POST ELECTION THOUGHTS FOR AGRICULTURE - 2 OF 5 (INTEREST RATES)
2. Interest Rates:
The cost of borrowed money is poised to rise. The Fed’s been hinting at a rate increase at every meeting for several years. Trump says we need higher interest rates because low rates have created an artificial bubble— even though it might slow down some aspects of the economy. Another negative aspect of ultra low interest, it punishes savers and main street investors who are watching their nest egg grow by half a percent per year.
What’s this mean for Agriculture? It means grandma’s CD at the community bank will finally fetch more than a fraction of a point in annual return. But it also means when grandma’s farm sells after grandma passes away, the sale price will suffer because interest rates correlate negatively with land sale prices.
I wouldn’t sweat the threat of high interest. We’re not going back to the 1980s. Today, 18% interest rates don’t even exist on credit cards for people with a credit score in the 500s. Interest rates will be blamed for the 10-15% furthering of Ag land’s correction, but commodity prices and competition from other asset classes are as much at fault.
Karma is a bitch as they say — a few years ago farmers were so knee deep in cash they didn’t need operating loans but they could have gotten one for mere pennies in interest. Now they need the line of credit and the price of money is going up. But just a little bit and from a historical perspective not enough to fret.