Written by: Constance Cullman | September 16, 2024
One of the things I enjoy most about summer is the opportunity to catch up on reading that often gets pushed to the back burner during busy meeting seasons. It was a treat, this summer, to read a collection of articles on the University of Illinois farmdocdaily site and consider how macroeconomic trends might be shaping the future of U.S. food and agriculture. 
Understanding the intricate dynamics of the $28 trillion U.S. economy and the $6 trillion federal budget is vital for any business and the animal food sector is no exception. Historical ratios provide a context to examine the substantial rise in federal debt since the 2008 financial crisis and the increased federal interest outlays since 2020.
With an eye on the upcoming elections, Congress’ intention to tackle our tax policy and an impending farm bill, the four articles linked below piqued my interest. Provided here is my combined summary and the implications that struck me.
Federal Interest Payments and Historical Context
Interest on the federal debt is a crucial metric as it claims current tax revenue and must be paid to avoid credit downgrades. From 2021 to 2023, the share of interest payments in federal outlays increased from 5.2% to 10.7%. This rise, though lower than the peak of 15.4% in 1996, is significant and indicates potential for future policy debates. Expressing federal interest outlays as a share of gross domestic product (GDP) offers similar insights, showing an increase from 1.5% in 2021 to 2.4% in 2023. This trend suggests intensified debates on the appropriate share of government spending for interest payments.
Federal Spending and Its Implications
Federal spending in 2023 was 22.4% of GDP, aligning closely with its post-World War II trend. This indicates that while federal spending is a focal point in fiscal debates, it is not the sole factor driving increased interest outlays. Interest rates and past government spending also play crucial roles. The rise in federal debt and interest outlays sets the stage for discussions on reducing federal deficits through tax and spending adjustments, impacting spending legislation – including the farm bill - and potentially leading to cuts in farm safety net spending. It begs the question – should agribusinesses prepare for potential reductions in legislated support?
Interest Rates: More Than Just a Federal Reserve Tool
Interest rates serve as both a market-determined price of capital and a policy instrument of the Federal Reserve. Historically, the total U.S. net savings as a share of GDP has been declining, dropping from an average of 10.1% in 1947-1956 to 2.3% in 2014-2023. This decline, particularly in government savings rates, has contributed to the overall decrease in U.S. savings. Foreign investment in U.S. federal debt has also declined, raising questions about international confidence in U.S. federal debt. Current demands for capital include supply chain reconfiguration, energy transition, infrastructure upgrades and investments in artificial intelligence, all exerting upward pressure on interest rates.
U.S. Labor Productivity and Cost
Labor productivity and cost are crucial factors in current U.S. inflation. Since 2015, the rate of increase in nominal labor costs has been rising, reaching rates of increase not seen since the late 1980s. Despite technological advances, no long-term upward trend exists in U.S. labor productivity growth. The growth in labor costs suggests that its increase may not be temporary but reflects longer-term factors. Agribusinesses, which rely heavily on labor, may face higher operational costs as labor expenses continue to rise. The variability in monthly, even annual measures, of labor productivity and compensation suggests that long-term averages are more reliable indicators than short-term changes.
Federal Reserve Interest Rate Hikes and Market Reactions
In response to rising inflation, the Federal Reserve increased the federal funds rate from 0.08% in January 2022 to 5.3% by June 2024. This rate is now higher, relative to current inflation, than its historical average, reflecting the Federal Reserve’s concerns about the permanence of post-2020 inflation. Conversely, market interest rates are lower relative to inflation, indicating a belief that post-2020 inflation is temporary. If the market is correct, the Federal Reserve may cut rates, but market rates may decline less. If incorrect, market rates might need to increase if inflation remains high.
Implications for the Animal Food & Ingredient Industry
Higher Interest Costs: Increased federal funds and market interest rates mean higher borrowing costs for farmers and agribusinesses, affecting their ability to finance operations and expand business activities.
Federal Budget Constraints: Debates over federal spending and interest payments could lead to cuts in support for the agricultural community.
Investment Uncertainty: Volatile interest rates and inflation expectations create uncertainty, impacting business decisions on capital investments and long-term planning.
Global Market Dynamics: Declining foreign investment in U.S. debt might affect the dollar's strength, influencing export competitiveness for U.S. agricultural products.
Cost Pressures: Rising real labor costs and the need for investment in technology and infrastructure to boost productivity may add to operational costs.
Farmers and stakeholders in the agricultural sector should closely monitor these macroeconomic trends and adapt their financial and operational strategies accordingly to mitigate potential negative impacts. Understanding the macro dynamics of federal spending, interest rates, labor productivity and market reactions is crucial for navigating the fiscal future of agribusinesses.
US Interest Rates and the Price of Capital
US Federal Debt, Interest Outlays, and the Farm Safety Net
US Inflation and Interest Rates
AFIA Editor
August 26, 2024
Reflecting on Five Years of Transformation at the American Feed Industry Association
Constance Cullman
August 12, 2024
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