Todd's Take

In December 2021, I tried to explain how rising prices in the aftermath of the initial COVID-19 shock were different than the inflation some of us remember from the 1970s and 1980s. (See "Why This is Not Your Father's Inflation," https://www.dtnpf.com/…)

As I saw it then, and still do, the rising prices at the time were the result of specific disruptions in production that needed to be addressed. Bankruptcies in the oil patch sharply diminished oil and gas production in the U.S. A devastating contraction of the workforce in 2020 hit many parts of the economy and exacerbated port congestion. These were serious problems with no easy solutions and the rising prices were heavily weighted in the energy sector.

In a second piece about inflation in October 2022, I tried to further explain, "the Fed can raise interest rates and can help slow the economy, but it cannot produce fuel, make crops grow in drought or make Russian President Vladimir Putin go home and put his weapons away." (See "Problems With the Volcker Cure in 2022," https://www.dtnpf.com/…) I was concerned that "without a coordinated effort to increase production of the essential goods that are in short supply, the high interest rates can increase economic pain, but little else."

The good news is that today, the U.S. is producing 13.3 million barrels per day of domestic oil, a little more than the pre-COVID-19 peak, transportation is flowing much better, fertilizer prices have fallen by roughly half from their peaks of 2022 and the 25.6 million jobs lost during the pandemic were restored by the end of 2022. On Friday, the U.S. Labor Department reported 161.3 million people were working in the U.S. in July, up from the pre-COVID-19 peak of 158.8 million.

Spot crude oil prices trading near $75 a barrel is still a potential concern as fighting in the Middle East looks dangerously close to escalating into a larger conflict, but that is another situation not under the Fed's control.

The bad news is that the federal funds rate has not changed in more than a year and remains in the 5.25% to 5.50% range. From a high altitude, the U.S. economy looks fine after the Commerce Department reported second-quarter GDP up 3.1% from a year ago. However, that's the rub I have with Fed policy and macroeconomics, in general. The "economy" is not one homogenous blob.

Just as people are not all same, companies and businesses are also not all the same. As I've described before, there is a better way of looking at the economy. I categorize S&P 500 companies by their ability to make money and the level of debt they carry. Some companies generate high returns of capital and have little need for debt. Fed policy doesn't typically affect their bottom line much at all. Other companies struggle to make a consistent profit and, if they have much debt, they are the first to suffer from either higher interest rates and/or a slowdown in the economy. Guess which category most young farmers fall into?

According to the National Farmers Union, farmers earned $5.32 of the $41.83 it cost consumers to have a Fourth of July cookout this year. Agriculture is not the source of inflation. Unfortunately, the Fed is unable to distinguish between different sectors of the economy and misdiagnosed this problem from the start. Like the man with a hammer that sees every problem as a nail, the Fed sees the world through the lens of monetary theory and can't help but punish the entire class.

In the big picture, I'm not so concerned if a company that sells tennis shoes goes under, but when the businesses that fail are the hard-working folks that grow the crops we all depend on, it deserves our attention. If you own high-yielding farmland in the clear and rent out your ground, you'll be back next year. If you're young and farm someone else's ground, trying to pay off expensive equipment and an operating note, $3.75 corn and $10.00 soybeans aren't going to cut it.

There is one other bearish aspect to Fed policy that I haven't talked about enough and that is my fault. I want to thank Mitch Miller, a fellow analyst from near Winnipeg in Canada, for reminding me how the current Fed policy also contributes to fund-selling in commodities. In short, when the Fed started its campaign of raising rates in early 2022, they gave fund managers a green light to sell commodities, knowing their positions would be backed by a national, well-publicized effort to bring down all prices, including the ones that weren't contributing to inflation.

As of July 23, futures funds were net short 579,989 contracts of corn, soybeans and Chicago wheat, the largest combined net-short position for funds on record. DTN's national indices currently show cash corn prices more than a dollar a bushel below USDA's estimated cost of production and soybean prices near $2 a bushel below their cost estimate. From a fundamental view, the market has become extremely unbalanced, unsustainable in the long run.

After seeing the country's initial panicked response to a global pandemic, the primary reasons we're experiencing lower inflation today is because the U.S. is producing more oil and gas and people have gone back to work, alleviating many of the logistical problems that plagued us after the pandemic. The campaign to raise interest rates started with a misdiagnosis of the causes of inflation and has gone too far. It is exaggerating bearish speculation in the commodity markets and hurting the American farmer.

On Aug. 1, the yield on 10-year T-Notes dropped to 3.98%, the lowest in six months. The Fed is expected to follow with a small rate cut in September. For the sake of the people that have big expenses doing the work of growing crops that benefit all of us, those rates can't come down fast enough.

**

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

Follow him on social platform X @ToddHultman1

(c) Copyright 2024 DTN, LLC. All rights reserved.