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Of Intere$t
Of Intere$t
by Tony English
It’s all about the dollar. As we round out the summer months of 2008, the Federal Reserve is being scrutinized not only for the level of interest rates and the state of the economy, but also for the level of the U.S. dollar versus other major currencies. The first half of the year saw the U.S. dollar deteriorate in value versus other currencies, at least partially because of the level of real interest rates in the United States. Real interest rates take into account stated rates plus the implied rate of inflation. While a weak dollar is good for exports because foreign currencies are able to buy more of our goods and services, it is bad for the price of oil. Oil is traded in U.S. dollars all over the world. Thus if China wishes to buy Venezuelan oil, that transaction is conducted in U.S. dollars. With that, a weaker U.S. dollar means it takes more dollars to buy a barrel of oil.
So while there is plenty of volatility already existing in the price of commodities, level of rates, and the markets as whole, fluctuations in the value of the dollar are also contributing to the turmoil of the big picture. With numerous offsetting factors at play, national experts are indicating that the Federal Reserve has some tough choices ahead as to the target level of interest rates and the value of the dollar. Throw in the fact that the political season is now in full swing with national elections occurring this fall, we could see some interesting times. How much of a safety net the federal government should provide and who has oversight authority are issues that will be debated ad nauseam for the next several months. The implications from this debate will be felt for years to come. The balance between regulation and oversight versus free trade, open markets and the “constructive destruction”of capitalism is a fine line to walk.
Some of what this means to agricultural producers in eastern Kansas will include continued volatility and the need for risk management. As we all know, it is no longer adequate simply to deliver a high quality agricultural product to market. Producers must also be experts, or have a team of experts accessible, to deal with production, marketing, legal, finance, accounting, political and environmental issues. With increased volatility comes an increase in risk as well as the potential for higher reward. At Frontier Farm Credit, we wish to earn your trust as a full financial service provider. Please feel free to contact your Frontier Farm Credit Financial Services Officer to discuss the products and services that can assist you in these times of uncertainty.
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