August 26, 2016

Interest Rates May Dampen Milk Price Recovery

 |  By: Mike Opperman

Today Federal Reserve Chair Janet Yellen said the decision to raise interest rates is getting nearer as the U.S. economy grows stronger. Her comments came during a speech to central bankers and economists in Jackson Hole, Wyoming.

Ben Laine, senior economist at CoBank, says the direct impact of an interest rate hike won’t have a substantial impact on dairy producers looking to borrow money for expansion or capital investments. “The speed at which the interest rate will increase is relatively slow,” he says. “While higher interest rates will have an affect on borrowing costs, it won't be as significant as the indirect impact from alternative factors such as reduced exports.“

Producers may feel the affect from an interest rate hike on future milk prices and dairy producer margins. “The greater impact will be on the value of the dollar, rate of inflation and on exports,” Laine says. The dollar is already strong, and an increase in interest rates will bolster that value. The dairy industry has witnessed what the impact of a strong dollar has on exports. And the rate of inflation impacts producer input costs, which affects margins.

Because of these scenarios, Laine sees a long term impact on potential milk price recovery. “Certainly increased interest rates could dampen some of the potential rebound and limit upside potential,” he says. “It’s hard to say which side will win out—the potential lower milk price due to a stronger dollar and the impact on exports, or the reduced input costs from inflation adjustments and potential margin benefit.”