High inflation continues to squeeze the U.S. economy, including the ag sector. Mike Zuzolo, president of Global Commodity Analytics, says it’s hard to narrow down just how much pressure inflation is putting on the commodity markets.
“That’s a really tough question because the last time we spoke about inflation, it’s been a supply and weather-led inflation, not demand-related. It is still that way, in my opinion, I think the data points confirm that. To give you an example, we’re seeing mortgage applications in the latest week at their lowest and 22 years. They’re down six and a half percent in the latest week, four straight weeks lower. How does that translate into the commodities? Well, lumber prices at the futures market at the Mercantile Exchange are now down about 50 percent. They’re their lowest since last September.”
When it comes to the agriculture and energy markets, Zuzolo says the impact isn’t as clear-cut.
“We had the Organization of Economic countries come out and cut their world growth to three percent. That was one and a half percent less than their December forecast, almost all because of the Ukraine-Russia inflation narrative. So, I guess to answer your question is we could be doing a lot more, in my opinion, to help secure more supply in energy and therefore lower the inflationary pressures in energy, but the levers we have right now when it comes to the energy side of the equation are almost all government policy and not a lot of market mechanism, and I would say the same thing for the agriculture sector.”
The government does have options in agricultural policy to help lower the impact of inflation, but he says they haven’t taken many of those steps yet. “There’s a lot of policy things that you could do. It would probably be something that farmers and ranchers would not necessarily want, but the government by and large is laying off policy things to try and tamp down inflation, other than the Federal Reserve. And so, my take is, is that we’re not through the worst yet in the energy side of the equation for inflation. And if Mother Nature doesn’t cooperate with us any better than it already has in the northern hemisphere so far to date, we’re not through the worst when it comes to the ag food price inflation.”
He says there are a lot of factors in play that could make things rough for the American economy. “Quite honestly, at this point, a little bit scared and nervous that between the high energy prices, housing prices going down sharply, and then the equity markets going down sharply, and then you tack on top of that the fuel prices, and then you tack on top of that the higher interest rates we’ve already got in the real market, I don’t know how you can get away without a hard landing at this point and a deep recession, and whether it’s a deep recession only lasts three months or whether it ends up being a multi-year, almost depressionary-type scenario like we had back during the World War One, World War Two time period.”
With so many unknowns, producers need to be vigilant when it comes to risk management in their marketing plans.
“How do you bring that back to the agriculture sector? Well, it’s pretty clear to me between the supply side being so unknown, and now I’m saying the demand side is so unknown that if you’re gonna lock in hedges, which I think you should during this time period, you got to do it, in my opinion, on paper for the vast majority what you do. In other words, bought puts using futures and options, and I prefer options at this point, and just get a floor underneath you.”
