The recently passed debt ceiling is important for the entire agricultural industry to avoid a default of the government and possible shutdown of essential services. It can also limit farmer’s ability to secure FSA guaranteed loans and drive short-term ag lending rates even higher.
“The worst thing for rural America today is any default whatsoever because it’s going to drive up the cost of capital; it’s going to drive up lending rates; it will have a real negative impact,” says Nate Franzen, agribusiness division president, First Dakota National Bank, “especially when you consider the fact that a large amount of amount of capital that goes out to rural America has a connection to government, whether it’s a government sponsored enterprise like the Farm Credit System, or Farm Service Agency, which is an agency of the government, all of those things are really impacted by the government’s ability to stay in a strong credit rating and not default on their obligations.”
Franzen says the reluctance by some lawmakers to support a higher debt ceiling is because the U.S. can’t continue to go deeper into debt without economic repercussions.
“No doubt we’re at a point in time where that needs to be addressed,” he says. “I think the latest numbers I saw were at about 125% of GDP, which is approaching the highest point we’ve ever been at. Many would argue that’s still manageable, but it’s certainly getting to an uncomfortable level. And so that needs to be addressed. I think the challenge here is how can we address that but at the same time, adjust the debt ceiling so that we can continue to pay our bills, as we know we need to.”
He says the fact that the debate drug out so close to the deadline had a cost to the marketplace.
“Anytime the market is nervous, they price in for more risk, and the way the market prices and forms our risk is it raises rates. It wants to get paid more for the increased risk that it’s foreseeing in the marketplace, and I’m sure that is already happening on small levels.”
The equity, energy and markets such as the U.S. dollar index have also been pricing in the possibility of a default, and when the dollar rises, it make U.S. exports less competitive globally. Farmers are also hopeful that the newly passed deal will help avoid the negative effects on ag markets and their bottom line.