Inside the Market
A New Bearish Threat Emerges in 2023
As I write this in mid-March, the U.S. has experienced three bank failures in less than a week. Two of the closures, Silvergate and Signature banks, were the result of doing business with firms dealing in cryptocurrencies, a practice famed investor Charlie Munger would like to see banned.
The failure of Silicon Valley Bank (SVB) was different, however. It wasn't so much cryptocurrencies that got SVB in trouble as it was its large holdings of long-term U.S. Treasuries, securities normally viewed as safe if you can hold on to maturity. In this case, SVB underestimated the amount of cash needed for depositors and was put in a bind, having to sell long-term Treasury holdings at big discounts. Why the discounts? The Federal Reserve raised interest rates eight times during the past year, and every increase reduced the present value of the bonds. A classic mismatch of cash-flow and investments led to the second-largest U.S. bank failure in history.
In less than a week, all three bank failures were announced and were quickly followed by a sharp drop in the share price of Credit Suisse, a large bank considered essential to Europe's financial system. The Swiss National Bank quickly arranged a $54-billion loan to calm markets, but traders are clearly nervous about these new events.
In ag markets, we saw evidence of trader nervousness, as speculators lightened their largest positions. Prices of soybeans, soybean meal and live cattle all suffered in the Ides of March, and there may be more to come. Wheat prices rallied, as noncommercials were previously short and had to buy back positions to lessen their risk.
For DTN's Ag Summit Series on Feb. 28, I displayed a simple stress test of S&P 500 companies most at risk of losing money if the federal funds rate went to 6%, and the economy slowed returns on assets by 2%. At the time, problems weren't yet known, but Silicon Valley Bank was No. 32 on the list, and Signature Bank was No. 30, both on the riskiest end of the spectrum.
While at least 80% of S&P 500 companies appear to be in good shape at this time, it is troubling that many of the top 50 companies most at risk in this economic environment are banks and other financial firms -- companies that have long had a reputation of earning low returns on large amounts of borrowed money.
As best I can tell, the current situation is not as serious as what we went through in 2008, but the caution flag is clearly out. For ag markets, the concern is that more cash-flow problems will surface in the financial sector this year as the Fed continues to raise interest rates in its effort to bring down inflation.
If good weather leads to larger corn and soybean crops this fall as DTN meteorologists currently expect, prices will have more than one source of bearish pressure to be concerned about. It all adds up to what looks like a challenging new year for row-crop prices.
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