Economic relief may be coming for American farmers, but not on the monetary policy front, Federal Reserve Board Governor Christopher Waller said Wednesday.
Speaking at an agribusiness conference hosted by Arkansas State University, Waller said he expects personal consumption and price growth trends to benefit agriculture this year. But, he pointed out, the sector will have to deal with high interest rates on loans for “some time.”
The assessment follows a message the Fed has been signaling for months, that once interest rates are high enough to reduce consumer demand for goods and services, they are likely to stay that way. for an extended period.
The projection does not bode well for farmers who rely on lines of credit and other loans to cover their expenses between harvests. Waller acknowledged this dynamic, but assured the audience that the Fed’s rate hikes will pay dividends to the economy in the long run.
“Of course, we know that higher interest rates pose challenges for farmers and ranchers who must borrow to smooth out the costs and returns of farming during the year,” Waller said. “But excessive inflation is a bigger challenge because it has the potential to become a long-lasting problem that weighs on economic growth, undermines living standards and hurts consumers, on whom farmers depend.”
In his speech, Waller noted that after rising sharply through 2020 and 2021, consumer spending on groceries fell in 2022. He attributed this trend to people returning to restaurants and an overall drop in food spending driven by the inflation, which was expected to normalize in the next year.
“Looking ahead, I expect personal consumption to grow modestly and price increases to moderate, and I think those results would bode well for the agricultural sector this year,” Waller said. “It appears that economic activity may be moderating further in the first quarter of 2023, but I expect the US economy to continue to grow at a moderate pace this year, supported by a strong labor market and encouraging progress in reducing inflation.” “.
One of the ways that the Fed’s main tool for reducing inflation (raising interest rates) affects farmers is through commodity prices. When rates were at their lower bound during the early stages of the pandemic, commodity prices soared. Waller noted that soybean and cattle prices are particularly high.
Farmers capitalized on those higher commodity prices by paying off outstanding debts, according to data analyzed by the University of Wisconsin. Agricultural loans at agricultural banks fell more than 3% in 2020 and more than 2% in 2021.
Despite the Fed’s monetary policy tightening, it raised rates by 4.25 percentage points last year and an additional 25 basis points this month — prices of many basic products remain high.
“Cattle and soybean spot prices are well above their levels at the start of the pandemic, likely driven by the sharp increase in input costs faced by farmers,” Waller said, noting the price of fertilizers, which rose more than 50%. year-over-year at a point in 2022.
Waller also noted that general food prices have continued to rise at a rate of 10% year-over-year, according to the personal consumption expenditures price index, or PCE, the Fed’s measure of inflation.
While higher interest rates have not depressed commodity prices or food costs, they have affected farm banking in other ways.
Farm loans have risen sharply since the second half of 2021, according to a december report of the Federal Reserve Bank of Kansas City, the Fed’s main research arm in the agricultural sector. In particular, real estate loans to farmers increased by 10% from the third quarter of 2021 to the third quarter of 2022, a trend driven by rising farmland values through the country. Meanwhile, other forms of farm lending increased 4% over the same period.
Amid this return to lending by farmers, rising interest rates have been a boon for their lenders, who have boosted profits with higher credit spreads, according to the Kansas City Federal Reserve.
Farm banks have also enjoyed declining delinquency rates among their borrowers, with 80% of banks tracked by the Kansas City Fed reporting delinquency rates of 1% or less and more than 90% reporting a delinquency rate of 3 % or less.
However, the Kansas City Fed noted higher costs, uncertainty in commodity prices and ongoing droughts as potential risk factors for farmers and their lenders in the coming year. In addition, many agricultural banks have seen an increase in unrealized losses on their balance sheets, according to the reserve bank. In all, agricultural lenders saw a 35% decline in equity capital last year, largely due to depreciating investment securities.
For farmers and their lenders, the Fed’s effort to curb inflation is a double-edged sword, but Waller argued that the difficulties created by raising rates are outweighed by the benefits of price stabilization.
“We’re seeing the effort start to pay off, but we have a ways to go,” he said. “It could be a long fight, with interest rates higher for longer than some currently expect, but I will not hesitate to do whatever it takes to do my job.”
