Ag Policy Wrap-up - Dr. Larry Sanders, Oklahoma State University

22 August 01
(Sunup Program to be aired 23 August 01)

1. As predicted, the Fed met this week and lowered interest rates a quarter percent. Can you review where we are and how we got here?

--The one-quarter percent cut brings the fed funds rate down to 3.5%, the lowest its been since March of 1994.
--This is the fastest drop in fed rates in almost 2 decades.
--Recall that it was only 1-2 years ago that the Fed was worried about inflation.
--Between August 1999 and May 2000, Greenspan and company drove up the rate from 5.25% to 6.5%.
--It stayed there until January of this year, when the Fed took a dramatic turn and began to lower the rate.
--Fears of recession have replaced fears of inflation.
--There are enough signals conclude we are not in a recession, and are not very likely to go into one.
--However, continued weakness in the manufacturing sector continues to worry the Fed.

2. So what are the impacts likely to be for agriculture?

--There are several levels to consider if we look at agriculture as farmers who buy inputs and seek credit, agribusinesses who sell product, and farm families who work off the farm, just to name a few.
--Lower rates can often set off inflation, but we aren’t seeing much of that right now, although energy costs are volatile.
--This will be good news for producers who have debt with variable rates, because they’ll likely go down.
--For those seeking loans, rates will be lower.
--Another impact that often occurs with lower rates is that we see a weakened US dollar. This makes our goods relatively less expensive to foreign consumers.
--A look at a chart of fed funds rates for the past decade can be compared to the level of US ag exports.
--While there are many factors that affect sales to foreign customers, it is clear that an increase in exports is related to lower rates.

--Another factor to consider is that most farm families get most of their income in nonfarm employment.
--This makes the health of the nonfarm economy even more important to farm families.
--A lower interest rate is likely to spur consumer spending, which will decrease business inventories and hopefully increase manufacturing activity.
--This should strengthen employment and encourage higher wages.
--Bank rates on deposits and money-market accounts, however, often go down.

3. This is the seventh time we’ve seen the Fed lower the interest rate in this year. Are more cuts ahead?

--That’s the $64 question, isn’t it?
--The lowest the rate has gone in the past decade is 3%, between 1992-94.
--While most analysts expected this latest quarter percent cut, many in the market were hoping for a more dramatic half percent cut; expectations can affect reality.
--Economic indicators are very mixed right now, but weakness in manufacturing and the lack of inflation in the economy seem to be affecting the Fed=s decisions.
--If the manufacturing sector continues sluggish or worsens, I think the Fed will lower rates another quarter to half percent.
--If we begin to see signs of inflation and manufacturing picks up, look for the Fed to hold pat or limit their next cut to a quarter percent.
--This latest cut pushes the prime lending rate to 6.5%, also the lowest in 7 years.
--That should spur economic activity, unless many are expecting an even better deal in the next few months.
--The Fed’s next regular meeting is 2 Oct, and analysts are already predicting another cut.

4. Speaking of the economy, let’s turn to the latest turmoil in Washington--the federal budget surplus. Is it disappearing and what’s it mean for agriculture?

--It seems to be a classic act taken from a stage magician: “Now you see it; now you don’t”.
--But this gets very political, so hold on.
--Supporters of the 10-year tax cut (the larger Republican Bush proposal won) were relying on rosy economic predictions and huge budget surpluses.
--There sales pitch was this:

(1)    The economy is strong and will stay healthy.
(2)    This will create even greater surpluses in federal government revenue.
(3)    We can cut taxes and still have enough money to run government programs that the public wants (defense, education, Social Security, Medicare, prescription drug benefit, etc.)

--Opponents of the larger tax cut (most Democrats) said:

(1)    It is dangerous to expect the economy will stay strong.
(2)    Even if the economy remains strong, this will limit new funds for existing programs and funds for new programs that the public may want in the future.
(3)    If the economy weakens, the limited choices will be unpleasant:

--reduce existing programs and spending (defense? Education? Agriculture?)
--don’t respond to public demands for new programs (prescription drug benefits? highway funds? Foreign crises?)
--raid Social Security and Medicare trust funds

5. So, if the Republican tax cut won, what’s happened to rekindle the debate?

--Here we are now with an estimated $158 billion surplus, which sounds great compared to the deficits of only a few years ago.
--The problem is that, when the Republican tax cut passed, the surplus was projected to be $125 billion greater than the trust fund, or $275-285 billion this year.
--And, to make matters worse, all but $1 billion of the current surplus is really Social Security and Medicare trust fund money.
--So, if that money is off the table, we may not have a surplus that can be considered by Congress to spend.
--If that’s the case, agriculture is going to have a much tougher time getting money out of Washington.
--We’ve only seen the beginnings of this battle.
--It’s likely to be the centerpiece of the election wars for 2002, and perhaps 2004.

6. Congress is still on summer break. The Senate Ag Committee has been conducting field hearings. What’s the message they’re getting from farmers?

--Recall that the committee is playing catch up to the House Ag Committee who has already passed a version of the next farm bill.
--The Senate Ag Committee has conducted several field hearings in Michigan, Minnesota, Iowa and Georgia during their summer break.
--Not surprisingly to some, if a vote were taken at these meetings, the 1996 farm bill would fail, and a return to earlier farm programs would pass.
--While producers seem to favor production flexibility, many at the hearings want the Farmer Owned Reserve back, higher loan rates, targeting support so wealthy producers don’t get so much, limit EQIP to smaller producers, more support for energy-related production, and more conservation program support.
--The Senate Democrats are going to have a tough job coming up with a new farm bill that has a reasonable chance of compromise in conference.
--Some House Republicans are already saying that, while they are not opposed to strengthening conservation programs, for example, it will have to come at the expense of other programs.
--This will play into the debate on the disappearing surplus.
--If Congress agrees it won’t raid the Social Security trust fund, there will not be additional money for agriculture.

7. Congress:

a. Recent/Current:

--Senate Ag Committee continues hearings on next farm bill
--17 Aug, University of Georgia, Athens, GA.
--18 Aug, Tipton, Iowa.
--20 Aug, Stewartville, Minnesota

b. Upcoming:

--Senate Ag Committee continues hearings on next farm bill

--other dates to be announced

c. Congressional Calendar:

--When Congress returns from summer break 5 Sep, about 22 weekdays remain in this Congressional session, if the House target adjournment date is met.

August 4 ‑ Sep 4 Summer District Work Period

September 3 Labor Day

September 18 Rosh Hashanah

September 27 Yom Kippur

October 5 Target Adjournment (for the House)

d. Key issues for this session of 107th Congress include:

--completing/continuing progress on the next farm bill
--dealing w/Social Security, Medicare, Medicaid
--consider debt reduction & appropriations bills
--campaign finance reform
--education reform
--prescription assistance
--moratoria on mergers in agribusiness
--Endangered Species Act reform
--energy policy reform