Pause in Rate Cuts? Inflation, Tariffs & Ag Markets in Focus

Persistently high inflation and a not-too-hot, not-too-cold labor market are combining to create a situation where further rate cuts by the Federal Reserve look unlikely in the very short-term. Meanwhile, agricultural commodity markets cooled in recent weeks after a bullish January and February run.

The Federal Reserve’s dual mandate directs them to keep inflation low and unemployment rates reasonable in the midst of healthy economic growth. The Fed relies on a variety of tools to help control inflation at their target rate of 2% and the unemployment rate moderate at their target rate of approximately 4%, including but not limited to adjusting the federal funds rate. 

Banks charge one another for overnight borrowing at the federal funds rate, resulting in this rate having a relationship with other interest rates charged to consumers. Keeping interest rates moderate via carefully setting federal funds targets is a challenging process that can result in the economy accelerating or decelerating too fast.

After historically quick federal funds rate increases in 2022 to combat high inflation and low unemployment, the Fed began lowering their federal funds rate targets in September 2024. Four rate cuts equaled the equivalent of 1% decline by December 2024. But, in January 2025, the Fed paused cutting rates and most economists expect the Fed to pause again at their upcoming March meeting.

Factors Playing into the Federal Funds Rate 

The Fed prefers the Bureau of Economic Analysis (BEA) Core Personal Consumption Expenditure (PCE) Index as its main inflation data point, as it is a relatively non-volatile inflation measure. The Core PCE Index removes items prone to wilder inflationary fluctuations, namely food and energy products. The February data release of the Core PCE Index came in up 0.3% in January for a year-over-year +2.6% average yearly inflation. Overall headline PCE Index was up 0.3% in January for a +2.5% year-over-year average inflation. Both PCE numbers indicate inflation above Fed targets of 2%.

The Bureau of Labor Statistics (BLS) tracks the other major macroeconomic inflation measures: the Consumer Price Index (CPI) and the Producer Price Index (PPI), as well as the unemployment rate. The BLS showed inflation up for consumers (up 0.5% in January for a yearly average of +3.0%) and producers (up 0.4% in January for a yearly average of +3.5%). The Fed does not favor these inflation measures as they tend to be more volatile, which is evident in comparing January’s higher CPI and PPI to the PCE Index. Nonetheless, all these pesky higher inflation numbers are difficult to ignore. Federal Reserve Chairman Powell recently reported to Congress he is in “no hurry” to change rates. 

Ag Commodity Market Dynamics

On the ag commodities side of the economy, grains and livestock futures prices recently cooled to lower prices after a month and a half of upward momentum. Let’s discuss a few drivers for the corn and soybean futures market run up in early 2025. First, an unexpected World Agricultural Supply and Demand Estimates (WASDE) Report on January 10 seemed to be the right market trigger at the right time to push corn and soybean prices higher. This was then followed up by volatile trading of on and off again tariff news in late January and early February. 

The January WASDE reported a relatively surprising 3.9/bushel drop in average corn yield for 2024, causing the U.S. corn stocks to use ratio dropped to 10.2% (1,540 million bushels ending stock/15,115 million bushels total use). That ratio hitting 10% is often a fundamental market trigger causing corn price increases. While corn was the most surprising number in the January WASDE, soybeans also saw a slight drop in production estimates. Nonetheless, soybeans tagged along for the rally. 

While tariffs are generally bearish to commodities markets, a February pause on tariffs with Canada and Mexico calmed some fears and were likely another factor in the January and February upward trends in markets. Now, with the tariffs pause lifted on March 4 and still in effect as of the writing of this article, the markets have turned shakier.

The Latest Grain Use Numbers & a Tariff Update

Another recent market mover appears to be the latest 2025 forecasts from the United States Department of Agriculture (USDA) Outlook Forum. The USDA 2025 corn forecast predicts 94 million acres, up 3.4 million acres from 2024 (but, in context, this just returns the U.S. back to 2023 corn acres) and a 2025 forecast corn price of $4.20/bushel. The USDA 2025 soybean forecast predicts 84 million acres, down 3.1 million from last year (but, in context, would still be above 2023 soy acres if achieved) and a 2025 forecast soybean price of $10/bushel.

While not far off expectations of many analysts prior to the Outlook Forum, the futures market did not seem to like the acreage announcement. The generous production forecasts combined with the implementation on March 4 of additional tariffs with Mexico at 25%, Canada at 25% and China at an additional 10% on top of the existing 10% tariff, cooled down the grain and livestock futures markets as we head into spring. These countries represent the top three destinations for U.S. ag commodities.

Tariffs are an import tax on goods brought into a country by producers in another country (the exporter). Tariffs are collected at import during the customs process. Tariffs generate tax revenue for the importing country and essentially make the imported products more expensive. Tariffs can either discourage trade and/or create a favorable market price differential between the domestic and foreign products. Consumers often “pay” the price of the tariff in the form of increased prices until the market corrects – if it ever does.

The possibility of retaliatory tariffs and their potential downward, bearish impact on the ag commodities markets through reduced demand is generally more concerning than the initial U.S. import tariffs. For consumers – including ag producers that consume inputs like equipment, fertilizer, chemicals, feeder animals and more – the import tariffs will likely raise prices for the products we consume.

In markets where substitution is possible, an identical product with the tariff may reduce in price in an amount roughly corresponding to the tariff. Soybeans from South American are exact substitutes for soybeans from the U.S. economically.

Price reductions due to reduced demand or/and substitution occurred when retaliatory tariffs were placed on U.S. pork and soybeans in 2017-2019. After the U.S. imposed import tariffs on other products imported from Mexico and China, U.S. ag producers faced retaliatory tariffs when exporting targeted ag products to Mexico and China. During this time, we saw U.S. values for those ag products fall by approximately the same amount of the retaliatory tariffs.

For example, China imposed a 25% tariff to import U.S. soybeans, and there was a 20% decline in national average soybean price between 2018-2019. Cash prices varied by location and some places like Illinois faced even greater declines. We saw a semi-similar situation in Mexico with U.S. pork. Mexico implemented a 20% tariff in 2019, and there was a 20% decline in U.S. pork value at that time. These are simply historical examples, and historical results are not necessarily indicative of future economic performance.

For ag commodity producers that rely on exports for demand, retaliatory tariffs generally reduce the prices received if all other factors remain constant. But for the average consumer and for the overall U.S. economy that relies on imports to meet those consumers’ demands, tariffs could raise prices and trigger more inflation. This brings us back to where we started this article: if inflation continues to remain above 2%, a federal funds rate decrease becomes less and less likely in the near term. If the tariffs do not trigger higher inflation, but instead reduce economic growth, this could conversely push the Fed to lower rates. 

Managing Uncertainty in the Ag Commodity Markets

With so much uncertainty influencing markets right now, it’s helpful to remember income and expenses can turn fast, for the positive or negative. Focusing on margin management, breakeven analysis and utilizing effective risk strategies are always good approaches, especially during periods of uncertainty.   

And as you consider your farm’s future, don’t forget the importance of a well-thought-out succession plan. Join me at our next AgriMindset webinar where I’ll provide an economic update before moderating a discussion with Brooke Didier Starks, estate planning attorney, on taking the next step in your farm’s succession plan.

For monthly updates on ag commodities, inflation and economic trends and more, subscribe to Compeer’s Economic Minute e-newsletter.