High interest rates have the potential to slow an economy and drop prices. So when the Federal Reserve Board raised the interest rate last week for the first time in seven years, farmers and ranchers likely wondered how it would affect their outlook.
Economists say corn and soybean prices should fall, but not by much.
“We'll never know what the effect of these interest rate hikes are going to be on corn and soybean prices because those effects are going to be so small compared to the market swings we see anyway,” said Jeffrey Dorfman, professor of economics at the University of Georgia, and author of a FarmDoc Daily article about the issue.
Dorfman predicts higher interest rates will push down corn prices by 2 cents a bushel and soybeans by a dime a bushel over the next year.
Interest rates impact corn and soybean prices in two ways:
- Corn and soybeans are storable commodities. When interest rates are higher, storage costs more and the opportunity cost of waiting to get paid is higher.
- Most farmers take out loans to pay for equipment, seeds, fertilizer, and other essential inputs to run the business. When the Federal Reserve raises the interest rate, those loans get more expensive.
Dorfman thinks the Feds will raise the interest rate .25 percent every few months, a slow and gentle strategy that will impact farmers much less than they think.
“If you have a corn and soybean operation in the Midwest, you farm 1,000-3,000 acres, this increase probably raised your production costs by $1,000,” he said. “Nobody likes paying an extra $1,000 but it’s not going to make or break anybody.”
The Federal Reserve Board hasn’t said how high they’re planning to raise the interest rate. But, Dorfman predicts they’ll cap it at 2-3 percent.
“Assuming they get that far,” he said. “We’ve already had a longer period than average since the last recession. So at some point there’s going to be another recession and they’ll start lowering rates again.”