The Federal Reserve is discovering it more durable to chill the financial system than virtually anybody anticipated. Most corners of the U.S. financial system are performing very properly contemplating the Fed has been aggressively elevating charges for seven months. Manufacturing continues to broaden, shopper spending stays robust, the labor market remains to be extraordinarily tight and Q3 GDP information will possible present stable development.
Whereas the speed will increase have accomplished little to chill spending and tamp down inflation, critics are rising their requires the Fed to cease elevating charges. The argument is that additional financial tightening can have catastrophic results on the U.S. and international economies, and that inflation is about to fall precipitously. In line with a brand new Quarterly report from CoBank’s Data Trade, the Fed doesn’t see it that manner, nor ought to it.
“Thus far, there isn’t any stable proof that inflation is on a steep downward path and there may be additionally little proof that greater charges are severely damaging the financial system,” mentioned Dan Kowalski, vice chairman of CoBank’s Data Trade. “In the end, to get inflation ranges down, the willingness or means of customers and companies to spend should additionally come down. Which means fee hikes will proceed till the Fed achieves its mandate of worth stability. Sadly, that will increase the probability of collateral injury coming within the first half of 2023.”
There are indicators of slowing, nonetheless, that are the primary cracks to kind from financial tightening, famous Kowalski. Shopper credit score is on the rise whereas financial savings charges are falling. And wage development is falling whilst inflation stays excessive, decreasing shopper buying energy.
In distinction, the power and agri-food sectors have gained surprising ranges of pricing energy as provide shortages now look like medium-term challenges. Dangers and uncertainty stay exceptionally excessive, however elevated commodity costs additionally provide alternatives.
Grains, farm provide & biofuels
Grain costs remained unstable all through the third quarter, ending largely greater. U.S. corn and wheat futures rose 11% and eight%, respectively, partly offset by a 2% drop in soybeans. On farm grain storage is above 2021 ranges for the three main crops, doubtlessly signaling a stronger harvest-time foundation this yr. Corn and soybean exports for the brand new crop advertising yr are up 13% over final yr. Nevertheless, grain transport bills may stay greater as low water ranges on the Mississippi River brought on a spike in barge charges. And Russia is now indicating it might not prolong its settlement to permit Ukrainian grain exports through the Black Sea, which might ship grain costs upward.
Regardless of a sluggish begin to the spring planting season, ag retailers efficiently managed crop enter inventories and had an excellent summer season agronomy season. Home fertilizer costs fell by 5-16% in Q3 amid an enormous correction in power costs. Nevertheless, costs have been rising as harvest will get underway and farmers shift their consideration to fall utility season. Russia’s battle with Ukraine continues to influence international provides and costs for nitrogen, phosphorous and potassium fertilizers.
Ethanol manufacturing continued to pattern down as Q3 got here to a detailed, concurrent with recession fears, decrease gasoline demand and capital market volatility. Probably the most important occasion of the quarter was on the coverage entrance, with the passing of the Inflation Discount Act of 2022. The laws gives robust present and future assist for renewable power, and biofuels particularly.
Animal protein & dairy
The slowing international financial system and unrelenting meals inflation are issues for pink meat and poultry demand into 2023. Shopper willingness to pay greater costs for meat and poultry for the reason that begin of the pandemic encourages optimism, nonetheless. USDA forecasts home per-capita pink meat and poultry consumption at a brand new file excessive of 225 kilos in 2022.
Per capita rooster consumption will possible set new data in coming years given rooster’s attraction to budget-minded customers. Whereas broiler chick hatchability has been a problem over the previous few years, weekly incubation charges have improved, and chick placements are up 5% year-over-year. Export markets stay favorable for broiler meat regardless of quite a few HPAI outbreaks, which business broiler services have largely prevented.
Beef markets remained usually robust all through Q3, with costs for reside cattle 13% greater than a yr in the past. Cattle slaughter numbers have surged in current weeks and are operating 4% above the five-year common. Thus far, robust beef demand has largely overcome swelling retail costs. That is spurring optimism as cattle provides erode, which is able to inevitably pressure beef costs greater.
Whereas the hog market is softening, costs have been remarkably robust in Q3 with money lean-hog costs topping $1.20/lb. in early August. Pork cutout costs spent a lot of the quarter above $120/cwt., a stage about $50 above the five-year common. China continues to sluggish its pork imports, resulting in a 16% discount in complete U.S. pork exports year-to-date. Nevertheless, Mexico and different locations have helped decide up a few of these losses.
The U.S. dairy cow herd continues to indicate solely incremental development, regardless of file excessive milk costs and optimistic margins. Excessive feed and labor prices, mixed with tight heifer availability, are limiting herd development. Class IV milk continues to carry a premium to Class III, elevated by rising butter costs which reached file highs final quarter. Butter provides remained extraordinarily tight, down 22% year-over-year. The USDA has raised its forecast for U.S. dairy exports to a file $9.5 billion in 2022.
The complete CoBank Quarterly might be accessed right here.
