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What does the Fed rate hike mean for farm country?

A chat with Farm Credit Mid-America’s Matt Montiero

On Dec. 14, the Federal Reserve raised interest rates for the first time since 2008. The hike is expected to be followed by three more in 2017 and forecasts claim this will mean higher borrowing costs in the near future.

Two days after the Fed’s action, Matt Montiero, Senior Vice President and treasurer for Farm Credit Mid-America, spoke with Delta Farm Press about what happened in 2016 and expectations for the new year. Among his comments:

On what 2016 brought farm country…

“In very broad strokes, the lower crop prices haven’t helped with farm income. Of course, that income hasn’t been as strong as in past years when we were at the peak of the ag cycle.

“Sentiments for the next few years are that we’ll remain in that same kind of environment. We don’t see an immediate rebound to crop prices.

“We don’t do any of our own internal forecasting – this is just looking at USDA predictions on crop prices and other external sources.

“Land prices, though, have held pretty firm, all things considered.”

Interest rates

On 2016 interest rates…

“As for interest rates, for a while we expected several increases over the course of the year. We ended up just having the one that was announced Wednesday.

“That was part of an upside, a pleasant surprise to many although it was because the economy wasn’t recovering as fast as the Fed would have liked. But at least the rates, on the short end of the curve, were held low.

“We did see some pleasant surprises in dips in 10-year Treasury, particularly in the June/July timeframe. The 10-year Treasury hit record lows so we were able to see a revival of customers converting. That is something unique to Farm Credit Mid-America in that we’re able to offer conversions to customers that most lenders don’t.

“A lot of folks in agriculture have really prepared for this downturn. One of our specialties is long-term fixed rates. The customers have had extended periods of time to fix their rate, and most have. Many are now positioned going into what may be tighter farm incomes.”

The Trump factor

The general sense among lenders with the incoming Trump administration? Any impact from the trade deals he wants to kill or renegotiate?

“What we’ve seen from the election … is about a 50 basis point increase in the 10-year, benchmark Treasury. That’s due to expectations of higher growth and spending based on stated policies of Donald Trump. Of course, it remains a ‘wait and see’ for what happens once he takes office. Will he take action to lower taxes? Increase infrastructure spending? Defense spending?

“There’s at least a belief that inflation and growth will pick up. That also brings an expectation the Fed could raise rates at a quicker pace. They’d want to make sure inflation doesn’t get out of control – and that can happen quickly.

“Even (Fed chairwoman) Janet Yellen said they’re taking a ‘wait and see’ approach. There is no predetermined course on the actions they’ll take, they’ll be data-driven. So, they’re looking closely at things like the employment rate, GDP and inflation. Those have improved in the past few months so they stuck with the December rate increase.

“Currently, they’re looking at three rate increases for 2017. Again, those will depend on what actually happens and what Trumps’ actual policies are.”

Balance sheets

More on money available to farmers…

“When you talk about banks and the availability of loans for farmers, that’s where the farm credit system differs. Banks will move in and out of lending as agriculture is hot or unattractive.

“The reason Farm Credit Mid-America (a member-owned cooperative) was formed in 1916 was to ensure the availability of credit at all times. We’re here for the long-term and will remain in agriculture. Our financial strength is extremely strong moving into this downturn.

“Even with some of the government payments that have gone out in the last few months, we’ve seen customers tightening up their balance sheets. That’s a good thing to see. They’re paying down lines of credit so they’ll have some capacity to borrow when the opportunity comes.”

On common questions…

“We get questions on what we expect interest rates to do in the future. … Trying to predict interest rates is like trying to predict what crop prices will do. You may have a better picture over the long-term. With crop prices as low as they are, you’d think the longer-term picture would be brighter than the extreme short-term.”

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