MT. JULIET, Tenn. (DTN) -- The Federal Reserve offered farmers, businesses and consumers some relief on Wednesday as it lowered its benchmark federal funds rate by half a percentage point to a range between 4.75% and 5%.
"Wednesday's half-percent rate cut is a good start for easing price pressures on agriculture, and more is needed ahead," DTN Lead Analyst Todd Hultman said. "As has been true the past year, much will depend on oil prices and jobs numbers moving forward."
The Federal Reserve board voted for the more aggressive rate cut, reflecting a shift in concerns from taming inflation to supporting employment.
"Higher interest rates have hit the ag sector much harder than the rest of the economy," Hultman said.
Interest rates on farm loans have been at multi-decade highs for the past two years, but in addition to increasing farmers' operating costs, higher interest rates also helped fuel fund managers' record short positions in corn, soybeans and wheat earlier this year.
"I'm not going to blame the lower corn and soybean prices on speculators, but they certainly add to and exaggerate the downward pressure on our commodity prices," Hultman said. "Lower interest rates could help provide some relief to farmers in a couple of ways."
The Kansas City Federal Reserve reports that demand for non-real estate loans, such as operating notes, is rising at the fastest rate since 2016, with 45% of lenders in a survey saying demand is higher than last year.
"Elevated production costs and lower prices for key commodities, particularly major row crops, have reduced liquidity in the sector and spurred a rise in non-real estate loan demand. Interest rates on farm loans also remained at multi-decade highs, keeping financing costs high," Federal Reserve ag economists Cortney Cowley and Ty Kreitman wrote in an Ag Credit Survey post on the Fed Reserve's website last month. (https://www.kansascityfed.org/…)
Farmers in the Kansas City Federal Reserve district paid an average interest rate of nearly 9% in 2024.
In projections released Wednesday, a slim majority of the rate-setting committee forecast two more quarter-point cuts in November and December.
Hultman would like the Federal Reserve to continue cutting rates but warns they'll remain cautious.
"They don't want any reinflation of consumer prices to occur," he said. "In my mind, we really need to get the federal funds rate back under 3% again to help take some of the pressure off the ag economy," he said.
Farmer Mac Chief Economist Jackson Takach thinks that's within the realm of possibility, telling the Kansas City Agribusiness Council's Ag Outlook Forum recently that the secondary lender anticipates almost 200 basis points of cuts over the next two years. He also cautioned that based on the schedule of renewals, it may take several cycles before farmers feel the full benefits of a lower interest rate environment.
Katie Dehlinger can be reached at katie.dehlinger@dtn.com
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