Market Outlook

Summer Market Outlook:

Rain Ready

By Matthew Naeyaert, GreenStone Capital Markets Senior Credit Analyst, and Nick Jablonski, GreenStone Capital Markets Credit Manager

All eyes are on the weather report at the moment, as drought conditions persist across much of the country. These weather concerns, combined with continued strong export demand, have helped to extend the grain market bull run that began in late 2020.

Michigan has been particularly impacted by drought conditions, with 99% of corn and soybean acres located in either severe or extreme drought in

June according to the U.S. Drought Monitor. Wisconsin has enjoyed more favorable conditions; however, drought is still a concern with 45% of corn acres and 44% of soybean acres in severe or extreme drought throughout the state. It is still early in the growing season, but improvement in weather conditions, particularly more rainfall, will be critical for yields this fall.

According to the USDA’s most recent data, corn crop conditions are on a downward trend with a smaller proportion of the crop in good to excellent condition as compared to both the previous week and the previous year. Despite this recent deterioration, nationally roughly 70% of the corn and soybean crops are still in the good to excellent category. While the current run-up in grain prices has been a welcome occurrence for row crop operations, those producers in the animal protein sector are beginning to feel acute pressure as rising sales prices for their products cannot keep up with the spike in feed costs, thereby compressing margins. Prudent risk management strategies have proven once again to be vital for animal protein operations, as those producers that have been able to limit their rise in feed costs via hedging strategies, cost-plus contract arrangements, and/or ample storage capacity have outperformed. Grain aside, supply disruptions and increased lead times have caused prices to rise throughout the economy, with both consumer and producer prices seeing significant upward momentum over the last several months. To put the current price inflation picture in context, the 0.6% month-over-month increase in the Consumer Price Index (CPI) seen in May suggests that prices are currently rising at a rate of ~7.2% annually. That being said, prices have only been rising at that pace since March, meaning that the current upward price pressures would have to remain for some time if we are to realize inflation at or near the 7% figure for a full year. It is also worth noting that a large percentage of the consumer price increases seen thus far have materialized in just a few product categories as opposed to broad price gains across the economy. For example, a full one-third of the 0.6% CPI increase reported in May was related to price increases for used vehicles, which have been in high demand due to the global semiconductor chip shortage that has limited new car production. Prices for used vehicles spiked 7.3% in May alone. The cost of commercial airline travel has also been one of the segments driving price increases, which is unsurprising given the rebound in travel seen over the last number of months.

Percent Change, May 2021 from May 2020

All Items Food Away From Home New Vehicles Used Cars and Trucks Rent of Primary Residence Owners Equivalent Rent Airline Fares

0 5 10 15 20 25 30 In light of the fact that price increases have largely materialized in certain understandable segments of the economy, the Fed and most economists are still of the opinion that the current inflationary trends will prove to be transient, and abate as supply chains slowly normalize post-covid. It remains to be seen if the current price pressures will indeed be transient, but inflation data will be key to track going forward as continued price pressures could force the Fed to tighten monetary policy, an action that would have ramifications throughout the economy and could stifle growth. The unemployment rate currently stands at 5.8% and the total number of unemployed persons per the most recent data from the Bureau of Labor Statistics is 9.3 million. These measures are down considerably from their recent highs in April 2020, but remain well above the levels seen prior to the pandemic (3.5 percent and 5.7 million, respectively, in February 2020). The leisure and hospitality, education, and health care sectors are currently adding jobs at the fastest rate. A somewhat paradoxical bifurcation is emerging in the labor market, with worker scarcity driving wage increases in most industries at the same time that the unemployment/ labor participation rate suggests continued slack, particularly in the service sector. While the unemployment rate will likely continue to steadily decline as the economy reopens (assuming no black swan event), this trend appears indicative of a potential structural shift in the employment landscape, with many employers reassessing what “fullcapacity” is from a labor perspective in light of rising wages, rapidly shifting consumer preferences and increased automation availability. The number of individuals receiving unemployment benefits continues to steadily decline month-over-month, a trend that should only accelerate as many states opt to roll-back their supplemental benefits in an 0 5 10 15 20 25 30 effort to encourage a return to the labor market. The recent uptick in hacking events within the corporate and governmental arenas warrants mention as well. While ransomware incidents have been increasing in prevalence for the last several years, the recent attacks on Colonial Pipeline and JBS have put the public spotlight on the issue. The attack on JBS in particular shows that agriculture is not insulated from these events, and in fact may be a prime target for those with malicious intentions. While strong corporate security protocols can reduce the risk of attack, these events appear to represent a new risk that organizations across the global will have to reckon with for the foreseeable future. The housing market continues to be relatively tight, largely due to low inventory levels and supply constraints. As of May the national inventory of active listings was down 50.9% compared to the prior year, while the total inventory of unsold homes, including pending listings, was down 20.8%. This comes at the same time as shifting consumer preferences have led many prospective buyers to enter the housing market for the first time, further exacerbating the supply issues noted above. The national median listing price for single-family homes was $380,000 in May, up 15.2% compared to the same period last year. Large metro areas saw an average price gain of just 7.4% compared to the prior year, well below the median, which to some extent reflects how the pandemic and increased prevalence of remote work are affecting the housing market. Prospective buyers are increasingly seeking out suburban and rural housing options given the decreased need to be in close proximity to urban centers. Nationally, the typical home spent 39 days on the market in May, down from 71 days during than the same period last year. ■