By  E. W. Lang

The Federal Reserve raised its target federal funds rate by .75% on Wednesday.  This was, I think, sensationalized in the media, threatening higher interest costs on “everything.”  While this is loosely based in fact, it’s not a near term threat to commerce, including milk production and farming.  Two years ago, treasury rates and interest rates, generally, were the lowest in the 9,000-year history of lending money.

In early 2020, the 10 Year U.S. Treasury Note was under .60% for a couple months, down from 3% two years before that.  Spring, 2022, saw the 10-Year back at 3% and we’re creeping up from there.  In my almost three decades of borrowing money and paying interest, I saw just a few months with the 10 Year at 3% and a lot of years with the 10-year running from 4% up to 16%.   Treasury rates and Fund rates aren’t the same thing, but there’s a high correlation, thus my reference to both in this post. 

Here are a couple things to remember about the fed fund interest rate.  That number is just the interest rates that banks charge one another to loan surplus money overnight and over weekends.  It’s loosely correlated, over time, to retail interest rates, and is currently 1.75%.  The historical high is over 19% in 1980.    

Any farmer or business owner that hasn’t in the last year or two locked in a 12-month to ten-year interest rate on his or her enterprise should consider doing so now.  It is no secret that borrowing has never been as cheap as it has in the last couple of years and there’s no reason to think this will continue.

The recent fed rate adjustment from 1% to 1.75% is intended to wring excesses from the economy, and it’s only a first step in controlling inflation, based on conventional wisdom and historical perspective.

 Witnesseth.  From 1978 to 1980 the fed set their target rate from 10% to 20%, up from 4% in 1960.    This action brought about lower commodity prices and a bone crushing general recession in the early 1980’s.  I – actually no one - thinks the current sub 2% fed rate will slow the price of oil, food or any other commodity.   It will take several such increases, or an unfortunate world event, to stop the current rate of inflation, much as it did 45 years ago when 15% interest and economic recession gripped the United States.

Farmers were very much among the victims of the 1980s recession that delivered a lot livestock, farm equipment and farm land to public auction.   While I’m not saying this degree of debauchery is headed for the ag sector again, I think there is sufficient bloodletting ahead that locking in all interest rates should be a priority for farmers right now.

Block cheese lost 11 cents and ended the week at $2.14 per lb.  Barrels lost nine cents and were $2.15 while Butter only lost three cents to close out at $2.94 per lb.  Average prices on Class III Milk Futures lost 72 cents this week, while Class IV lost 84 cents.  Equally disturbing is the Class III Milk-Feed Index which is down 87 cents per cwt. for July through December of this year, and down 64 cents for the first quarter of 2023.  Dairy quality hay, not a component of the Milk-Feed Index, is reported at an average price of $450 per ton, up from $300 one year ago.

Markets are closed tomorrow for Juneteenth.  On this holiday, let us be mindful of the estimated 20 million people of all ages and genetic makeup currently enslaved in North Korea, China, India, Nigeria, Russia, Iran and Afghanistan.