Interest Rate Hike Will Have Minimal Impact on Dairy Cash Flow

If you do the math, the 0.25% rise in interest rates announced yesterday by the Federal Reserve will have minimal impact on your cash flow.

For every $100,000 you have in a variable rate loan, that’s about $21 per month in added interest cost. “The fluctuation in your monthly milk check dwarfs that,” says Michael Swanson, an ag economist with Wells Fargo.

The bigger issue is what the interest hike means for the national economy and our competiveness on global markets. “The Fed’s move yesterday validates where currency values have been going,” says Swanson. And a stronger dollar signals stronger head winds for dairy exports.

“That’s the single biggest issue dairy farmers should be thinking about,” he says. Twelve to fourteen percent of U.S. dairy production is now exported. But those numbers are not etched in concrete in the supply/demand equation.

“The point is: What happens if our exports, due to the strong dollar, slip back to 6% of total production?” Swanson asks. While he’s not predicting that kind of collapse because so many other factors go into export markets, a contraction of that magnitude could be really, really painful, he says.

Conversely, increasing interest rates signal that the U.S. economy is strengthening and domestic demand for all commodities could improve, says Tim Swenson, a dairy business consultant with AgStar Financial Services.  “Added momentum in the U.S. economy is a real positive thing for agriculture,” he says.

“Psychologically, higher interest rates signal things are on the upswing, the economy is strengthening and it’s pulling things forward,” he says.