Updated October 16, 2024
The Federal Reserve lowered its discount rate by half a percentage point on Sept. 18 to 4.75-5%, the first cut since 2020.
George Russell, a founding member of the Machinery Advisors Consortium, says during an October 15 MAC check-in the team agreed that a half point cut helps, but isn't significant. He added that increases in commodity prices are more impactful. The group said that a typical $30 million floorplan debt would see a $150,000 benefit. "If there are additional cuts, then maybe more capital improvement projects would be back on track and we might see more combine sales as a result," he said.
The cut was more aggressive than investors had been expecting a week ago, reports the Wall Street Journal. "For all the attention on the Fed, upcoming economic data could still play the biggest role in shaping markets. Stocks have historically performed well in the 12 months after the Fed has started to cut rates — unless the economy has entered a recession during that period," the WSJ reported.
In announcing its decision, the Fed said, “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”
Mixed Reactions
Greg Roberg, vice president of sales at AgDirect says he was pleasantly surprised by the decision. Back in August he had told Ag Equipment Intelligence’s On the Record he was expecting a 0.25 percentage point drop to be announced following the Fed's September meeting.
“This will be good news for producers as operating rates will likely come down saving them interest and equipment dealers should see lower fixed rates by finance companies to offer to their customers," Roberg says. "With the decreases in commodity prices this year, the ag industry needed some positive news and we received some today.”
Preliminary results of a Farm Equipment Insider text poll indicate over half of surveyed dealers say the news will have a positive impact on year-end 2024 farm equipment purchases.
Don Van Houweling, owner of the Iowa-based Deere dealership group Van Wall Equipment, sees the news as positive for the industry. "It will obviously help as it will reduce every payment on every new contract but it will have more of an effect psychologically," he says. "We have been offering low interest rates on many key items already so it will just help us lower them some more. It will help us as dealers the most as it will reduce our floorplan interest costs."
However, Moving Iron's Casey Seymour says he doesn't think this cut will move the needle much, but another cut before year end at the same pace could start to make an impact. Using current rates posted on AgDirect.com, Seymour said, "the rates are 6.7% for equipment over $200k for six years but not exceeding seven years. Assuming the rate will adjust to between 6% — and 6.25% around October 1, some end users could be looking at refinancing some of the 7.5%+ notes down by a couple of points. I don’t think this move will significantly impact the overall market because equipment is still costly, and commodity prices are still low.
"If the Fed lowers again at the same pace before the year-end and rates are in the 5.5% - 5.75% range, I think the market will see movement, especially at the end of the year. If you have a $500,000 machine at 7.5% interest, the yearly payment over a 7-year note is $94,987.77. The same machine, at 5.5%, has an annual fee of $88,396.25. A savings of $6591.52. You need to see maybe one or two more adjustments and rates in the 4.85%-5.25% range before the market heats up. Then, the driving factor will revolve around offloading high-interest-rate loans and replacing them with lower rates. I am sure this will turn the crank, but not much."
Colin Hlavinka, director of sales for Case IH dealer Hlavinka Equipment in Texas, says the cut would have little impact on their business because of the double whammy of low commodity prices and yields that were negatively impacted by Hurricane Beryl. "I just don’t think the total amount of rate cuts in store will do much for us in the industry. Floorplan interest is still a huge expense as well as operating notes for producers. If we saw a 500 basis point move then yes we would see an immediate reaction but 25 or 50 points just don’t do it for us. The stock market yes but not us."
High interest rates have been top of mind for farmers and dealers alike over the last year. However, the effect of the news of the likely interest rate cut could be seen in the latest Ag Economy Barometer. In August, 17% of respondents pointed to interest rates as a top issue, down from 24% a year ago. In a related question, two-thirds (68%) of respondents said they expect interest rates to fall during the upcoming year, while only 19% said they look for rates to rise.
The last several Dealer Sentiments & Business Conditions Updates from Ag Equipment Intelligence regularly cite rising interest rates as a challenger in the dealer commentary. “Slowing crop prices, high equipment costs, and elevated interest rates are putting pressure on farmer sentiment,” said one dealer in the August report. In the September report, another dealer said, “Commodity prices and interest rates are putting pressure on farmers. Customers are still willing to talk about quotes but final purchasing commitments are slowing each month.
