Today’s U.S. commercial farmers have pretty much come to understand that anticipating what happens in the general economy is as important as weather and crop prices. However, as we head into 2016 nearly all economic factors that affect agricultural markets are about as unsettled as they could be. Key economic questions include:
- Will the Fed raise interest rates enough to slow the economy?
- Will the value of the dollar continue to strengthen or begin to fall again?
- Will the Federal budget continue to shrink or expand, and how will this impact farm programs?
- Will the presidential campaigns make the Congress even more dysfunctional than in recent years?
- Will previously-growing foreign markets continue to stumble, reducing U.S. ag commodity exports?
- What can ag lenders assume about net farm income?
- Will cheap oil continue, and is this a bonus for farmers?
Let’s briefly review how these uncertain issues will play out over the coming months.
HOW FAST? HOW HIGH?
The Federal Reserve, with monetary policy, has been the key player in managing the U.S. economy. Using such tools as quantitative easing, the Fed has kept interest rates as close to zero as possible. Generally, this has harmed those with fixed assets and income, and blessed those with debt and needing borrowed capital.
Now the Fed has signaled a transition to edging up interest rates. How fast and how high are the key questions.
If the economy continues to improve, especially with hiring and higher wages, it will be faster. If sluggishness returns, it will be slower and possibly put on hold. So, rates are probably the lowest they will be for the foreseeable future. Low unemployment and upward pressure on wage rates are bright spots in the economy, but the oil patch in Oklahoma-Texas dampens this good news.
After months of generally sideways movement in the value of the U.S. dollar, the currency has been showing a trend of strengthening. If this continues, it will be harder to sell U.S. ag commodities to foreign markets. Compound this likelihood with the apparent decline in growth of key foreign buyers such as China, Japan, and Europe, and there is little good news for trade and its impact on commodity prices.
MIXED OUTLOOK FOR AG
The federal deficit is relatively low. The budget, as a percentage of Gross Domestic Product, is lower than in 2000, but edging up. Revenues have moderated, and spending is also creeping up, although it is lower than a decade ago.
And, while government debt-to-GDP seems to be leveling off, the U.S. has not seen such high levels since post-WWII.
This mix of federal fiscal news suggests a mixed projection for U.S. ag in 2016. A slowing of federal spending may put the skids on farm program support, in spite of 2014 farm bill promises.
However, relatively high federal spending will translate into growth for the economy. The price for that growth will likely mean pressure on higher interest rates. Dysfunction in Congress will only increase as the country gets closer to the November elections.
After record-breaking years in 2012-2014, net farm income is flirting with pre-2000 lows. Wheat, cotton, corn, and livestock markets are contributing to income woes. Low energy prices help to moderate input prices, but ag producers with oilfield income from leases and jobs have little to cheer about in the near term.
So, there’s plenty of uncertainty in and around agriculture. This is probably a belt-cinching time for producers with good risk management plans.
If you need borrowed capital, it will be cheaper to get it sooner. But, limit your debt loads because rates are on their way up. Those who enjoy risk-taking will have a field day in 2016.