Tightening monetary policy in the US is bad news for land prices, but less negative for staple foods.
On Wednesday the US Federal Reserve raised interest rates for only the second time since the financial crisis of 2008, citing economic growth and rising employment.
Although the move was widely expected, and at 0.75% the Federal Funds Rate is still historically low, Janet Yellen also signalled that the Fed would continue to tighten monetary policy in 2017 at a faster rate than expected, spurring the dollar higher.
Rising interest rates are bad news for farm land values. The current value of land is driven by the expected return per unit of land in each future time period divided by the discount, or interest, rate. As a result, land prices vary inversely with interest rates.
But prices for agricultural commodities are less vulnerable.
Although higher interest rates discourage borrowing, and hit consumer spending power, demand for food is usually very inflexible.
Therefore it is likely that demand for agricultural output will hold up better than the demand for less essential goods.
And production may be squeezed by the higher price of credit.
The cost of short term funding, for such as fertilizer, seed, or livestock, and long term funding for inputs such as land and machinery will increase.
But there will be pressure on agricultural commodity exports.
Raising interest rates will push up the value of the dollar against other currencies, with the greenback already at a 14-year high.
This will make dollar denominated produce – such as US agricultural output – more expensive in terms of other currencies.
As customers in the Euro-zone or UK have to hand over more of their euro or sterling to purchase each dollar denominated unit of farm output, so their demand for this output will decrease.John Phelan, chief economist Agrimoney, has published a new in-depth report on China's current situation, China 2017: Agricultural Deregulation and Its Global Impact. More information: www.agrimoneyresearchreports.com
By John Phelan