A Chill In Our 2014/15 Agricultural Economics: Interest Rates Remain Key

Low Interest  Welcome Janet Yellen!  If you don’t know whom I am talking about she is President Obama’s nominee to take over from Ben Bernanke as US Federal Reserve chair.   That is a favored position of mine, having quoted predecessors Alan Greenspan and Ben Bernanke many times.  I am glad that after 100 years the US Federal Reserve will have a woman at its helm.

She certainly will have a lot to deal with when she takes over as chairperson.  Will she taper or will she not?  Will she be an activist US Federal Reserve chairman and pullback from the money printing policy of the last several years?  How will she manage the US Federal Reserve and how will that impact farmers going forward?  These are just some of the questions I would like answered as Mrs. Yellen takes the helm.  Managing the most important money supply in the world takes a steady hand.

It surely is a difficult job, that of the US Federal Reserve chair and the Bank of Canada governor.  I admire Stephen Poloz, the new Bank of Canada governor.  He is no Mark Carney but if early impressions are anything important the Bank of Canada is in good hands.   I love to have his job for a day.

I say that because I think you all know that I would love to have my hands on the economic levers that actually affect our economy.  Whether it is finance minister Jim Flaherty introducing some new fiscal policy or Stephen Poloz introducing a new monetary policy its always a bit of a shot in the dark.  Economics is affected from so many stimuli.  Case in point is a quantitative easing we have seen in the United States over the last several years.  It all points to inflation, but so far we have not got that.    If it ever rears its ugly head, you can bet much higher interest rates will be the hammer to keep it under wraps.

So the returns to managing our economy can be very fickle for the finance minister and the Bank of Canada governor.  It’s the same thing for future US Fed chair Janet Yellen.  Nothing is done in isolation.  It certainly is the same thing in the world of agriculture.  Just take a look at where $8 dollar corn got us last year.

Sure, it was fun while it lasted especially for corn producers like me who had a record crop.  However, we all learned that $8 dollar corn was like a stonewall for demand.   Adding to that was all the new supply that came on the world market competing for some of that gravy.  Now, some people were putting hope in the October 11th USDA report to take some of that grain away.  The only problem is with the government shutdown there will be no report.  The big white elephant in the room is that 14 billion bushel corn crop in the United States.  It just won’t go away.

So like Janet Yellen and Stephen Poloz, we’re going to have to manage our way out of this bind.  I listened to a report today on the radio that the answer might be to grow continuous soybeans.  I even heard an interview from an American farmer who talked about building up organic matter by growing soybeans.  I agree that soybeans seem to be the oil seed of hope this fall but growing them continually on my land is a recipe for disaster.  So I am going to have to manage differently.

In my mind that means a lot less corn acres in Ontario in 2014 and 2015 and more soybeans.  As farmers we are going to have to focus more on our fixed and variable costs even at a time when interest rates are still super low.  In many ways I have argued before that low interest rates are the testosterone to the agricultural economy.  I still believe that, in fact any type of farm debt right now has a very low carrying cost.  However, increasingly it looks like it’s back to the future for many of us.  With lower grain prices in the offing, fixating on our breakeven costs may become an even more important job in 2014 and 15.

I hope I am wrong, but I don’t think so.  What could really throw a monkey wrench into the cost price relationships squeeze for farmers is if Janet Yellen and Stephen Poloz have to manage aggressively against quantitative easing induced inflation.  That will mean much higher interest rates sending a general chill into the agricultural economy.

As chills go, we really haven’t had too much of that since 2006 when farm rallies were the order of the day.   I’m not saying were going back there.  In fact, that may never happen again.  However, the road ahead for Canadian agriculture is not like the past 5 years.  Aside from the weather constant, our agricultural economics are sure to be more constrained.  How we meet that challenge will certainly determine our road ahead.