The fiscal cliff in question includes the expiration of numerous tax cuts and transfer payments set to end on or around January 1, 2013. The lower marginal income tax, capital gain tax cuts, lower dividend tax rates, lower employee payroll tax, and extended unemployment benefits are all set to expire with the new year. Additionally, we are facing $1.2 trillion in reduced government spending as dictated by the Budget Control Act of 2011.

Some economists argue that the combination of these factors will reduce US GDP growth by several percentage points in 2013 and 2014.

One of the more frustrating aspects of the MF Global issue was that many of MF Global customers were using their commodity accounts as hedging accounts to minimize risk and volatility. They were unknowingly exposed to counterparty risk. This is the risk that those with whom you conduct business are able to perform as they have promised. There appears to be as much as $1.2 billion in customer money that is “missing” from MF Global customer commodity accounts.

Early indications are that MF Global at a minimum did not segregate customers’ accounts from its own trading accounts. This became a problem when MF Global made a series of bad trades involving European sovereign debt. This is just one more example of the global and complex economy that we are now experiencing.

All of the fallout from the MF Global bankruptcy will not be known for some time. Commodity producers, hedgers and market participants have been given a hard lesson in counterparty risk. Banks and lenders are watching closely as to how the grain-trading industry reacts. The Farm Credit System alone lent $6 billion to grain elevators for margin calls in 2008 when grain prices fell significantly. Initially, there looks to be a renewed emphasis for “back-to-back” transactions and direct contracting. The Chicago Mercantile Exchange and its regulator, the Commodity Futures Trading Corporation, will almost assuredly see additional regulation and increased scrutiny. The bankruptcy will also be a topic during the next Farm Bill debate.

At Frontier Farm Credit, we know that things are more complex today. That is why we offer a full suite of Financial Service products backed by our team of experts. Contact your FSO today to discuss how we can be your partner “Side-by-Side, Season-by-Season”.

When it comes to government spending and support for farm programs, it is simply a case of “too many ticks and not enough dog”. The pain of working our way out of the national debt will be felt in every segment of our society and across all economic industries. As always, uncertainty in the economic and political environment will add volatility to the agricultural industry for producers. Risk management is a skill that producers will be required to utilize while employing the tools that are available.

At the time of this writing, the equities markets seem to be straddling the fence between the belief that a recovery must be on its way versus the realization that there are numerous issues that must be addressed before any real progress can be made with this economy. Commodity markets will continue to be influenced by the value of the dollar as well as macro supply and demand forces. Bond prices and interest rates are being shaped by a Federal Reserve policy that includes extending the duration of its investment portfolio in an attempt to “twist” the yield curve to bring longer-term rates down. There appear to be few additional tactics that the Fed can use in their commitment to provide low rates and liquidity for the markets.

At Frontier Farm Credit we offer a team of experts in the areas of financing, insurance, record keeping and tax preparation. Farm Credit is your full financial service provider in these turbulent and uncertain times.

This issue will likely become more acute as we are experiencing global food inflation. Experts estimate that Americans spend 9% of their income on food, while Europeans pay more than twice that amount and the percentages rise dramatically in other parts of the world. But even here in the United States, it seems at times that policy makers are out of touch with how important food prices are for those they serve. Recently, New York Federal Reserve President William Dudley got a dose of reality during a public meeting in Queens, New York. Dudley essentially told the crowd essentially that there was little to no inflation in the United States because you can now buy an iPad 2 for the same price as an iPad 1. The crowd became increasingly hostile and responded with comments such as “I can’t eat an iPad” and “When was the last time you went grocery shopping, Sir”. (Reuter’s Wire Report)

Just as a frame of reference, it is interesting to note that Dudley was the former chief economist for Goldman Sachs. It has been a running joke that the Federal Reserve does not measure food nor energy prices in its core inflation numbers. After all, food and energy are only important to people who eat and drive.

So as policy makers and politicians continue to grapple with the numerous stakeholders, we here at Frontier Farm Credit are committed to serving the farmers and ranchers of eastern Kansas as they produce the highest quality agricultural products for an increasingly hungry world.

After its latest meeting this month, the Fed issued its statement which indicated that they are less worried about inflation and still intended to keep interest rates low for an extended period. Thus they are still looking for job creation which continues to trump the threat of inflation. Additionally, they reaffirmed their commitment to QE II which is the purchase of an additional $600 billion in treasury securities. This further expansion of the Fed’s balance sheet along with the reinvestment of maturing securities from QE I will provide significant liquidity to the markets, but ultimately should weaken the US Dollar and is inflationary in nature. While global food prices are at all-time highs, and with crude trading at elevated levels, one has to wonder how long overall inflation will be held in check.

