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Mixed Bag of Economic Factors Impact Cheese Markets

Falling cheese prices and steady milk prices are nothing new. So let’s dig into the larger state of affairs from a macroeconomic standpoint. Last week, one shipment from Ukraine set sail for an inspection in Turkey. This week, three more cargoes are out of Ukraine. Not that it’s directly relevant to the dairy discussion, but it does have an impact on the ebb and flow of global trade. As a note, Russia went from selling crude at a discount to a premium. They have found partners in India and China as off-takers of their refined products. The war in Ukraine and the wider ripple effects from Russian sanctions are just a small piece in the gentle balance of global economics.

To narrow down impacts at home, think of this: China crude imports neared a four-year low. Coronavirus lockdowns continue to be stubborn. Chinese protocols to avoid the virus are strict, which has affected output in some regions. That impact generally is a lagging one, as there can be both a consumption and production loss. On another day we can talk through how lockdowns have caused lowered pork, and thus soybean and soybean meal consumption. I would suggest keeping an eye on their manufacturing data. It can be telling on what to expect given the dependence on their manufacturing sector.


Close to home, the Democrats have passed the Inflation Reduction Act. While narrow in naming, the bill includes the largest climate investment in U.S. history. It also gives Medicare more power in negotiating prescription drug prices as well as extending health care subsidies. To pay for the additional spending, new taxes will be levied on large corporations and stock buybacks as well as enhancing the Internal Revenue Service’s ability to collect.

One of the major goals is carbon reduction. As part of the plan, there is a target to reduce U.S. carbon emissions by 40% in 2030. There are also incentives to lower the cost of electricity with more renewables and conversion to renewable energy generation. While this could be a positive move, there is a cost to convert. As the Europeans have learned a in their move away from traditional fossil fuels and dependence on Russian natural gas, it’s a slow process. Russia’s de-throttling of the Nord Stream 1 pipeline has led to a 20% of normal gas flows. The future flows remain unclear, but if the trend continues the cost of natural gas at these levels could cost the EU 3% of total GDP based on 2021 numbers. That’s a huge cost for energy. In addition, a full shutdown of gas supplies from Russia could push the euro zone into a recession later this year. While the consequences of that impact are unknown, it’s important to follow.

That leads into more awareness back home. How many of you are familiar with Scope 1, 2 and 3 emissions requirements by the EPA? If you have not read up, now is the time to do so. It ties back to earlier comments on what’s going on in the world, how will it affect me, and what’s the broader impact? What I can say is this: carbon, sustainability and conservation are not going away. The questions to ask are: how does this affect me? What is the cost? And what do I need to do? While there are still some items to resolve this will impact your business, your producers, your suppliers and BE DRIVEN by your consumers in the future. Start acting now to be prepared for what’s to come.


Lastly, as a finance person I have a duty to talk about interest rates, and there has been no shortage of movements on the short-term side in recent months. It’s important to note short- and long-term rate impacts. What has been discussed and has seen dramatic moves is more on the short-term side in recent months. The Federal Reserve the bench mark Fed Funds rate four times this year. While not unexpected the hikes at this pace have not occurred since the late 1980’s. Clearly inflation is the target. A tight labor market and record inflation have driven the moves. There is not another rate decision until September. These shorter-term interest rate moves have directly affected things like credit card rates, student loan debt and shorter terms borrowings.

On the longer end of the spectrum, U.S. Treasuries are telling a different story. The Treasury yield curve continues to see a flattening. In recent weeks longer dated maturities have started to pull back. This week 30-year mortgage rates settled below 5% a level not seen since April. While that’s helpful for some it shows doubt about longer term confidence. The Fed has continually noted that keeping pace on rate increases until inflation subsides, energy prices are one of the early signs domestically their action may be having an impact. With that said, according the Fed’s Dot Plot we’re in for more increases. The most direct impact we see affects those clients tied to a variable rate on term and operating debt. The movements, while somewhat expected, have come fast and furious. Keep an eye on employment numbers, GPD, housing starts and energy prices and long-term interest rate movements. This should give a sense to where we seem to be heading. While debt tied to variable rates can be sensitive, it’s important to note that we’re still in a favorable environment long term. For comparison, the Fed Funds rate peaked at 19.99% on June 1, 1981. In looking back in time, we were here before in 2019 and have to roll the calendar back to 2008 when we saw these levels previous to.

In summary, you have options between structure. Look at segmenting part of any debt package between fixed and variable. There are plenty of firms out there that will advise on hedging debt between with swaps and options, that could also be a consideration. Know your exposure, where your comfort zone is and what the interest expense capacity of your business is. Happy to help with the conversation and again pay attention to what’s going on in the broader world as well as at home!



Senior Food and Agribusiness Lending Specialist
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