The lowest interest rates in history, coupled with growing worldwide demand for commodities, have been a boon to American farmers at a time when much of the rest of the U.S. economy has been in the cellar.

But what happens when those near-zero interest rates start rising? How much a factor will inflation be as massive amounts of liquidity flow into the economy?

“One of the unique things about today’s situation, says Brian Briggeman, “is that at the same time the Fed has dropped interest rates to zero, they’ve also pushed historical amounts of liquidity into the marketplace.

“During normal times, before the financial crisis and recession in 2007, the Fed’s balance sheet normally had about $800 billion of assets. Today, it’s at $3 trillion, and continuing upward. It has nearly quadrupled — a massive amount of liquidity, such as we’ve never seen before.

“At some point,” says Briggeman, associate professor and director of the Arthur Capper Cooperative Center at Kansas State University and former economist with the Federal Reserve Bank of Kansas City, “all that liquidity is going to have to come out, and we’ll have to return to a more stable environment.

“What matters is the sheer size of the liquidity,” he said at the Mississippi Farm Bureau Federation’s joint soybean, corn, wheat, and feed grains advisory committee meeting at Grenada, Miss. U.S. banks normally would have about $50 billion excess reserves sitting in the Fed’s coffers, he says. Today, they have about $1.5 trillion on the Fed’s books.

“Banks make money by making loans — that’s their bread and butter. At some point, that ton of money that’s just sitting on the sidelines is going to flow out. That is relevant to us in agriculture because of the potential for inflation and rising prices, and the way the Fed flights inflation.

“A rapid rise in inflation occurs when too much money is chasing too few goods. What drives inflation is the quantity of money, the velocity of that money, and the quantity of goods. When we have tons of liquidity, as we do now, it starts economists asking if we might have hyper-inflation. We’ve worked off a lot of goods inventory, we’re coming off one of the worst recessions we’ve ever had, and we’re in a slow growth period

“In the 1970s, when we saw prices shoot up, inflation tended to be good for agriculture in the short term, but a challenge in the long term. The challenge is in the way the Fed fights inflation. In the mid-1970s, interest rates got insanely high — 18 percent, and some home loans were 22 percent. Think about how that could hamper our ability and competitiveness in the global marketplace and how it could depress our farm incomes.”