US Federal Reserve Interest Rate Freeze a Huge Stimulus to Agriculture

Bernanke Grains JPEGThis past week I had the opportunity to speak to 2 different regional grain farmers associations in southern Ontario.  They are always great events where local grain growers talk about the nuts and bolts of the grain business.  For instance last Monday I was in Woodlsee Ontario in Canada’s most southern County, Essex County.  Essex farmers this past year have had a horrendous fight with the weather.  They had a terrible wet spring followed by a terrible wet fall.  As I got up to speak, there were still soybeans standing in some Essex County fields.

The Essex growers had invited a friend of mine, Jim Boak to speak about how to recondition fields, which were rutted from wet conditions this past fall.  It’s a huge issue in many parts of the province.  Getting those fields into a position for good crops in 2012 will surely be a challenge.

I spoke on the grain markets and what I saw as keys to future price direction.  It was an interesting time because only 2 days later something changed in the grain markets, which I think will surely affect them for at least the next 2 years.  When Ben Bernanke, chairman of the US Federal Reserve said Tuesday that they would keep interest rates low until 2014, commodity markets spiked.  With an open playing field for the next 2 years, low interest rates are good for the grains.

It is what it is.  Western economies are so weak that Federal Reserve banks have kept interest rates low trying to spur economic growth over the last several years.  It’s working and it’s not working.  The economy in the United States is showing signs of life but it is obvious that the US Federal Reserve wants to keep interest rates low to make sure there is capital to keep it going.  With Europe still the slowest moving train wreck; there is a need for more fiscal stimulus in the form of cheap credit.

When I heard this news it was entirely obvious to me that it was good for agricultural commodities.  In my mind it was also very good for Canadian agriculture.  For instance if you want to buy a tractor or combine or any type of farm machinery, if you have any equity at all you can get credit to buy it.  This credit is cheap, especially when somebody like me has a memory up paying over 20% interest rates and paying off farms at 12 and 13%.  With the road clear until 2014, it’s a huge stimulus for agriculture across North America.

In many ways the Canadian agricultural economy is sheltered against what’s been going on in the nonfarm economy.  The last few years have been good years.  Compare that to the Caterpillar plant in London Ontario where workers have been locked out after being offered a contract for wages almost half what they had previously worked for.  Sure, we have the same things happen to us with farm prices sometimes, but the last few years have been good.

That does not take away the impact to Canadian agriculture that is been felt from the economic impact of the slowdown in Europe, which has washed up on Canadian shores.  For instance last week Bank of Canada governor Mark Carney stated that the slowdown in Europe has cost Canada $10 billion in economic growth.  When I heard that figure, I was struck by how huge it was.  A large part of that has caused lower prices over the last few months in the grain market.

Low interest rates have been the bane of Gov. Mark Carney.  I’m sure he was pulling his hair out last week when the Bank of Montréal announced that they have a new five-year home mortgage rate for under 3%.  I say this because he’s been trying to get Canadians to spend less and reduce their debt levels.  He might even think that about farmers, as it was brought home to me last week about the skyrocketing farmland prices in southern Ontario.  One farmer told me he had lost 300 acres of rented which was sold underneath him for approximately $11,000 an acre.  With interest rates staying low, it makes that so much easier.

So from the grain bin to the real estate desks and beyond the announcement by Ben Bernanke this past week about keeping those rates low until 2014 will surely reverberate into the future.  It’s going to be the same here in Canada.  It’s hard not to be bullish agriculture.  Those 23 1/4% interest rates seem so science fiction now.