What Impact will Higher Interest Rates Have on Agriculture?
The Federal Reserve raised interest rates last week by a quarter of a point. This is just the beginning of higher inflation and more costly credit in 2017. The interest rate hike is just the first of what will likely be several such hikes in 2017. Purdue Ag Economist Dr. Chris Hurt says higher interest rates along with a more robust US economy will have an impact on agriculture, “We are going to see a more stimulitve economy that will put more pressure on interest rates at the same time the Fed will be tightening down on money supply growth. Both of those factors will drive interest rates up at least 1% in 2017, and perhaps even more.”
Yet, an increase in inflation will have a positive impact on commodities. “Grains, oil, and metals all do better in times of rising inflation,” noted Hurt. However, he says runaway inflation and skyrocketing interest rates like we saw in the 1980s is not likely. During its Wednesday meeting, the Federal Reserve also indicated it could raise rates up to three times in 2017, while cautioning it would watch employment and any stimulus programs Congress might enact.
“I think the Fed is cautiously trying to get interest rates back to a workable, acceptable, normal level without squelching off the final little bit of strength and growth we have in the economy,” stated Jerry Lynch, professor of economics in Purdue’s Krannert School of Management.
The higher rates will increase the cost of credit which will come at a time when more and more farming operations will need more credit from their lenders. Hurt worries that for some this may be a serious problem, “We have operations that have not cash flowed in 2014, 2015, and 2016. Now, if we are raising interest rates in 2017 and beyond, banks are going to take a real hard look at these farms.”
Watch the complete interview with Dr. Chris Hurt in the latest HAT Better Farming report, sponsored by the Indiana Soybean Checkoff. Check it out on our web site.