Thoughts to begin the week:
Following resolution of the debt ceiling debate, I keep thinking about the famous quote by Ben Franklin: “the U.S. will be a democracy as long as we can keep it.” Let’s keep keeping it please! In that same spirit and upon reflecting on the recent Kansas City Federal Reserve Ag Symposium (May 23rd to 24th), we conclude that “the U.S. will be a major agriculture producer as long as we can keep our edge.”
Here are our 5 takeaways from that event:
- U.S. agriculture maintains a strong position in agricultural production but in some ways, we are losing our leadership position (for example, corn and soybean production/exports.)
- Extreme weather and volatility will likely remain high for the foreseeable future. As one grower mentioned during one of the panel discussions, “derecho is now part of our vocabulary.”
- AI (artificial intelligence) could drive additional commodity price volatility. We believe the introduction of AI into the open commodity markets could prove to add additional volatility in an environment of even more advanced algorithmic / electronic trading.
- The “Song Remains the Same” regarding the need for climate smart agriculture and EDF’s pitch on what financial institutions should do to promote better practices. The problem is that there is still too much “preaching” rather than actual, tangible programs to drive systematic change. Carbon monetization is a notable example.
- U.S. agriculture has an incredibly large opportunity to lead the global energy transition and agriculture innovation 5.0.
The watchlist
- U.S. Debt Ceiling President Biden on Saturday afternoon signed into law bipartisan legislation that suspends the $31.4 trillion debt ceiling, narrowly avoiding an unprecedented U.S. default.
- Inflation / Interest Rates Market expectations for a +25 bp rate hike at the June 13-14 FOMC meeting rose slightly to 28% Friday from 24% Thursday.
- Where are Oil Prices Heading? Prices have slid since the Organization of the Petroleum Exporting Countries and its allies (OPEC+) jolted markets in October by cutting production by 2 million barrels a day. Interestingly, Moscow’s February announced to cut a half-million barrels and a voluntary April move by eight OPEC+ members to cut an additional 1.2 million barrels have NOT stemmed the slide.
- Economic Malaise in China and Europe China’s post-COVID boom appears to be losing momentum and as we mentioned previously, youth unemployment in China is at a staggering 20%. Germany just reported that its economic activity contracted by 0.3% during 1Q 2023, after shrinking 0.5% the previous quarter.
Numbers of interest
339,000 The US economy unexpectedly added 339K jobs in May 2023, the most in four months, and way above market forecasts of 190K.
3.7% However, U.S. unemployment rate rose to 3.7% (May) from 3.4% prior with the number of unemployed persons rising by 440k 6.1 million and employment levels dropping by 310K to 161 million.
9% The change in front month CME lean hog futures from May 25 – June 1. Hog values finished May down 30% year/year.
6.1% India economy grew by 6.1% in fiscal 4Q 2022 and 7.2% for all of 2022. In April, India’s central bank increased its growth forecast for 2023 to 6.5% from 6.4%.
2.4% The quit rate (% of employees who leave companies of their own accord as opposed to fired or laid off) is 2.4% compared to 3.0% last year and 2.3% prior to the COVID pandemic.
Jobs Data
Non-farm payrolls increased 339,000 in May, easily beating the consensus expected 195,000 jobs.
However, civilian employment, a measure of job growth that includes small business start-ups, declined by 310,000 in May. Not only have the two measures diverged, but the gap is at its widest since the COVID pandemic.
What does this mean? Its difficult to tell, but one plausible explanation is large corporate employers are expanding hiring, and small businesses are cutting back.
The outlook for large employers is concerning as well: the ISM manufacturing index was in contraction territory for the 7th consecutive month, inventories were up, and new orders were down. Hours worked (non-farm payroll report) were down 0.1% The logical takeaway: there were more workers, working less. And for pay that has not kept up with inflation.
As one observer mentioned, it is as if large employers are “hoarding workers” – the question is how long that can be sustained?
The top sectors for job creation in May were:
• Health care and Social Assistance (75K)
• Professional and Business Services (64K)
• Government (56K)
• Leisure & Hospitality (25K)
