Global economies, consumer trends and price volatility have ongoing impacts on the agriculture and energy sectors. Nelson Neale, vice president of CHS Hedging and global research, spoke at the CHS Annual Meeting on December 7 about what trends on the horizon might mean for CHS owners.
We chatted with him just before the meeting about inflation, volatility and other timely topics.
How do today’s interest rates compare to historical trends, and what does that mean for agriculture?
In this most recent bout of inflation, we topped out at about 9% in the United States. We haven't seen that type of inflationary pressure since the late 70s or early 80s. That has a significant impact on farmers. If you look at the operating costs for seed and fertilizer and other supplies, they've gone up along with inflation. Prices have begun to moderate as we come into the end of 2023, but it's still something that farmers are going to have to deal with.
What’s the connection between inflation and interest rates, and how does that affect agriculture?
Today’s higher interest rates have significant impacts on agriculture. Number one, they create additional volatility in commodity prices for corn, soybeans and wheat. Number two, higher rates increase debt servicing impacts for farmers. Number three, land values ultimately underpin a lot of loans in the agriculture space, and there's typically an inverse relationship between interest rates and some of the prices of those real assets, whether it's housing or land. We've seen a lot of the quarter-over-quarter increases in agricultural land values begin to decline from their highs roughly a year to a year and a half ago.
What’s the economic outlook right now?
There’s been lots of conversation about recession in the broader public and in the news. In the past, when the Federal Reserve increased interest rates to try to cool the economy, the economy did indeed cool and unemployment went up. But if you were to ask me today, “What is the impact of these increased rates up to 5.5%? What impact have they had on the broader economy?” my answer would be, “Nothing.”
So far, we still have unemployment at nearly record lows, with plenty of job openings. And if you look at the GDP growth in the United States third quarter of this year versus last year, it was 4.9% growth, which I don't think anybody expected. So the Fed still has its work cut out for it, but I think we’re leaning toward a soft landing versus a very strong recession in this country.
What should we be watching for in China?
If you look at China over the last 20 to 30 years, they have been the global sink or global demand destination for a whole host of commodities. The country is a huge importer of soybeans and corn from a variety of countries. I think what's interesting is not so much what's happening with commodities in China, but what's happening with their population. It’s anticipated that the percent of the population that is 15 years and younger will be outpaced by the percent of the population that is 65 years and older. That has ramifications for the productivity of the country and for commodity consumption. So that's probably the key thing to watch out for, not necessarily in the next two to three years, but on a longer time scale.
