Todd's Take
What Does the Failure of Silicon Valley Bank Mean to Ag Markets?
On Friday, March 10, the Silicon Valley Bank with 17 branches in California and Massachusetts became the first bank failure since the Federal Reserve started its campaign to bring down inflation. According to several media sources, this appears to be a classic cash flow problem after Silicon Valley Bank (SVB) invested much of their deposits in government bonds that lost value as interest rates went up.
To date, the Fed's campaign has taken the federal funds rate from near zero to an upper limit of 4.75% in less than a year and more hikes are expected ahead. SEC documents show SVB controlled $217 billion of total assets at the end of 2022. If we take Warren Buffet's advice and ignore the dubious entry of goodwill, SVB assets were a little less. It is fair to say, the $376.4 million of so-called goodwill at SVB is gone.
FDIC records show this is the second largest U.S. bank failure in history, behind Washington Mutual's failure of $307 billion of assets in September 2008, a time remembered for widespread international collapse of the financial system. Several bank stocks finished lower Friday after the news spread, and it is understandable that traders are jittery about what might happen to the economy.
On Sunday, March 12, state authorities in New York announced Signature Bank was also closed to protect depositors, a bank that failed for a different reason. Signature Bank is known for its association with companies that deal in cryptocurrencies and has suffered as the shine of initial popularity has dulled. On Jan. 3, 2023, the Federal Reserve's Board of Governors, the FDIC and the Office of the Comptroller of the Currency issued a joint statement, acknowledging "key risks for banking organizations associated with crypto-assets and the crypto-asset sector."
DTN has written about the cryptic nature of crypto-assets before, most notably a Jan. 26, 2022, column by Elaine Kub (see https://www.dtnpf.com/…). So far, the federal government has not banned crypto-assets as famed investor, Charlie Munger, has urged. Nor has there been any decision yet to ban banks from having exposure to the sector. In January, the three federal agencies agreed to "monitor crypto-asset-related exposures of banking organizations" and offer future guidance. The failure of Signature Bank may spur protective action.
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In an effort to prevent further bank runs, the Treasury Department, Board of Governors at the Federal Reserve and FDIC issued a joint statement at www.federalreserve.gov late Sunday, March 12, explaining their actions and saying depositors at both banks will have access to their money Monday, March 13. The statement also said senior management has been removed and shareholders will not be protected. These are not the kind of bailouts widely criticized in 2008.
It is difficult to predict how traders will react, but corn, soybeans and cattle have large net-long positions held by specs and look vulnerable to increased anxiety over the bank failures and the possibility there may be more ahead. Corn prices look the most vulnerable as specs long corn were already stressed by May prices that have fallen 60 cents in the past three weeks.
Readers of this space may recall that, on Feb. 10, I talked about how the economy was doing after eight rate hikes and offered a simple stress test as a way of gauging how the economy might do if things got a little worse (https://www.dtnpf.com/…). When I updated the test for DTN's Ag Summit on Feb. 28, Silicon Valley Bank was No. 32 on the list of S&P 500 companies most at risk and Signature Bank was No. 30.
As I mentioned in the Feb. 10 column, many of the S&P 500 companies at risk of losing money in a modest scenario of higher interest rates and lower returns are banks and financial firms -- companies notorious for carrying high debt loads and earning low returns on assets. Many experts quoted in the media have said this situation is not as risky as 2008 and I agree, but no one can rule out the possibility of more upsetting headlines on the way.
For ag markets, the world won't stop spinning and people won't stop eating. The more practical concern is that, like the summer of 2022, this is the kind of scare that causes traders to shed their long positions in the ag market. We know from past experience that traders can be easily spooked by negative headlines and there have been several just this weekend.
At a time when inflation remains high, oil production is limited and the Fed is intent on raising interest rates, now knowing financial firms are vulnerable, U.S. ag markets in 2023 are encountering more landmines than a Ukrainian wheat field.
To read about SVB's stake in ag tech startups see this by DTN Political Correspondent Jerry Hagstrom and DTN Policy Editor Chris Clayton:
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Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.
Todd Hultman can be reached at todd.hultman@dtn.com
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