At last: Interest rate relief appears to be coming, at least that’s what the market says

Feeling the burn: Low prices, high input costs challenge farmers’ working capital

With planting season long complete—although not without some early-on cold weather or flooding in certain regions—expectations for the 2024 crop are generally upbeat. Still, farmers continue to be challenged by declining prices, while many continue to hold off on sales from their 2023 harvest.

“Today’s per-bushel corn prices are at least 75 cents below what they were seven to nine months ago, and you get the feeling that there is quite a bit of working capital eroding at the farm level right now,” said Marcus Wilhelm, western region president of CoBank’s Agribusiness Banking Group. “That’s not to suggest that farmers are in dire straits financially. We still have a lot of equity to work with, but could that start to bleed into some accounts receivables or aging receivables issues? 

“Farmers have begun borrowing to pay for their inputs, and that's at a much higher interest rate than the last time they had to borrow for operating costs,” he added. “2023 was the most expensive crop they ever planted. Parlay that with continued declining prices from the last harvest, and that could amount to a potential income loss of $2 per bushel.

“We suggest that our customers review their accounts receivable policies, and pricing and fees, to handle the cost of today's market,” Wilhelm concluded. “In some cases, farm supply customers might benefit by looking at privately held crop input financing companies as an option for laying off some of their receivables risk. They have the processes down to help mitigate the risk as much as possible.”

Heading for a showdown? Rural America vs. federal courts 

It’s not a certainty, but the Supreme Court’s recent 6 - 3 ruling to overturn the Chevron doctrine potentially could impact telecommunications services in rural America. 

The court’s June 28th decision curtails the 40-year-old practice of federal regulatory agencies interpreting the federal laws they administer and instead giving courts the power to interpret those laws when ambiguity arises. 

The ruling introduces the possibility that programs such as the Universal Service Fund (USF), which funds telecommunications services in rural America, could be challenged in court based on the Supreme Court’s decision. The USF is operated by the Universal Service Administrative Co. (USAC), an independent, not-for-profit corporation designated by the FCC as the administrator of the USF under the Telecommunications Act of 1996. 

USAC collects fees, typically paid by consumers, from international and interstate telecommunications providers with revenues over a certain threshold. The funds are redistributed to smaller telecommunications providers for service in rural areas.

Also, on July 24th in a lawsuit filed prior to the Supreme Court’s decision, the 5th Circuit Court of Appeals ruled the USF unconstitutional, referring to it as a “misbegotten tax.” However, the ruling creates a circuit split—opposing decisions between two or more circuit courts—that could end up in the Supreme Court. Prior to the 5th circuit ruling, the 6th and 11th circuit courts rejected claims that the USF is unconstitutional.

“Many small, rural telecom operators rely on USF support to run their businesses,” said Jeff Johnston, lead economist, Communications at CoBank. “If they didn't get USF funds, they would not be in business. The reality is that providing communications services in very remote parts of the country is a money-losing proposition.”

“Unless the government provides some type of cost-recovery mechanism, they will run out of money in very short order. And people living in those areas will no longer have service. With both the Chevron and 5th circuit court rulings, the rules and implementation of the USF program will most likely be redressed by the regulators, courts, Congress or all three.”

Market strength prevails over political uncertainty; healthy economic conditions compress corporate bond spreads

Despite the recent disruptive events on the political landscape, the current market remains strong.

“The typical response to near political upheaval like this would be an immediate sell-off of risk assets—equities, high-yield instruments and the like—and a flight quality,” said Bill Fox, managing director, Capital Markets with CoBank. “Yet the exact opposite has happened. If there were ever a time for a weak market to crumble, it would be now. But what we’re seeing is indicative of just how resilient the market is at this point.” 

In turn, the strong market and improving economic conditions are positively affecting heavy users of the bond market—including investor-owned utilities—in the form of tightening bond spreads. In addition, the 100-basis-point differential between the 10-year Treasury and one-month SOFR has made issuing fixed-rate debt more attractive. 

“Fixed-rate corporate bond spreads are as tight as they've been for the last 10 years,” Fox added. “Part of that is likely because now that interest rates have ticked up to north of four or even five percent, the absolute yield institutional investors are receiving is significantly higher than they've seen in the recent past, certainly the last five years. 

“They care less about spread because they’re buying yield as much as anything else,” he continued. “The yield premium for power and energy issuers over a comparable U.S. Treasury—which is presumably risk-free—continued to narrow, and it’s tough to see what would reverse it. Markets are always subject to change, but for now, the strength is evident.”

Fox pointed to bond issuer expectations for the Fed to reduce interest rates, which would create an instant gain for bonds purchased at higher rates.