The World Bank is projecting the global economy will expand just 2.4% this year, down from 2.6% in 2023. The slowdown is due in part to higher interest rates in an effort to curb inflation. Leading ag economists at the Water Street Solutions Edge Conference in Tucson, Arizona say this will impact agriculture in 2024.
They expect inflation to return in 2024 and that will not only have an impact on the interest rate environment, but it could bring the fund or speculative community back in to buy commodities. And that would be positive for the grain markets.
Inflation cooled in 2023 to a low of 3.1% for November, following hikes by the Fed that put interest rates at a 22-year high of 5.25 to 5.5%. However, the December Consumer Price Index showed inflation rose to 3.4%.
Arlan Suderman, Chief Commodities Economist, StoneX, says there are other economic signs inflation is returning. “With the economy kind of getting its footing underneath it again, that’s just going to encourage more buying of goods and services, which tends to inflate wages again as well and the other shelter.”
So, despite the markets pricing in lower interest rates, he doesn’t expect the Fed to make that move, at least in early 2024.
Suderman says, “I believe that means higher for longer from the Federal Reserve, but I believe the Federal Reserve starts to lose its influence on interest rates this year, particularly the longer end of the yield curve, as we see what’s projected to be a 23% increase in debt certificates that are offered onto the Treasury market because of government spending.”
That means the Fed won’t be able to raise interest rates to effectively curb inflation. Plus, Dr. David Kohl, Professor Emeritus, Ag and Applied Economics, Virginia Tech says the Fed doesn’t want a repeat of the 1980s, so he thinks the market is getting ahead of itself. “They don’t realize that the Fed was late to tackle inflation and they don’t want to, you know, do a strategy to bring it back. And so they’re going to, the Federal Reserve’s going to be very, very cautious.”
This setup could cause the funds to buy commodities as a hedge against inflation, after being in a deflation mode for the last 21 months and short in many markets like corn and wheat according to Darren Frye, CEO, Water Street Solutions: “Well they have a tendency once they come out of something they go the other way. I think we could have a catalyst to get them flat. And then we’d see if there’s something optimistic enough to get them long. 7:09 But we might find out that we have another surge in inflation and that would be bullish to commodities if that happened.”
Suderman adds, “We’ve seen a strong correlation in price action of money coming into the commodities which tends to affect prices in years when the main management is worried about rising inflation.”
And that fund buying could support grain prices later in the year, which would be welcome news for farmers like Danny Leifker, who farms in Southwest Wisconsin and Northwest Illinois. “We’ve been in a bear market here for about a year and a half and so we need some sort of spark to get the grain markets to move higher and hopefully that inflation part of it can do that.”
Suderman says, “That doesn’t necessarily mean we get a big rally in prices. But it does make it easier for the market to respond to any type of a friendly story that comes along.”
Kohl says the headwind for those grain rallies may be global demand. China’s growth rate was 5.2% in 2023, which cut U.S. exports by 40%. The World Bank projects China’s growth at 4.5% this year, the slowest in 30 years. “One in five dollars of net farm income comes from export markets and as we look at this global economy, we’re in a global economic slowdown. Number one China because of its demographic issues and also because of the exports being down to China not only around the world but to the United States and Europe, along with the European economy kind of being in recessional times.”
At the same time South America’s agricultural production is expanding. So, Kohl says the U.S. is becoming a secondary provider. Those export customers are also going away from the U.S. dollar and creating their own currency. “In other words, Asia and China, they’re going to go to the Southern Hemisphere whether its Brazil or New Zealand, Australia, etc. they’ll go there first. Now if they can’t supply them then they’ll come to the United States.”
As a result, he says farmers will see tighter margins and need to globalize and future proof their operations. Kohl says, “You keep your business very financially liquid with working capital, keep your cash, keep your options open.”
Farmers attending the conference say they are taking all this advice to heart and integrating into their marketing and financial plans for 2024. Leifker says, “The last couple of years from a profitability standpoint it’s been relatively easy just because whatever price the grain was at was a profit but this year it’s going to be a situation where you know if you see profit you better grab it.”
