50 • URNER BARRY'S REPORTER / VOL. 18, NO. 4 / FALL 2023
Interest rates...
The seventh district experienced the lowest
rates in 2021. Like the eleventh district,
rates have increased through 2023. Farm
operating rates increased from 4.34% in Q4
2021 and Q1 2022 to 7.97% in Q2 2023.
These rates would refer to any loan related
to the farm's operations, including the
purchase of feed and livestock.
When comparing these operating loan
rates with pork supply metrics, we found
a strong negative correlation between
rates and hog & pig inventories and pork
production. Specifically, hog and pig
inventories correlated negatively with
operating loan rates posted three quarters
before the inventory report date. Such a
negative correlation with approximately
nine-month lag was especially interesting
since the hog production cycle hovers
around the same time. Moreover, pork production correlated strongly with operating loan rates posted two quarters prior to the report
date. In general, lower rates correlated with higher production and vice-versa.
These preliminary findings may suggest that pork production could suffer when interest rates increase. With the Federal Reserve
increasing the rates, the market could see decreasing inventories. However, similarly to the cattle market [and any other market for this
purpose], correlations may not bear much weight if the market experiences shocks, including recovery cycles from disease complications,
strong export demand, and many other factors.
It is crucial to understand that each market has unique supply and demand determinants. While interest rates may be a strong driver
for some markets, they are only a piece of the puzzle. As noted, the cattle and hog markets have and will continue to encounter supply
shocks which may potentially have more weight in projecting supply than interest rates.
These quick exercises help illustrate the
relationship between monetary policy and
the protein commodity markets. Again,
correlation does not mean causation; it is
just one of the initial steps when performing
quantitative analysis. Therefore, it will
require additional work to find in-depth
relationships between interest rates and
supply trends and incorporate other
relevant and essential factors. Nonetheless,
market participants should be aware
of these correlations when positioning
themselves, especially given the recent rate
hikes and the potential outcomes in the
upcoming months and possibly years.
Article contributed by
Andrei Rjedkin | arjedkin@urnerbarry.com
Angel Rubio | arubio@urnerbarry.com
Operating loan rate in Q4 2021 &
Q1 2022 = 4.34%
Operating loan rate in Q2
2023 = 7.97%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 2024
Seventh District Interest Rates
Rise from historic lows
Operating Loans
Farm Real Estate Loans
Figure 4. Seventh District Interest Rates, 1975-YTD. Source: Federal Reserve Bank of Chicago,
UB Consulting
Continued from page 49
©grafvision / Shutterstock.com
"These preliminary
findings may suggest
that pork production
could suffer when
interest rates increase."