pencils will be needed, he says, to devise cropping plans. “It’s one of those periods when we have to find ways to be more efficient. Farmers may have to give up things that are not making money. They may need to take out a piece of land that used to make money but is not making money now.
“Look at inputs,” he adds. “Find ways to trim budgets. It will be a little here and a little there.” He says something like adjusting seeding rate could mean reduced cost without sacrificing yield. “Farm management decisions will be important,” Coble says. “Pull back where you can.”
He said choosing the right crop mix will be important, especially considering low prices and tariffs.
“The most affected crop in our area is soybeans with a lower price and harm from the China trade tariffs. That could go away tomorrow if the trade issues are settled, but it also could be a long, persistent battle.”
Coble says the tariff payments approved by the USDA will help, especially soybean producers. “They need to make sure to get into their FSA offices as soon as they can,” Coble says.