S& P this week downgraded the credit ratings of Fannie Mae, Freddie Mac and other agencies linked to long-term U.S. government debt. Farm lenders and debt issued by 32 banks and credit unions are also involved in the latest downgrade. Analysts are saying they are not surprised by this decision.
“Obviously there is a direct linkage between government supported programs and the rating of the federal government,” Brian Gould, Associate Professor of the Department of Agricultural and Applied Economics at the University of Wisconsin-Madison told DairyLine Radio.
“The question remains, theoretically when the quality of bonds goes down the cost of attracting money for those bonds has to go up because there viewed as more risky. If that holds true than both short term and long term loan costs could go up for the ag sector.”
“There is some indication that the markets aren’t reacting as we would have thought in terms of significant increases in those interest rates, but it’s a wait and see because we’ve never been in this state before,” Gould said.
The first two days of CME trading – spot butter was down 3 ¼-cents to $2.07 on four trades and seven offers. Block cheese was also down 3 ¼-cents to $2.13 on four trades and 2 offers. The barrels were unchanged at $2.1350 with no activity.
The dairy industry is seeing some volatility because of the fluctuation in the grain prices. That affects both the revenue side and the cost side. When looking at the relative volatility of feed versus the Class III milk price since 2006, feed markets have been just about as volatile as the Class III market in terms of month-to-month variability of those prices.
“You have to look at both sides of the coin now, we don’t have stable grain prices, and we need to be concerned about volatility in the grain market as well as in the dairy market,” he said.
Gould’s analysis on the volatility of feed prices versus Class III includes a series of 16 percent dairy rations and how it varied relative to the Class III since the BFP formula in 1995.
“Between 2000 and 2005 we did indeed have relatively stable feed prices and we didn’t need to be concerned about margins, all we had to do is look at the milk price side,” he said.
“But since 2006, the volatility measures that I’ve looked at are about equal with respect to the 16 percent dairy ration that I put together verses the Class III milk, so again that implies that you need to look at both the revenue side and feed side since feed is such a high portion of total cost of production.”