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Financial Outlook - Cheap money could help

Market expects lower interest rates sooner, not later

The refusal of the Federal Reserve to cut interest rates this year triggered the ire of President Trump, who says the central bank’s tightening last year was a mistake. But the president may get his way soon, perhaps at the end of the Fed’s two-day meeting on monetary policy July 31.

To be sure, interest rates aren’t high by historical comparison for anyone who remembers the sky-high cost of money back in 1980. The current target for short-term Federal Funds is only 2.25% to 2.5% after all. But after a decade of cheap money, that’s expensive in a world where central bankers appear in a race to the bottom to see who can cut rates the most.

Even members of the Federal Open Market Committee that sets rates seem ready to cut. A majority see the short-term Fed rate falling a half of 1% in 2020, and nearly half believe in one, or even two cuts of a quarter of 1% yet this year. Betting on Federal Funds futures this summer was even more aggressive, seeing a rate cut in July as a virtual certainty.

Cheap money is a benefit in a cash-intensive business like farming, especially after six years in a row of stagnant income that depleted working capital of many operations.

Lower rates have other impacts on agriculture. Yields on 10-Year Treasury Notes often tied to mortgages are set by the market, not the Fed, and already fell near 2% while the central bank dithered. Lower rates on these “safe” investments make farm land more attractive to investors. That helps support land prices – good if you own it, maybe not so much if you want to buy it and have to compete at the auction with a pension fund or doctor in town.

Lower rates also act as a damper on the value of the dollar, which traded near two-year highs this spring when it appeared the Fed might even raise monetary costs. All things being equal, investors tend to buy currencies where they earn a higher return. So lower rates tend to weaken the dollar, which can be positive for commodities valued in greenbacks.

The dollar still appears overvalued by traditional measures of supply and demand. That support came from buyers seeking a safe haven in world full of risk. The biggest winner rang both the commodity and safe haven bells. Gold rallied to a six-year high. Inflation remains low, but fear, it seems, is alive and well.

 

Senior Editor Bryce Knorr joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Advisor. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.

For more corn, wheat and soy news, commodity marketing recommendations and daily commodity charts, subscribe to Farm Futures' free e-newsletter, Farm Futures Daily, and keep up during the day with Farm Futures on Twitter.

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