The Federal Reserve has been raising interest rates for several months. The same is true for many other countries around the world. The reasoning is that higher interest rates will curb inflation. Inflation usually occurs when too many dollars are chasing goods and services, there is a shortage of supply, or both.
The backdrop to the inflation story is that in 2020, when the world virtually went dormant from a supply creation perspective, savings grew at a faster rate than at any time. another moment in history. Add to that labor shortages as workers stayed home and the backlog of supplies (lack of new supplies being made) drove up the prices of products, especially those that needed to be delivered across the oceans. It was a near perfect storm for more available dollars chasing less goods.
Initially, the banking system and the administration viewed the situation as transitional and temporary, assuming a rapid rebound from the pandemic. Unfortunately, this view was probably too passive, as it took much longer for the offer to bounce back. Labor was scarce and continued Covid lockdowns prolonged the lack of availability of overseas goods and services. Rising wages and salaries with dollars being pent up in search of goods and services has put upward pressure on prices, with an annualized rate of inflation not seen since the early 1980s.
The Federal Reserve’s reaction has been slow in coming and is now aggressive, raising interest rates on borrowed money to slow 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 rapid rate) .
The implications are many, but the two most glaring are: 1) it will cost more to borrow money, and 2) rising interest rates in the United States imply that the US dollar will continue to rise, making goods (especially agricultural products) more expensive for importing countries. For American farmers, this means a sharper awareness and pencil when making marketing decisions.
Suggestions are to watch base, carry and price. With the harvest this fall, many will store. Storage is an alternative that saves you time to make marketing decisions later. Storage is expected to provide a better base and higher deferred price. Still, due to tight supply in some regions, the base might be stronger than usual. The current futures market offers little to no carry (reward for storage) until July. It might suggest you rethink your storage decisions. If the basis is better than usual and there is no carry, and you want to retain ownership, consider selling spot and buying futures. This is a very simple example that does not encompass all potential variables. Have an in-depth conversation with your advisor and weigh the merits of specific strategies.
For most farmers, the challenges of inflation and a rising dollar are variables they haven’t had to consider for decades. Yet these challenges are not new. Before you start harvesting full steam ahead, take a few minutes to think about the impact higher interest rates and inflation could have on your farm. Have meaningful conversations with those who can give you advice to help you navigate these waters. As the old saying goes, “pre-planning prevents poor performance”.
If you have any questions about this view, please don’t hesitate to contact Bryan Doherty of Total Farm Marketing: 800-334-9779.
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 situation. Past performance is not necessarily indicative of future results.
About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the grain belt, Bryan Doherty is deeply passionate about his customers, their success and their successful long-term relationships. As Senior Market Advisor and Vice President of Brokerage Solutions, Doherty lives and breathes agricultural marketing. He has a deep understanding of tools and markets, listens and communicates with intention and clarity to ensure clients are comfortable with decisions.