A Federal Reserve rate cut on Wednesday is seen as a virtual lock by financial market participants, with further reductions expected in December and next year. That’s a positive backdrop for grain and livestock futures.
“The general thinking is that easing cycles, when we get the money supply expanding faster, are good for agriculture,” said Jeffrey Dorfman, the Hugh C. Kiger distinguished professor of agricultural and resource economics at North Carolina State University, in a phone interview.
Expectations for rate cuts tend to be viewed as a positive for the stock market, provided investors are confident a recession can be averted. LPL Financial found that during the last nine major easing cycles dating back to the 1970s, the S&P 500 has gained ground two-thirds of the time, adding an average of 30.3% over the course of the cycle and the subsequent one-year pause, producing a median return of 13.1%.
That relationship explains the “bad news is good news” dynamic often seen in the stock market, when equities rally in response to disappointing economic data that reinforces rate-cut expectations. The exception is when investors fear the Fed easing will be too little or too late to avert a recession.
When it comes to agricultural commodities, the relationship between easing and market performance may seem obvious. For example, if the Fed is easing more than other central banks, that should, all else being equal, lead to a weaker U.S. dollar. On its own, that’s typically seen as a positive for commodities priced in dollars as it makes them cheaper to users of other currencies. That’s also a boon to U.S.-based companies that rely more heavily on exports.
But Dorfman, in his research, found an interesting wrinkle. Ag commodity prices respond faster and with a greater magnitude to monetary easing shocks than other goods and services, he said.
The general thinking is that easing increases demand among both investors and end users for commodities, in part because lower rates make it cheaper to store and hold them.
Farmers have an advantage not only because lower interest rates mean lower storage costs, but because they can respond more quickly than manufacturers and other players. “If everyone sees the easing cycle and both the farmer and the car makers say they can boost production, the farmer can increase production faster,” Dorfman explained.
The current easing cycle would give a particular advantage to farmers because it’s occurring at a time when manufacturers have little in the way of idle capacity to bring back online because the economy remains in decent shape overall, he said.
But if investors are aware of the relationship between easing cycles and commodities, wouldn’t it already be priced into the market? Dorfman said that isn’t necessarily so.
Financial markets offer participants a number of ways to bet on what the fed-funds rate will be in the future. Technically, ag commodity futures offer contracts far enough out to allow that to happen as well, but it doesn’t, Dorfman said. Instead, rate moves get partially priced into ag commodity futures, but not to the extent that expectations get reflected in the bond market, he said, which may reflect the fact that traders recognize commodities remain vulnerable to significant production risks.
For their part, fed-funds futures traders have priced in a 98% probability that policymakers will cut the fed funds rate by a quarter of a percentage point Wednesday to a range of 3.75%-4%, according to the CME FedWatch Tool. They see an 87% probability of another quarter-point cut in December. The Fed policy statement is due at 1 p.m. CT, followed by Chair Jerome Powell’s news conference at 1:30 p.m.
The Fed began cutting rates in 2024 but then put easing on pause. It delivered its first rate cut of 2025 in September, cutting the fed funds rate by a quarter of a percentage point.
Farmers, meanwhile, are feeling pain from low prices for crops and rising input costs. They may not feel like the easing cycle has provided much relief, but continued rate cuts should help. Producers, after all, are heavy borrowers who will benefit from lower interest rates on loans and any boost in demand for commodities.
“Farmers are certainly not happy with the current conditions and they will tell you they’re not making money and just trying to hand on another year. This will put them in a better position,” Dorfman said.
See: Tight Margins, Tough Decisions: Farmers Face 1980s-Like Pressures as Harvest Rolls On