TFM Perspective 09-23-2022


The Potential Impact of Rising Interest Rates

The Federal Reserve has been raising interest rates for several months. So have many other countries throughout the world. The rationale is that rising interest rates will curb inflation. Inflation generally occurs when either too many dollars are chasing goods and services, there’s a scarcity of supply, or both. The backdrop to the inflation story is, in 2020, when the world basically went dormant from a supply creation perspective, savings grew at a faster rate than any time in history. Couple that with labor shortages as workers stayed home, and the backlog of supplies (lack of making new supplies) put premium prices on products, especially those that were to be delivered across the oceans. It was a near-perfect storm for more available dollars chasing fewer goods.

Initially, the banking system and Administration viewed the situation as transitory and temporary, assuming a quick rebound from the pandemic. Unfortunately, this view was likely too passive, as it took significantly longer for the supply side to rebound. Labor was in short supply and continuous Covid lockdowns have prolonged the lack of availability of goods and services overseas. Increasing salary and wages with pent-up dollars chasing goods and services put upward pressure on prices, with an annualized inflation rate not experienced since the early 1980s. The response from the Federal Reserve was slow in coming, and is now aggressive, raising interest rates on borrowed money to slow down the economy. The Federal Reserve is now walking a tightrope of raising rates too fast (which could send the economy into a recession) or not acting fast enough (allowing inflation to climb at a historically fast rate).

The implications are many, yet the two most glaring are: 1) it will cost more to borrow money, and 2) raising interest rates in the U.S. infers the U.S. dollar will continue to climb, making goods (especially agricultural products) more expensive for importing countries. For U.S. farmers, this implies a sharper awareness and pencil when making marketing decisions. Suggestions are to monitor basis, carry, and price. With this fall’s harvest, many will store. Storage is an alternative that buys you time to make marketing decisions later. Expectations of storage are that it will provide for a better basis and higher deferred price. Yet, due to tight supply in areas, basis may be stronger than usual. The current futures market offers little or no carry charge (reward for storing) to July. This might suggest you re-think your storage decisions. If basis is better than usual and there is no carry, and you want to stay an owner, consider selling cash and buying futures. This is a very simple example and does not encompass all potential variables. Have an in-depth conversation with your advisor and weigh the merits of specific strategies.

For most farmers, challenges with inflation and a rising dollar are variables they have not had to consider much in the last few decades. Still, these challenges are not new. Before jumping into harvest full steam ahead, take a few minutes to consider how higher interest rates and inflation could impact your farm operation. Have serious conversations with those who can provide advice to help you navigate these waters. As the old saying goes, “prior planning prevents poor performance.”

Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.


Bryan Doherty

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