The current weather rally notwithstanding, there’s plenty of angst about declining farm income. Most analysts are quick to point out the situation is nowhere near as dire as the 1980s farm crisis.
Farmer balance sheets are in much better shape, for one thing. But there’s an even more stark contrast between now and then: Inflation, interest rates and the value of the dollar are all at levels that seemed impossible 35 years ago. None of the three factors appears likely to produce a threat to farmers any time soon.
Inflation topped out at 13.6%, with short-term interest rates not stopping until they’d ratcheted all the way to 22.36%. The dollar peaked above 148 on the currency index tracked by the Federal Reserve, 65% higher than the last reading put out by the central bank.
During the farm crisis these factors produced a trifecta of financial pain. Land values mushroomed on commodity prices that shot higher with inflation that weakened the dollar. When the Fed raised interest rates, the dollar soared. Land and grain prices collapsed, loans dried up and farmers were forced to sell land into falling markets that only spiraled lower.
Inflation remains the conundrum in today’s markets. Not because it’s too high, but because it’s so low. The Consumer Price Index, less food and energy, in June rose at just 1.7% on an annualized basis, and the full measure was even lower. Unemployment is way down, but wages remain stubbornly low too. The injection of trillions of dollars into the economy by the Fed, matched by stimulus from its counterparts around the world, hasn’t ignited a firestorm of inflation, despite the blizzard of money thrown into circulation.
Just this winter the Fed appeared ready to raise interest rates 1% in 2017, with a series of 25-basis-point hikes. But after increases in March and June, the wheels fell off that bus. Trading in Federal Funds futures shows virtually no chance for two increases, with a hike in December less than a 50-50 proposition.
The Fed holds a two-day meeting on monetary policy July 25-26, but doesn’t normally consider rate hikes at these mid-quarter sessions. Investors will parse the latest statement for clues on potential increases, as well as a timetable for unwinding the Fed’s massive balance sheet accumulated in the wake of its financial easing. While that could put more long-term debt on the market, the yield curve remains, if not flat, gently curved, keeping long-term rates historically low for land purchases.
Wall Street’s latest worry is failure of the Senate’s health care bill, which threatens to derail efforts at tax cuts and infrastructure spending. Hopes for that fiscal stimulus this winter buoyed the dollar, inflation ideas and commodities. Now bets on all three appear on the defensive.
Sometimes a weak dollar is good for commodities, so the dollar’s break to 10-month lows Tuesday lends a little support to futures denominated in greenbacks. But the dollar can also be a harbinger of a risk-averse mood, too. The grain market is trading weather, and when that story’s over, these outside market factors could become more important.
The concerns took stock market indexes off record highs. Investors are also focused on fundamentals, namely earnings, which are coming in below companies’ previous forecasts, but still beating expectations. The S&P has hit my projected high for the year based on current fundamentals. That doesn’t mean it can’t go higher, but fatigue at some point may set in to produce profit taking. September tends to be the worst month for stocks, with October also a minefield.
The dollar, meanwhile, is only slightly undervalued, with fundamentals pointing to an index value of 97.33, compared to Tuesday’s close of 94.658. The currency is oversold, and likely due for a little rebound.
Senior Editor Bryce Knorr joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Advisor. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.
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