While the recent drop of a key interest rate is generally seen as good for the economy, it will take awhile to tell what its ultimate effect will be for farmers and ranchers, says Larry Sanders, agricultural policy specialist with the Oklahoma Cooperative Extension Service.
The interest rate drop may seem like a good time to borrow, but Sanders says producers wanting to borrow money or extend loans may want to wait.
“The recent move to drop the federal funds interest rate one-half percent by the Federal Open Market Committee gives some a signal that there’s not much chance of them increasing rates the rest of this year. In fact, there’s some talk that they may drop it again,” Sanders says. “With little risk of increased costs of borrowing, producers who don’t need money immediately may want to hold off and see if they might get a better rate.”
With cheaper credit, many producers may be tempted to borrow money for improvements and expansion. Sanders warns that overextending in this market is risky because of the volatility.
As for farm exports, Sanders says there has already been a weakening of the dollar since the rate drop, and that gives producers an opportunity to sell more products overseas. A weaker U.S. dollar means that products are relatively cheaper on the world market, and competitors’ products are relatively more expensive.
Sanders warned there is also a potential downside for producers. “With the dollar weaker, imported inputs such as fuel, fertilizer and some equipment will increase in cost,” he says. “Depending how high that cost is, it could wipe out any advantages we get from the weaker dollar, or it could be relatively neutral and just let us keep pace with expenses. We’ll simply have to wait and see how that plays out.”
One other important factor for farmers to keep an eye on is inflation, which can take off if costs move higher than gains from increased export sales.
“For that reason, I can’t stress enough the importance for producers to have a risk-management program in place,” he says. “Crop insurance, market options, whatever producers can do to help lower financial risk is essential, especially when there is so much room for volatility in the next few months.”