By: Dr. David M. Kohl
Wow, what a fall and winter speaking tour! Hurricanes, snowstorms, and other travel impediments resulted in ten cancelled or postponed speeches and seminars. Despite the cancellations, I had the opportunity to speak at many seminars that were very well attended by exceptional producers, lenders, and agribusiness groups. Here are some perspectives and points to ponder related to the questions I was most asked this fall and winter.
INTEREST RATES, INTEREST RATES, INTEREST RATES!
Questions about interest rates were the most popular on my agricultural landscape speaking tour. Many inquiring minds want to know a specific time frame for an increase in rates. While I cannot give a specific date, there are some factors the Federal Reserve has identified that could signal a possible rise in rates.
Recently the Federal Reserve attempted to become more transparent by providing specific metrics for unemployment rate and inflation that may signal tapering back the current stimulus packages. The Fed has identified target metrics of reported unemployment rate at 6.5 percent and inflation at 2.5 percent. As of the April release, unemployment is 7.5 percent and both core and headline inflation are well below 2.0 percent. With the unemployment rate nearing 7 percent, it may signal Federal Reserve action, first to reduce bond buying, and then to incrementally increase interest rates, most likely by a 25 basis points initially.
[rich-callout title="30-Day vs 15-Year Farm Credit Bond" image_id="5702"]The 30-day vs. 15-Year Farm Credit Bond chart below illustrates that 30 day issues continue to stay at historically low levels through May 2013. On the other hand, movement in the gap between long-term and short-term rates is increasing. Ask your FCS Financial expert about conversion options and the advantages of locking in low, fixed rates on real estate loan or other term loans.[/rich-callout] Closely watch the growth of the U.S. economy. A sustained gross domestic product (GDP) growth rate of 2.5 percent or above would be taken into consideration.
Finally observe published comments of the members of the Federal Open Market Committee (FOMC). Trial balloons are usually forwarded to the press two to four months prior to a change in Federal Reserve policy, such as tapering bond purchases, or increasing interest rates.
FARMLAND VALUES
Speaking of asset values, the next favorite question I have been asked recently relates to my thoughts on land values. The bull market of farmland values is on a 26-year run, if one discounts devaluation in 2009 in Florida, Nevada, Arizona, and in some parts of the California agricultural real estate sector. The contention is that land value increases of 20 percent to 30 percent are not sustainable in the upper Midwest. The epicenter of the farmland asset bubble is in that region of the country and tapers off toward the coasts and southern part of the U.S.
The top-five signals to observe for a land value correction are:
- Multiple years of negative profit margins for producers
- Slowdown or recession in the emerging markets
- Increase in interest rates
- Changing government policy, i.e. renewable energy and biofuels
- An improbable black swan or blue sky event
SUPER CYCLE
Agriculture is now a decade into the great super cycle. How long will it last? What are the signals that strong commodity prices will abate? First and foremost, the strength of emerging nations’ GDP growth is a factor. The current weighted growth rate of 4.8 percent GDP for the emerging nations would suggest some softening of commodity prices. Reduced central bank stimulus in the U.S. and abroad is a variable worth observing. Of course, commodity supply and demand imbalances created by weather are most likely the clear and present danger.
GENERAL OBSERVATIONS
This fall and winter’s speaking tour was full of highly motivated lifelong learners, eager to network and find new management principles and techniques to give them the competitive edge. In many regions of the country, nearly one half of the audience was less than 40 years of age. More women are attending the seminars as farm and ranch owners as well as major decision-makers in farm and ranch businesses. Many adults brought 4-H, FFA, high school, and university students to expose them to opportunities in agriculture available to our youth. These hot topics provide you with some points to ponder and discuss as the 2013 summer growing season unveils the prospects of the economic outcomes of agriculture.
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