Interest Rate Hike a Double-edged Sword for Ag

It was no surprise earlier this week when the Federal Reserve upped its federal funds rate target range by 0.25%. With their positive outlook for the U.S. economy, the Feds plan on continuing to raise interest rates well into 2018.

This most recent hike was one of the bright spots for farm commodities this week, according to Mike Zuzolo from Global Commodity Analytics.

“The Feds raised rates, as promised, because they see their inflation and employment mandates being met,” Zuzolo said. “We have already seen the gold market react, the crude oil market remains at its elevated levels of two-year highs and the dollar fell pretty precipitously. I would expect a similar reaction in the commodity markets once the government passes the tax reform legislation”

Zuzolo said if he sees these trends continue in gold, crude and the dollar, then that would signal to him that the market assumes that aggregate demand is going up, global trade will go up and inflation will take a stronger hold in the markets.

Higher interest rates, on the other hand, will impact the cost of doing business on the farm. Even though rates are still manageable for producers, Zuzolo said it may be time to take control of some operating costs.

“I have been going around the country talking with producers that have a lot of short-term money tied up in operating loans that are not fixed,” Zuzolo said. “If you have any of those type of loans for 2, 5 or even 7 years, I think now is a good time to lock those interest rates in.”

Zuzolo said that farmers may be better suited leaving 10, 15 and 30 year loans open at this point.

Source: Morning Ag Clips

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