Friday night’s announcement of a credit downgrade for the United States of America could have a significant impact on dairy farmers.
It could raise interest rates, which will contribute to greater inflationary pressure on goods and services. Food prices have already been under inflationary pressure this year. Inflationary pressure could make it more difficult for consumers to buy dairy products, especially if there is a slowdown in economic activity and more jobs are lost.
Higher interest rates could also affect operating loans and farmland values.
This comes on the heels of an announcement by the credit rating agency Standard & Poor’s (S&P) that it had lowered the U.S. credit rating from AAA to AA+.
“If investors viewed the S&P news as strongly indicative of U.S. bonds as a bad investment, then we would expect that action to increase interest rates on those bonds and it would work its way through commercial banks to raise interest rates to businesses and consumers,” says Mark Stephenson, director of the Center for Dairy Profitability at the University of Wisconsin.
“It would also likely lead to greater inflation on goods and services in this country,” he told Dairy Herd Management. “Both of these things would not be good for consumer spending and it would negatively impact our domestic demand for dairy products," he said.
Purdue University agricultural economist Michael Boehlje says increased risk in the markets generally leads to higher interest rates. "If markets feel there is increased risk, they will be wanting to be compensated for that increased risk by having higher interest rates," he told Dairy Herd Management.
"Agriculture is connected to the global capital markets, but it is better insulated from those capital markets than other industries," he says.
It all depends on what happens to the economy in the short-term. If there is an economic slowdown and a double-dip recession, it could actually slow down interest rates, according to Boehlje.
Longer-term, over the next two to four years, if the nation does not solve its budget problems, "we will have higher interest rates," Boehlje says.
On the plus side, Friday's credit downgrade could put downward pressure on the U.S. currency against other countries and make our products look like a better buy to foreign buyers; that is, “we could expect exports to increase,” Stephenson says.
Stephenson says it is important to remember two other things:
- S&P isn't the only rating company that investors look at. Other credit-rating agencies, like Moody's, have not downgraded U.S. bonds yet.
- There are other countries that are in trouble. Spain and Italy look as though they may join Greece and Ireland requiring a substantial investment on the part of other European Union countries to remain solvent.
"The bottom line is that when many of the major economies of the world are in trouble, the U.S. is still a place that investors run to,” Stephenson says. “We saw that happen in 2009 in the depths of the recession when the value of the U.S. dollar actually rose — not because we were in such good shape, but because we are still perceived to be a safe haven for money.”