Food security refers to the availability of food and one’s access to it. A household is considered food-secure when its occupants do not live in hunger or fear of starvation. While food production has been and continues to increase dramatically, there are an estimated 850 million people globally that are chronically hungry due to extreme poverty. An additional two billion lack food security intermittently due to varying degrees of poverty.

There are two million agricultural producers in this country. How can we provide an environment in which we support those producers in order to feed the world?

We may be facing food inflation in this country in the months ahead. We have been blessed with the most stable and highest quality food supply in the world. America’s agricultural producers put the best quality product on our dinner tables as well as feeding a large portion of the world’s population. We are also fortunate that we only pay about 9% of our average household income on food. Even other “developed” countries can expect to pay at least twice that much for their food.

If we get into food inflation in this country, and if (or when) there is another world-wide food crisis, I fear that those involved in agriculture will be thrown into another political debate defending what we do so well. Certainly we have not heard the last of the food versus fuel debate. We also may be thrust into tough discussion about production practices, government programs and trading policies. My question to you is “Are there any lessons in Egypt for American agricultural producers?”

As we kick off 2011, the Federal Reserve continues to walk a tightrope between inflation and deflation. Over the last two years the Fed’s actions have indicated that it is more concerned about the devastating ramifications of deflation versus inflation. Deflation – characterized by falling prices – leads to falling incomes, job losses and contracting economic activity. Once the tipping point of deflation has been reached, history would tell us that working out of the economic slump is a long and painful process. Thus in 2009 and 2010 the Fed purchased $1.7 trillion in US Treasury securities and mortgage-backed debt instruments. This injected significant liquidity into the markets and kept not only short-term interest rates, which the Fed can directly control, but also long term interest rates at historic lows. This action, known as Quantitative Easing, weakened the US dollar and was inflationary in nature.

We are now in the midst of Quantitative Easing II (QEII), with the Fed expanding its balance sheet by another $600 billion. While the long-term success of these moves will not be known for some time, there are a few things that we can observe about the markets. Since the Fed has embarked upon QEII, long-term interest rates have actually risen by 5/8 to 7/8%, which has steepened the yield curve. Some would say that the markets are anticipating higher short term rates in the future, perhaps in response to accelerating inflation. US consumer prices (CPI) rose 1.5% in 2010 which was actually slower than the CPI growth of 2.7% in 2009. Core inflation, which the Fed tracks closely, rose 0.8% in 2010. The market seems to be anticipating that when inflation picks up, the Federal Reserve will act swiftly and decisively to ensure prices don’t rise too quickly and overheat the economy.

The continued actions of the Fed and the fact that emerging markets are actually raising rates put downward pressure on the value of the dollar. In isolation, a weaker dollar should boost commodity prices to include both inputs as well as outputs of those involved in agriculture. There still are significant risks to the economy to include a loss of confidence in the Fed actions, socio-political shocks, and poor economic performance by countries both in the European Union as well as the emerging markets. Those involved in agricultural production need to be aware of risk management and its importance as we navigate in these turbulent times. As always, please contact your Financial Services Officer to learn about the full array of financial products and services offered by Frontier Farm Credit.

The Federal Reserve likely will neither shrink their balance sheet nor raise short-term interest rates for the remainder of 2011. The Fed’s balance sheet is seen as being at least $2.5 trillion by June, 2011 and will consist mostly of US Treasuries of 2 to 10-year maturities. This will raise excess bank reserves which in turn provide significant liquidity to the markets.

Another item that I would place into the political risk category is a simmering currency war. As the global economy struggles to climb out of this lingering flat growth period, the leading industrialized nations are looking to do anything to help their own situations. This has included a weak currency policy by many of the world’s central banks, which is designed to improve exports and global competitiveness. The United States certainly has historically used a weak dollar policy to help its balance of trade. This is fine until countries become reactionary to one another and aggressive in their steps to influence not only their own currency, but the currencies of their trading partners. As opposed to tariffs and embargoes, this simply is a covert method to conduct trade wars. The global economy is too fragile at this time to withstand much in the way of impeding growth and recovery. Those involved with commodities could potentially see increased volatility from these and other factors.

As far as the situation for the US economy, many forecasts would include very slow growth and a challenging labor market again for the duration of 2010 and well into 2011. This has the potential to push the next Federal Reserve move, which should be up, on short-term interest rates into late 2011 or even 2012. In the interim, the Federal Reserve will use open market operations to influence liquidity, interest rates and the shape of the yield curve.

As always, this outlook can change dramatically in this economic, political and even geo-political environment. Thus agricultural producers should have a good handle on their risk profile and tolerances. Farmers and ranchers should consider use of all available tools and techniques to manage risk to appropriate levels. Please feel free to contact your Frontier Farm Credit Financial Services Officer to discuss the wide range of financial products and services that are available.