March 14, 2023
Nelson Neale, head of CHS global research, explains how recent macroeconomic forces are affecting bottom lines across agriculture.
Commodity markets are always top of mind for ag producers as they anticipate marketing opportunities and work to mitigate risk. But as Nelson Neale, who heads up CHS global research, explains, macroeconomic forces can have just as much influence on a business’s bottom line and deserve attention.
Causes behind inflationary pressures
Inflation is hitting every industry hard, and agriculture is no exception. Following 12 years of reasonable prosperity, low unemployment, low interest rates and strong equities markets, many weren’t expecting the economic downturn the COVID pandemic delivered, Neale says. “We had the pandemic shock, which fueled more unemployment, supply chain constraints and a surge of stimulus dollars into the economy. Essentially, there were too many dollars chasing too few goods, which resulted in the inflationary pressures we are dealing with today.”
How macroeconomics affect ag
Over the past several years, ag retailers and producers have felt the impacts of these broader market conditions. “Inflationary pressures have hit the agriculture industry especially hard. First, the cost of borrowing money has increased. That may limit cash flow and growth opportunities for farms. On top of that, higher interest rates typically result in a stronger dollar, which negatively impacts the agricultural export market,” Neale says.
When big economic shocks like those occur, the shock waves generally spill over into commodities markets, says Neale. For example, as interest rates began to rise in the spring of 2022, the equities market began to take a risk-off position to prepare for a possible recession. Commodity markets felt the shift, and between the spring and summer of 2022, the price of corn dropped $2 per bushel. “It didn’t matter whether we planted the crop on time or what the weather conditions were. In essence, the marketplace fundamentals didn’t matter because the macro market was more influential,” he explains.
More volatility ahead
Neale expects volatile markets to continue. “I would anticipate an additional hangover coming from the macro markets. Farmers and ranchers need to pay attention to what is happening outside their specific commodity markets because larger economic forces can influence profitability potential.”
Note: This article is part of a six-part series on the trends shaping the future of agriculture. Read other parts of the series:
- The 5 latest trends in agriculture’s labor market
- Explore 3 technologies shaping agriculture’s future
Any information, materials and opinions (together, “CHS Materials”) presented by CHS is for general informational purposes only and does not constitute trading, legal or other professional advice and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances. Under no circumstances are CHS Materials intended to provide advice as to the value of, or the advisability of, trading commodity interest contracts or as an offer to sell, or the solicitation of an offer to purchase, any commodity interest contract. These materials have been prepared based on publicly available sources and information prepared by third parties that CHS is authorized to distribute. CHS believes that all such information obtained from sources is reliable but has made no independent verification. CHS makes no warranties, representations or undertakings, whether express or implied, about any materials (including, without limitation, as to the quality, accuracy, completeness or fitness for any particular purpose of any CHS Materials). The recipient agrees that CHS shall not be liable to recipient relating to or resulting from the use of any CHS Materials or any inaccuracies or errors therein or omissions.