It is August and with many colleagues on vacation, we decided to alter this week’s format a bit. A typical issue identifies key market highlights, issues to watch, commodity indices, financial market benchmarks and a timely synopsis analysis about key issues at the crossroads of agriculture and financial markets.
This week, we took some additional time responding to some deeper reader questions about the economy, such as: “over the last several weeks the economic data has looked good and seems to be trending in the right direction, so, are we out of the woods?”
The answer to that question requires the “Hole” truth. The “hole” we are talking about is Jackson Hole, the location of the Federal Reserve’s annual confab taking place there this week. Last year, Chairman Powell famously rattled the market with his hawkish speech. Now, 12 months later, what should we expect?
Economic Data: The Devil is in the Details
The U.S. economy in was hot in July –literally. Total industrial production increased 1.0% following declines for the two prior months. The biggest mover among the sectors was utilities, which rose 5.4%. As the Federal Reserve commented, “very high temperatures in July raised demand” for air conditioning.
As always, with positive top line numbers –from manufacturing, to GDP, to employment -the devil is in the details. Especially during this unprecedented period of history.
COVID related policies –shut downs and stimulus spending –simultaneously increased demand (through stimulus spending) and reduced output (through shutdowns and related supply chain interruptions). Likewise, there has never been such a raid pace of tightening of monetary policy as in the past year.
Recovering from COVID’s effects has created a game of short-term fiscal and monetary policy “whack-a-mole” to address unmatched market disruption. Conventional top-line metrics don’t tell the whole complex and nuanced economic story.
So, rather than dwell on negatives but instead provide context that you are unlikely to see described in business news broadcasts or publications, we summarize several of the key snippets from the minutes of the Fed’s July meeting on the following page.
July FOMC Snippets:
- The trade deficit narrowed, but that was NOT a positive for the economy. According to the Fed, net exports “subtracted from U.S. GDP growth in the second quarter.” Global economic demand is softening: “Indicators of economic activity, such as purchasing managers indexes (PMIs), pointed to a step-down in the pace of foreign growth in the second quarter” … including “fading of the impetus from China’s reopening, anemic growth in Europe, some weakening of activity in Canada and Mexico, as well as … “the slump in the high-tech industry weighing on many Asian economies.”
- The July Senior Loan Officer Opinion Survey on Bank Lending Practices, showed banks reporting they have tightened lending terms over continued “concerns about the economic outlook.” FOMC policy makers sees this as likely weighing on economic activity in coming quarters” that could lead to “a period of below-trend growth in real GDP and some softening in labor market conditions ….”
- The Fed’s target for “core” inflation –excluding energy and food –is 2%. Their model now indicates that core inflation will be 2.3%. by 2025. The Open Market Desk’s Survey of Primary Dealers and Market Participants in July “continued to place significant probability of a recession occurring by the end of 2024.”
Upcoming Events & Catalysts
Monday 8/21/2023
- Pro Farmer Crop Tour Begins; USDA U.S. Crop Progress
- Consumer Credit
Tuesday 8/22/2023
- Philadelphia Fed Non-Manufacturing Survey
- NAR Existing Home Sales
- Richmond Fed Survey Of Manufacturing Activity
Wednesday 8/23/2023
- New Residential Sales
- USDA Rice Stocks, Cold Storage reports
Thursday 8/24/2203
- Advance Durable Goods
- Chicago Fed National Activity Index
- Initial Claims
- Weekly Economic Index
- The Jackson Hole Economic Policy Symposium 2023
Friday 8/25/2023
- Michigan Consumer Survey (Final)
- USDA Food Price Outlook
Cattle on Feed Report Summary
The August cattle on feed report showed inventories on feedlots of 1,000 head or more capacity at 11 million and in line with pre-report expectations. The total was down 2% from last year. Marketing of fed cattle for slaughter were 5% below last year’s record beef production, in line with expectations.
However, placements provided another surprise, this time to the downside. Compared to last year, placement of cattle into feed yards was down 8% vs. consensus expectation of -5%.
In March and May, placements were above year ago levels, and in March through June, placements were all above the pre-report consensus analysts’ expectations.
That rapid pace of placements despite starting the year with the fewest feeder cattle outside of feed yards since 2014, now has a bow wave effect going into the second half of the year.
Things will get even tighter when heifer retention for herd rebuilding starts in earnest –early signs are emerging. The market will be tight into 2025, … if consumer demand for beef at high prices can hold up.
Spot Commodity Performance
For energy commodities (highlighted in blue) Gasoline and Crude Oil have risen in price over the past three months, while Natural Gas has continued to trend down (off 43% YTD)
For feed grains and oilseeds (highlighted in orange), the complex has continued to be weak over the past month. YTD, corn is down 20%, soybean is down 6.8%, Wheat is down 16% (HRW) to 24% (Spring Wheat).
For the protein complex (highlighted in green), three of the four commodities have risen by 20% to 28% over the past 3 months and 21% to 34% YTD.
