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Perspective:
Industry Issues

Higher interest rates: What they mean for the U.S. dairy industry

Ty Rohloff

Ty Rohloff is vice president of commercial financing for Compeer Financial. He has more than 20 years of experience in the food, beverage and agribusiness industry, including 12 years as a lender with Compeer Financial. He is a guest columnist for this week’s issue of Cheese Market News®.

For the first time in more than three years, the Federal Reserve elected to raise the benchmark federal funds rate. The quarter-point increase moved the target range to 3.75% to 4%.

The move was largely anticipated. In a unanimous 12-0 vote, the Federal Open Market Committee (FOMC) increased its key interest rate by 25 basis points. That marked a shift from the June meeting, when the committee voted to keep rates unchanged.

The June meeting was also Kevin Warsh’s first as Federal Reserve chairman. At the time, the Fed acknowledged that inflation remained elevated and required continued monitoring. The September increase offered the first indication of how the Fed may respond under Warsh’s leadership when inflation remains above its 2% target.

For businesses throughout the dairy supply chain, the question now is what higher rates and persistent inflation could mean for borrowing costs, consumer spending and future investment.

• Inflation remains the primary driver

In simple terms, inflation remains the main reason behind the rate increase.

Inflation has remained above the Federal Reserve’s 2% target, measured by both the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) price index. August data showed core CPI at 2.4%, while the latest available core PCE reading was 3.3%.

Most of us remember the spending and goods-shortage cycle that followed the COVID-19 pandemic. Today, inflation continues to be influenced by a combination of consumer spending, government spending, capital investment and geopolitical uncertainty.

That matters because continued fiscal expansion can put pressure on financial markets and contribute to higher borrowing costs. The federal government is also paying approximately $1.25 trillion annually to service the national debt.

For businesses, the broader point is that inflationary pressures remain in the economy, and higher rates are one of the Federal Reserve’s primary tools for addressing them.

• What does a quarter-point increase mean?

So, what does a quarter-point interest rate increase actually cost consumers?

While the impact of a single 25-basis-point increase can be difficult to quantify, the effects become more noticeable when higher rates are layered onto existing debt and new borrowing.

Credit card debt, home equity lines of credit (HELOCs) and other variable-rate debt can be affected relatively quickly when benchmark rates increase.

Based on average credit card and HELOC balances, a quarter-point increase can add approximately $129.41 in annual interest costs.

The impact can be larger for consumers taking out new fixed-rate loans. Based on average loan balances, the same quarter-point increase could add approximately $731.66 per year to the cost of a new auto or home loan.

A quarter-point increase may not seem dramatic on its own, but it has an impact, particularly for households already managing higher prices for everyday goods and services.

Lower-income households generally have less flexibility to absorb increases in necessities such as energy and food. When more household income goes toward those expenses, consumers may have less to spend on discretionary purchases or higher-priced food products.

We’re in the food business. That’s why it matters.

• Energy adds another layer

Energy prices remain an important inflation factor, particularly for agriculture and food manufacturing.

Geopolitical uncertainty continues to contribute to volatility in global energy markets.

A sustained 20% increase in crude oil prices can push headline inflation higher, while the indirect impacts can spread through transportation, freight, production and other costs.

At the farm level, higher energy prices affect fuel used in the field and on the road while also contributing to higher fertilizer and other input costs. Those higher costs are felt throughout the dairy supply chain, from the farm to processing and manufacturing.

At the time of drafting, West Texas Intermediate and Brent crude prices were around $95 and $100 per barrel, respectively. While prices had eased somewhat from the previous month, they remained elevated.

For dairy businesses, energy is an important factor to watch not only because of its direct cost, but also because of how those increases can affect margins throughout the supply chain.

• What comes next?

The Federal Reserve’s September projections provide some insight into where policymakers believe rates and the economy may be headed, but projections are just that: projections.

The current outlook calls for another 25-basis-point increase before the end of 2026, followed by relatively stable rates in 2027 and lower rates in 2028. However, economic conditions can change quickly, and the unexpected often happens.

The Federal Reserve’s dot plot reflects the individual interest rate expectations of policymakers and is updated following each meeting. Inflation, employment, economic growth and geopolitical developments can all influence future decisions.

That uncertainty makes it difficult for dairy businesses to build financial plans around a specific prediction of where interest rates will be six months or a year from now.

Instead, businesses can focus on understanding their exposure.

How much debt is variable rate? What projects may require financing over the next several years? How would higher borrowing costs affect expected returns? Where does the business have flexibility if rates remain elevated longer than anticipated?

Those questions are particularly relevant for dairy manufacturers and suppliers considering facility expansions, equipment upgrades or other significant capital investments.

• Control what you can

Interest rates are only one piece of the financial picture, but they remain an important one.

Long-term Treasury yields provide another indication of borrowing conditions across the economy.

In August, the 30-year U.S. Treasury yield reached 5.3%, up from a low of 1.7% in 2021 and the highest level since 2007.

Higher yields can benefit savers, but they also create a real cost for borrowers. For businesses carrying debt or considering new capital investments, understanding that exposure is important.

No business can control what the Federal Reserve does next. What businesses can control is how prepared they are for different outcomes.

Review debt structures and understand where variable-rate exposure exists. Evaluate upcoming capital needs before financing becomes urgent. Consider how higher energy and borrowing costs could affect margins and work with financial partners to evaluate available risk management strategies.

Interest rates may remain uncertain, but businesses can prepare for different outcomes. Understanding your risks and having a plan can provide greater flexibility as conditions change.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.

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