Global government debt weighs on U.S. ag exports

While the U.S Federal Reserve has lowered interest rates, which is beneficial for U.S. agriculture, there are many things outside its control that can affect the agricultural economy.

"No. 1 is our national debt. We love to talk about deficit spending in this country and how every politician, irrespective of political party, increases our national debt," said Tanner Ehmke, a lead economist with CoBank.

The amount of publicly held debt as a percentage of U.S. gross domestic product is now beyond where it was in World War II.

"Folks we're not even in a war, and we're spending like it is. This is simply not sustainable," he said during a livestream presentation at the National Association of State Departments of Agriculture.

More ahead

And there's probably a lot more deficit spending to come based on the economic policies of presidential candidates Donald Trump and Kamala Harris, according to projections by the Wall Street Journal.

Both are projected to increase national debt, he said.

That's a concern because it raises the yield rate on the 10-year Treasury bond, which is the interest rate the U.S. government pays to borrow money. That yield rate is a benchmark for other interest rates, including mortgages.

"We're not the only ones, this is a global phenomenon. The world is drowning in government debt," he said.

"Fiscal management among agricultural exporting countries like Brazil and Russia and importers like Mexico and China have caused currencies there to weaken as investors steer clear of growing economic risk," he told Capital Press after the presentation.

That's a negative for U.S. agriculture.

Headwinds

"While the dollar is still relatively strong because the U.S. has a growing economy, the weakening currencies abroad create headwinds for U.S. agricultural exports and depress commodity prices. Exports from Russia and Brazil become cheaper, while purchasing power among importers like Mexico and China falls and imports slow," he said.

But higher relative yields in the 10-year Treasury bond also attract foreign investors seeking stable returns and security. This can push up prices of U.S. government bonds and lower yields. That could in turn lower interest rates.

"The Federal Reserve's cut in interest rates might be a positive for the American producer as that could also draw down the value of the dollar. But this is highly dependent upon what our competitors and buyers overseas are doing. When we talk about the value of the dollar, what we really need to talk about is the value of foreign currencies like the Brazilian real, Russian ruble, Mexican peso and Chinese yuan," he said.

Mexican markets

That said, Mexico has been a success story for U.S. agricultural exports. Its currency had been getting stronger, and it's been able to import more from the U.S., he said.

"Our concern now is that under the new leftist government in Mexico, the market is concerned about their debt, the nationalization of assets and of course a weakening currency, which is what's happened since the new government was elected earlier this year," he said.

Here at home, crops are going to continue to see financial stress at the farm level. That's reducing net farm income. It's going to be the opposite for livestock and dairy, which are holding up the rural economy, he said.