What is in this article?:
- How will massive amounts of sidelined money in the economy affect agriculture?
- Very low inflation environment
- Two types of agriculture
U.S. banks normally would have about $50 billion excess reserves sitting in the Fed’s coffers, says Brian Briggeman, associate professor at Kansas State university. Today, they have about $1.5 trillion on the Fed’s books. "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."
BRITTON HATCHER, left, Mississippi Farm Bureau Federation, and Bob Harris, regional biologist for Ducks Unlimited, both at Grenada, Miss., were among those attending the Mississippi Farm Bureau Federation’s joint soybean, corn, wheat, and feed grains advisory committee meeting.
Very low inflation environment
The stage is set for this to become a topic of discussion, Briggeman says. “No matter what measure you use to calculate inflation — whether you include energy and food, or whether you strip them out — today we’re in a very low inflation environment. In fact, some might argue we’re continuing to battle deflation, the falling prices of goods and services. That’s what’s motivated the Fed to pump a lot of liquidity into the marketplace — to avoid deflation, which is terrible and can really wreck an economy.”
The Federal Reserve Bank of Cleveland has analyzed many components of the economic outlook, he says, and has developed inflation expectations for 10 years out. “They project inflation as exceptionally low, and the market is telling us inflation is not going to be an issue going forward. Of course, the market has been wrong — it told us sub-prime loans were OK.
“So, the question is if this will indeed be slow and steady inflation that’s kept under control? That’s largely what [Federal Reserve Chairman] Ben Bernanke says when he speaks for the Fed.
“When we look at all that money sitting on the Fed’s books and couple it with U.S. businesses with $2 trillion in cash sitting on their balance sheets, there’s a lot of liquidity that at some point is going to flow into the marketplace.
“The question is, can the Fed unwind their balance sheet in a way that does not (1) push us back into a recession, (2) create uncertainty, and (3) send global markets spinning out of control? Or can we actually realize the slow and steady pace the market is expecting? The market is saying the Fed will be able to do this in a straightforward manner that won’t adversely affect financial markets.”
Assuming the Fed can unwind all those assets in an orderly way, that will mean higher interest rates, Briggeman says. “If you’re going to incentivize people to purchase assets off the Fed’s balance sheets, interest rates have to rise.
“For those in farming, two key questions become: How are you going to position your business under that kind of environment? And how do you need to set yourself up to operate and be successful in such an environment?
“Supply and demand drives a lot of what we do in production agriculture. The ultra-low investment rate environment has helped boost farmers’ net income and stimulated interest in investing in agriculture. But, what happens when that begins to unwind, we maybe have inflation, and interest rates start to rise? The Fed’s exit strategy, pulling out of this market, will be tremendous and will have broad ramifications, not just for agriculture but other industries as well.”
Driven by strong crop profits in 2012, inflation-adjusted net farm incomes remained near historically high levels — the highest since 1974, Briggeman notes. “Net farm income in 2011 and 2012 was exceptionally high, and 2013 is expected to be even better.