The recent approval of a plan to help ward off the fiscal cliff that was publicized has had little direct impact on the commodity market. This does not mean financials will not play a major role in Agriculture for the next several months, possibly for the year.
The United States economy continues to tighten at the same time a new farm bill is being written. Lawmakers have already announced there will be cuts to spending on Agricultural programs, but have been vague in how much and to what programs.
One that is being considered is revenue support programs. The opinion of many is that these programs are not needed given current market conditions. While this is true, we also need to realize that current market conditions will not last. If the United States would produce trend-line crops this year, we could see substantially lower commodity values. In turn, we would also see more need for support programs.
Another program that is expected to see spending cuts is for food. Government programs such as food stamps and lunch programs in schools may be impacted by this change. This is an area that should be most concerning, as these programs are needed by many U.S. citizens.
Spending cuts are also forecast to conservation programs in the new streamlined farm bill.
What could have the most impact on U.S. agriculture from the financial market would be higher interest rates. Some economists are predicting higher interest rates at the end of 2013 than we currently have. This really should not come as a surprise given how low interest rates have been for the past several years. This would mostly impact U.S. farmers who have borrowed large amounts of money in recent years rather than retiring debt.
The greatest concern with higher interest rates is the possibility of seeing reduced commodity values at the same time. If the United States would see trendline yields on corn and soybeans this year, we could see carryout almost triple from this year. This would pressure futures a considerable amount.
For any producer who does not have a proper risk management plan in place, the combination of these lower futures and higher interest rates could be critical to their operations.
Karl Setzer is a commodity trading advisor/market analyst at Maxyield Cooperative. His commentary and market analysis is available daily on radio, in newsprint and on the Internet at www.maxyieldcooperative.com
The opinions and views in this commentary are solely those of Karl Setzer. Data used for this commentary obtained from various sources are believed to be accurate.
This commentary is intended for informational purposes only and is not intended for developing specific commodity trading strategies. Any and all risk involved with commodity trading should be determined before establishing a futures position.