Rising Interest Rates Highlight Cash Flow Needs

Rising interest rates affect farming in a big way as the capital-intensive businesses must generate the cash flow necessary to obtain favor with their local banks.

The Federal Open Market Committee is meeting this week, and news outlets give the committee about a 60% chance of raising the Fed Funds rate another ¼ point, the third such increase in seven months.  They also are expected to follow through with another rate hike later this year.

Some analysts are beginning to question whether the committee will raise interest rates as they see signs the US economy is softening for a bit.  Manufacturing and job creation by private companies are slowing down, making it harder for the FOMC to raise rates and stifle economic growth even more, they say.

However, others say low inflation and soft growth in the first quarter will not change the minds of committee members.  The low unemployment rate trumps the slower manufacturing and job creation, they say.

It could influence a rate hike in September, but economists generally believe weak first-quarter growth was temporary and think inflation will resume soon, and it would be more prudent for the FOMC to head it off than to try catching up with it later.




WalacesFarmer, writer Steve Johnson, an Iowa State University Extension farm management specialist, said in an article that farmers can expect some tough sledding after this rate hike, especially operations that are undercapitalized.  The outlook is not a full-blown farm crisis, but more of a liquidity crisis affecting a small but growing percentage of farms.

But profit margins are tight, especially those of row-crop operations, and higher interest rates will add to the cost of operations.

Higher rates are coming just as corn and soybean prices are during down, and these higher rates could produce the opposite effect as the low interest rates and weather concerns that helped fuel the last agricultural boom.




But it’s not as if the possibility of higher interest rates at this FOMC meeting weren’t expected, allowing farmers and lenders time to prepare, the WalacesFarmer story said.  Most farms were thought to be well positioned to weather a period of tighter margins after record corn and soybean yields the last two years and much-improved livestock prices this year.

Other producers and their lenders re-amortized loans for fixed longer-term rates before interest rates had a chance to rise.

Those that have not prepared and still have liquidity problems can expect more scrutiny into their operations and additional loan requests like providing cash-flow information, inventory inspections and required crop marketing plans.

In either case, getting through tight financial times will require a close relationship with their lenders.




Cash cattle traded Tuesday at $132 to $133 per cwt on a live basis, down $4 to $5 from the bulk of last week’s action and at $215 dressed, down $3 to $5.

The weekly livestock exchange video auction last Thursday sold two pens of fed cattle at an average of $136.75 per cwt on a live basis, up $4.57 from $132.18 last week.  A little subsequent cash trading was reported at $220 per cwt on a dressed basis.  Most action took place on Friday at $136 to mostly $137.

The USDA’s choice cutout Tuesday was down $1.33 per cwt at $251.19, while select was off $0.32 at $221.45.  The choice/select spread narrowed to $29.74 from $30.75 with 95 loads of fabricated product sold into the spot market.

The CME Feeder Cattle index for the seven days ended Monday was $154.21 per cwt, up $0.06.  This compares with Tuesday’s Aug settlement at $149.95, down $1.60.