Driving Blind: QE Infinity and Its Effect on Canadian Agriculture

    Combines are beginning to roll across southwestern Ontario.  Where there was drought this summer, crops are advanced and many farmers have had the opportunity over the last week to get into the field.  I have one early field of soybeans, which will be ready in one week.  I am glad because memories of being pushed into November harvesting soybeans are dancing in my head from last year.  It would certainly be refreshing to have those soybeans wrapped up by Thanksgiving.  I can only hope.

The Farm Credit Canada learning tour on grains volatility was a wonderful time for me in late August.  I got to meet many people across the province and talk about grain marketing.  However, while I was speaking about the grains at those meetings, my plowing and land leveling had to wait.  So just this afternoon I finished land leveling, a job for a younger man I must admit.  The good thing is I have my stale seed beds created for next year.

As all of you know when I drive tractor or combine I am constantly listening to Bloomberg business news on my Sirius satellite radio.  It was crackling today with the impending news out of the US Federal Reserve on further quantitative easing for the US economy.  It was announced that the US central bank would purchase mortgage-backed securities at a pace of about $40 billion per month to try and jumpstart, once again, the US economy.  The hope is to push employment growth but of course everybody is thinking inflation.

As soon as I heard the news, I knew that the US dollar would be down, the Canadian dollar would be up and it would be generally good for stocks and commodities.  The markets surely responded in kind.  Chairman Ben Bernanke also announced that the US Federal Reserve would hold interest rates low until mid-2015, a full year longer than had previously been stated.  To me, that was almost as significant as the $40 billion mortgage-backed security purchase.

When I finally got off the tractor and returned to my farm office I listened to the daily market video from DTN.  In the video my friend and colleague Darin Newsom talked about the quantitative easing even referring to it as QE-Infinity.  I laughed when I heard him say that but it referred to the fact that the Federal Reserve had set no limit on how much it would spend unlike previous rounds of quantitative easing.  So it’s almost like they will continue to spend money until inflation finally rears its ugly head.

So my head started spinning on where to put surplus farm dollars.  That is almost laughable as farmers can always find a home for extra cash.  However, with interest rates staying low until 2015 and our American friends essentially printing money, it’s entirely evident to me as Canadian farmers we need a strategy.  However, what will that be?

It means that interest rates will be at least as low as they are now for 3 years.  That means that anything you want to buy will have an inexpensive carrying cost compared to the years when I started farming back in the 1980s.  Essentially, it means that low interest rates will continue to be a huge stimulus for Canadian agriculture.  Combine that with the higher commodity prices that we see and farmland prices may rise even further than they have over the last 2 years.

It’s almost like let the good times roll for agriculture as long as there is more and more quantitative easing.  Or is it just kicking the can down the road so our American friends can avoid the real reason for their own employment problem?  Or does anybody understand how the American economy can return to robust growth as well as full employment?  Is the American debt situation just to staggering to deal with both economically and politically?

The answers to those questions are much above my pay grade.  It would seem to me that the US Federal Reserve is running out of bullets and with an election the 1st week in November, they are putting the gun back in the holster.  With our American friends facing a “fiscal cliff” of mandated higher taxes and lower expenditures postelection, something has to give.  It is a very uncertain time.

Luckily for Canadian farmers, we’ve been able to rise above that fray because of the prices of our agricultural commodities.  However, our Prime Minister warned last weekend about the difficult conditions within the American economy.  It doesn’t take a rocket scientist to figure out if US economy doesn’t get healthy soon, it’ll be bad for Canada and bad for Canadian agriculture.

The good thing is I suppose, that throwing the QE kitchen sink at the problem might work.  On the other hand, don’t we throw the kitchen sink at something when nothing else has worked?  I guess the answer is yes and yes.  I only hope they know what they’re doing.  Sometimes this reminds me of driving blind.