InFocus: Weekly Economic Outlook and the Food Supply

Starting at the top of this week’s headlines and concerns, Larry Fink, CEO of Blackrock ($10T AUM) warned that the Federal Reserve lacks the tools to stem supply shocks and risks higher inflation in the short term. Right now, I do think we’ll see peak inflation in Q2 or Q3, as we’ve already seen commodities prices recede from recent highs. Meanwhile, former Treasury Secretary Larry Summers continues to say this is reminiscent of the late 60s and 70s “Great Inflation” period. Here’s what Summers had to say this week: 

• “I’m probably as apprehensive about the prospects for a soft landing of the U.S. economy as I have been any time in the last year. Probably actually a bit more apprehensive. In a way, the situation continues to resemble the 1970s, Ezra. In the late ‘60s and in the early ‘70s, we made mistakes of excessive demand expansion that created an inflationary environment.”
• “And so now I think we’ve got a real problem of high underlying inflation that I don’t think will come down to anything like acceptable levels of its own accord. And so very difficult dilemmas as to whether to accept economic restraint or to live with high and quite possibly accelerating inflation. So I don’t envy the tasks that the Fed has before it.”  

Former New York Fed Bank President Bill Dudley said this week that recession is inevitable, and that’s what the yield curves are showing right now. The 2/10-year yield curve shrunk from 0.2 last week to just 0.049 this week, while the 5/30-year shrunk to 0.037. A sustained inversion of either yield curve is a reliable indicator of recession within the next 12-18 months, as shown in the two charts on the right.

Also this week, Philadelphia Reserve Bank President Patrick Harker said that the Fed “collectively underestimated” the impact that federal spending and stimulus payments would have on inflation. It’s another sign that the Fed has been behind the curve on inflation and is now struggling to catch up. Looking at a note on real estate: another Fed Bank President, Kansas City’s Esther George, said in a speech this week that the future of commercial real estate is in question as many workers still aren’t returning to their offices. We’ll take a look at the commercial real estate bubble next week.

In two weeks, we’ll start to see first quarter corporate earnings, and Goldman Sachs is warning that a “significant number” will show weak earnings due to inflation and the supply crunch. Speaking of supply, I continue to see numerous reports that American farmers are shifting away from fertilizer-intensive crops such as wheat and corn and instead planting soybeans and other crops requiring less fertilizer. That’s going to depress wheat and corn yields and also drive up prices.

Looking at some global developments, the World Bank is warning of a wave of sovereign debt defaults over the next 12 months as governments struggle to make debt payments amid rising rates. These defaults will be prominent among emerging and developing economies, which make up 40% of global gross domestic product (GDP). I’m also starting to see some early signs of rationing, as Spain, Germany, and Austria have started to adopt purchase limits to prevent shortages. A statement from the G7 – the seven largest advanced economies in the world – advised countries against protectionist policies in order to keep global trade open. Lastly, the People’s Bank of China this week pledged to stabilize markets and the food supply, especially in hard hit rural areas. All indications are that food shortages compared to previous years will be a global phenomenon through next year.

Turning now to US production, fertilizer costs continue a parabolic spike (top right). The S&P Fertilizer and Agricultural Chemical price index is up 200% from March 2020 lows. Meanwhile, wheat (bottom left) and corn (bottom right) futures have doubled from 2020 lows. Input costs like fertilizer and fuel are not the only reason to expect high food prices to persist. Last year’s US spring wheat production fell by 44% due to drought conditions in the Midwest and Plains region. Continued extreme weather, such as drought and heavy rains, will continue to negatively impact crop production.

Higher grain prices will also be felt in meat production costs and consumer prices. Meat prices remain high due to input costs, processing availability, and falling inventories. One notable development: market hog inventory is down 2.4%, while the hog breeding herd is down 1.9% from this time last year. Right now, hog farmers don’t plan on expanding their herds due to high input costs. Additionally, the Mexican hog herd is being decimated by disease, leading to increased Mexican imports of US hogs. All of this is adding up to further contraction in herd size, pork availability, and higher prices.

Food Shortages: The same disruptions to product availability, which includes lesser product selection and lesser supply of what’s available, that we’ve experienced since mid-2020 are likely to worsen this year. There’s a good chance that we see protectionist policies on food exports for many countries, despite the pleading of the G7 and United Nations, which will hammer countries that heavily depend on food imports. I am somewhat optimistic that countries like India, one of the world’s top grain exporters, are offering to increase exports. Additionally, Ukraine has about half a year’s production of wheat in storage and may also increase exports to alleviate shortages. There will, however, still be food shortages. 

Last year, we saw disruptive weather that further eroded global yields. South American drought plagued production and transportation last year. We pointed out that Brazil and other high production interior regions of South America (such as Argentina) had persistent problems using rivers for shipping because the grain barges were too heavy for drought-stricken river systems. This is still happening, and it’s going to reduce yields and disrupt transportation again this year. Additionally, heavy rains typical in these areas aren’t suitable for some crops. 

I expect US food exports to become a political issue. It may become a factor going into the November midterms. The more food the US exports, the higher food costs will be here. The US grows enough to feed Americans and studies say that 30% of food is wasted. Despite sensationalist predictions, starvation is unlikely to be an issue for the United States, however, it’s likely to be an issue for third world countries. One impact of drought (in Central America, especially) and lower food supply is that we will likely see another year of massive migration to the United States, especially because we’re so food-rich. Last week, I started warning that the Biden administration would be ending Title 42, which allows Border Patrol to quickly expel migrants due to public health concerns, namely COVID. The policy was up for official review yesterday, and Biden is now reportedly looking at the end of May to repeal Title 42. The DHS Office of Intelligence and Analysis warned that we could see up to a million migrants crossing the border within weeks of Title 42 repeal, once migrants learn that they won’t be quickly expelled. For now, I’d just add that food shortages could end up driving unprecedented numbers of migrants to the United States this year while allowing this situation becomes a deliberate political policy.

A final note here on beef: cattle on feed, which measures the number of cattle on feedlots waiting to be slaughtered, hit an all-time high. I read recently that March 2022 numbers are 106% compared to this time last year. This is good for the overall beef supply, however it’s also leading to lower prices for ranchers trying to sell. We held off on selling 20 steers and heifers earlier this month due to low prices. Ranchers who don’t sell incur added costs to expand their herds. This is a great opportunity – and now is a great time – for readers to find area ranchers who are also in our situation and negotiate the sale of beef. Call around and find an area meat processor (these are usually smaller, local processors) who can accept the work. There’s typically a wait time of weeks and sometimes months, although you may get lucky. (Given these wait times, meat processing is an expensive but probably lucrative business idea.) Once you confirm the processor has the available space, ask the rancher if he can drop off the cow for slaughter and processing. He may be willing, or the meat processor may be able to pick up for an added cost (usually expensive but may be cheaper in the long run). Depending on what you want (I keep the heads and make barbacoa from the cheek meat, and some people eat the tongue and brains), you should expect 400-500lbs of beef. We butcher a whole cow each year and it takes up about 18 cubic feet of freezer space. For us, that’s two 9 cubic-feet chest freezers, which have also been in short supply. Beef prices aren’t coming down, and if we have another wave of COVID (like China and Europe are experiencing right now), then we may also experience more disruption in processing and the food supply. – M.S.