48 • URNER BARRY'S REPORTER / VOL. 18, NO. 4 / FALL 2023
As a quick refresher, the Federal Reserve
Bank can control the money supply
through several avenues. One of its
more powerful tools is adjusting the
federal funds rate, which is the rate at
which commercial banks can borrow
or lend excess reserves overnight to
other commercial banks. The Federal
Open Markets Committee (FOMC), a
subcommittee within the Federal Reserve,
is responsible for setting the target rate.
In March 2022 the FOMC began to raise
rates to limit the money supply to combat
inflation not seen in decades. Before the
hikes, rates hovered at record all-time lows.
Understanding that these rate hikes
indirectly affect the credit markets is
essential. Since banks would borrow at
higher rates, they would command higher
rates from their lending practices. In turn, businesses looking for additional capital via loans would be subject to higher rates, which,
theoretically, can curb additional investment and the expansion of their operations.
But, how have interest rates affected the protein markets?
In the past, we have performed similar
exercises presented here to understand
the relationships between drought,
consumer credit, and sentiment to how we
eat proteins in relation to beef markets.
This analysis will look at several rates
specific to the agricultural space. The
interest rate data comes from surveys
developed by the Federal Reserve Bank of
Chicago and Dallas. The Federal Reserve
Bank of Chicago reports on the Seventh
District, which includes Iowa, Michigan, and
parts of Illinois, Indiana, and Wisconsin. The
Eleventh District includes Texas and parts
of Louisiana and New Mexico. The Federal
Reserve Bank of Dallas is responsible for
the reporting within the Eleventh District.
We used these districts as a benchmark
sample since there is considerable beef
and pork production in these regions.
The debate over future rate hikes…
The historical relationship between
interest rates and protein production
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0%
5%
10%
15%
20%
25%
1955 1965 1975 1985 1995 2005 2015 2025
Federal Funds Effective Rate
Rapid increase from historical lows
Recession
Risingfed
funds rate
from
historical
lows
Feeder Cattle rate in Q3
2021 = 5.23%
Feeder cattle rate in Q2
2023 = 9.28%
0%
2%
4%
6%
8%
10%
12%
14%
1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021 2024
Eleventh District Interest Rates
Significant increase from historic lows
Other Farm Operating
Intermediate Term
Long-Term Farm Real Estate
Feeder Cattle
Figure 1. Federal Funds Rate, 1954-YTD. Source: Board of Governors of the Federal Reserve System
(US), Federal Reserve Bank of St. Louis, UB Consulting
Figure 2. Eleventh District Interest Rates, 1990-YTD. Source: Federal Reserve Bank of Dallas, UB
Consulting. The data presented here represents variable interest rates.
As of July 2023, the Federal Reserve Bank has increased rates to the highest levels since 2007.
Although more hikes are less likely, protein producers should be aware of any possible setbacks the
market may face.