Baking needs attention as stimulus efforts change

by Morton Sosland
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The impacts grain-based foods has experienced as the result of the recent recession and the turmoil and chaos in financial markets may be greater than that endured in any other similar economic setback. As disastrous as the Great Depression of the 1930s was for the economy and the industry that is at the core of national food business, one senses that the repercussions of what occurred in the past several years and is still happening are going to be longer lasting than anything preceding. Sure, some parts of grain-based foods have benefited by their nimbleness and their positioning from this severe downturn. But on balance, the results have been trying, if not negative, and it is likely that grain-based foods going forward from this point will be quite different from the industry of the recent past.

Hardly anything promises a more lasting effect than the tightening of credit, of the supply of funds from lending institutions, that has been available to the great majority of companies in grain-based foods. For the first time in the experience of most industry executives, obtaining financing for important and attractive capital projects has been nigh on to impossible. For the most part companies in the industry have found that their traditional banks have been reluctant to lend or have so tightened credit availability that it might as well not have been offered. In more than a few instances, major expansion programs that in a different time would have seen suitors in pursuit of borrowers have encountered a final lender “no,” even though the projects were deemed not just substantive, but certainly worth doing. Well-conceived expansion and acquisition programs have been brought to a halt as last-minute efforts to obtain financing fell short.

Many undertakings that did move ahead have been characterized by infusions of equity or similar capital at a level that has not been easy to achieve except when owners or investors were themselves well self-financed. Tales about the reluctance of banks to provide funding are commonplace. It is in businesses like baking and other sectors of grain-based foods that the absence of funding has been especially troubling. Certainly, what has happened thus far has not advanced the national goal to speed job creation. Hardly any industry offers a better possibility of job creation through capital investing than does baking.

All of this makes the latest moves by the Federal Reserve, officially described as signaling a change in monetary policy toward some tightening, to be hard to understand. Chairman Ben S. Bernanke of the Federal Reserve has continued to hint of the first interest rate tightening in more than a year. A preview arrived last week in the quarter percentage point advance in the discount rate, to 0.75 per cent. What Mr. Bernanke calls “unprecedented” monetary stimulus would be reduced, mainly by raising the rate the Federal Reserve pays banks on their excess reserve deposits. While the chairman says these steps are “not expected to lead to tighter financial conditions for households and businesses,” the markets reacted to their disclosure and the discount rate rise by upturns in both interest rates and in the value of the dollar.

For an industry like baking, such steps, in support of the Federal Reserve’s fundamental commitment to price stability, offer little, if any, hope. While the past year of history-making fiscal stimulation has offered no benefits to bakers wanting to borrow to improve their companies, steps that would make banks even more circumspect in their lending would be most troubling. That is particularly the case in view of parallel warnings about how community banks are likely to be hurt by the collapse of the commercial real estate markets that will make refinancing of mortgages difficult, if not impossible. As changes are being made in financial policies that were launched in December 2008 and have been of no benefit to baking, it is time to give attention to how best to facilitate operations of a business such as baking standing at the center of the national economy.

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