Washington Insider-- Wednesday

Inflation and Markets

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

Coalition Calls on USDA to Launch Pilot Projects on Carbon Banks

Food and Agriculture Climate Alliance (FACA) is calling on USDA to launch pilot projects to explore creating a carbon bank, an idea not popular with Republicans on Capitol Hill.

The group released recommendations for how USDA should think about a potential carbon bank. But the report comes after several GOP lawmakers have made clear they prefer a private industry approach rather than getting USDA and the government involved in creating a carbon bank.

Initial reviews of the alliance recommendations were that they reflected a committee approach that lacked specifics. One of the FACA members is the American Farm Bureau Federation (AFBF), and its leader Zippy Duvall has indicated he was still not totally on board with the concept.

There also remains a question on whether or not USDA has the authority under the Commodity Credit Corporation (CCC) to create and/or operate a carbon bank.

Dairy Producers Press USTR Tai on Key Dairy Trade Issues

Eliminating non-tariff barriers to U.S. dairy exports and expanding market access for U.S. dairy products are among the issues that U.S. dairy producer representatives raised in a Monday meeting with U.S. Trade Representative Katherine Tai.

Representatives of the National Milk Producers Federation (NMPF), led by its President and CEO Jim Mulhern, emphasized to Tai a need for enforcement of existing trade agreements such as ensuring Canada meets its trade obligations; countering European Union attempts to misuse common food names through inappropriate geographical indication rules; engaging with Mexico to ensure a normal flow of trade; and concluding new market expanding trade agreements.

Washington Insider: Inflation and Markets

It's hard to read nearly any market-oriented publication and major media without seeing some reference to inflation. The prospect of rising prices for goods that consumers purchase remains a concern as commodity prices have risen and the government either has or wants to pump trillions of dollars into a U.S. economy that has been battered by the COVID pandemic.

The U.S. Federal Reserve, and Chairman Jerome Powell, have taken a stance that inflation will show, but it will be "transitory," a term to indicate that they do not see a sustained rise in inflation that could hamper the U.S. economy as the U.S. central bank would likely have to increase interest rates in order to quell price increases. One of their goals is price stability.

Enter Treasury Secretary Janet Yellen, herself a former Fed chair. In remarks to the Atlantic on Tuesday, Yellen suggested that the Fed may have to raise interest rates, spooking investors. "It may be that interest rates will have to rise somewhat to make sure that our economy doesn't overheat, even though the additional spending is relatively small relative to the size of the economy," she said in a prerecorded interview at the Atlantic's Future Economy Summit.

Stock indices fell moved lower in response to the comments as many in the marketplace have been betting the Fed will have to increase rates in a bid to quell inflation that many expect will be moving higher.

Later, in remarks to a Wall Street Journal CEO Council Summit, Yellen shifted her comments, with many outlets noting she "walked back" her earlier inflation comments. "I don't think there's going to be an inflationary problem, but if there is, the Fed can be counted on to address it," Yellen remarked.

This market dustup even with several Fed officials reiterating the view that the rise in inflation is going to be temporary in nature.

She also noted later in the day that the $4 trillion in spending now being advocated by President Joe Biden -- a $2.25 trillion infrastructure plan and another $1.8 trillion American Families Plan -- would not spur inflation as the spending would be spread out over eight to 10 years.

What is somewhat unusual in this situation is that Yellen commented on monetary policy in the first place. Typically, there has been an unwritten rule that an administration does not comment on monetary policy and that the Fed does not wade into fiscal policy which is the responsibility of Congress and the administration.

The situation arises as prices for corn, soybeans, wheat and other commodities have risen sharply. Indeed, Wheat prices jumped some 20% or more in April, corn prices gained more than 30% and soybean prices were up some 10%, based on futures market prices.

This coming while U.S. farmers are in the midst of planting this year's corn and soybean crops. The price increases have come as supplies of corn and soybeans in particular have fallen and demand from foreign buyers like China has been strong. And couple that with crop concerns in Brazil and the price rise has materialized.

U.S. farmers have been quickly planting this year's corn, soybean and spring wheat crops. But global markets are hopeful that the U.S. does not experience any major impacts to the seed that has only just gone into the ground.

The commodity price increases are among those that do raise inflationary concerns as they raise raw material costs. They also come after farmers have seen market prices battered by large supplies, trade wars and the Pandemic. But as history has shown, low prices cure low prices.

And that brings the inflation situation into a broader focus as the U.S. economy pulls up out of the depths of the pandemic.

So we shall see. Any potential rise in interest rates would increase costs for farmers as they seek to operate or buy farmland. It becomes a cost factor for farm incomes that have been supplemented during the low-price time by government support. It is a situation which farmers will need to monitor, adding yet another watchpoint for the sector as crops come out of the ground and move toward maturity, Washington Insider believes.

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