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Kim Schmidt:

Hi, I am Kim Schmidt, executive Editor of Farm Equipment. Welcome to Farm Equipment's Used Equipment Remarketing Roadmaps podcast. In this episode, Casey Seymour of Moving Iron LLC talks with Tanner McKee with CoBank. This episode of the Used Equipment Remarketing Roadmaps podcast is brought to you courtesy of Agri Solutions. Let's jump in as Casey and Tanner cover a lot in today's episode. From bank failures to the Consumer Product Index and Russia and Ukraine.

Casey Seymour:

I have got Tanner McKee back on here from CoBank to talk about the world of AG economics. So how you doing, man?

Tanner McKee:

Doing great. Great to be back again, Casey.

Casey Seymour:

Yep. And the good thing about this, Tanner, is that we actually have plenty of stuff to talk about here in a world of AG economics.

Tanner McKee:

You and I never have a shortage of things to talk about.

Casey Seymour:

We never do.

Tanner McKee:

We really don't.

Casey Seymour:

You're exactly right. So I'll set the table a little bit for kind what we're going to talk about today. So one, obviously we're gonna talk about what's happened with the bank out in Silicon Valley, Silicon Valley Bank, and then the bank in New York. I can't remember what it was called, but both of those collapsed and how that whole thing happened. Talking about USDA's outlook for '23, we're going to talk about the grain corridor and the black seat and what we see happening there with Russia and Ukraine and a few other things will pop up here along the way, too.

So let's start with this first, because I think these two correlate together. The CPI report came out this week. They were hoping for 6.7 and they got the 6.0. So we had a pretty dramatic downturn there, and overall consumer product index inflation and what they saw happening there, chairman Powell had already talked about raising somewhere between a quarter and a half percent. They headed more towards the half a percent more than anything else. But with this news coming up, there was some thought that, "Hey, you know what we're going to do, we're going to do this, and then kind of wait and see what happens." But with interest rates the way the were, that's what affected this collapse in the interest or in the bank that we saw. So I guess Tanner, looking at that, what's your thoughts on that? And I guess what's your best guess moving forward now what the Fed might do?

Tanner McKee:

Well, I think those two things that you just talked about there with CPI coming in at six and then the banking situation that we're experiencing right now, those two factors combined really takes the wind out of the sales of a 50 point increase and they're meeting next week. And so I think that talk is probably going to be softened quite a bit now with the Fed. Now, inflation is still high, just that the pace of inflation is slowing down. What really got the Fed concerned was back in January when we had inflation at 6.3, it was still fairly high and from December to January, didn't move the degree that people had hoped or that had thought. And so that was what really got the Fed and others fired up about, "Hey, we got to get back to 50 basis point increases.

But now you add in the slower CPI, now you add in the banking situation, you had the two banks, the second and third-biggest bank failures in US history happen in the span of a couple of days. And then you add in another bank failure and then you add in Credit Suis and some of the situations that they're dealing with right now and the Swiss government looks like they're stepping in to support them. It appears as though from the outset, these four events happening in short order, in the span of less than a week, that one would think that we're in the midst of a crisis and now we're going to relive 2008 all over again. Well, maybe not. There's always that market dynamic where money's going to get pulled out of the marketplace because of those fears. And that's kind of what we're seeing in things like the stock market.

But I'd say though that a lot of this was really focused on some banks that were badly managed. It's not a contagion. And so I think that's in the Fed's mind, because go back into 2008, that was a contagion. You had all of those accounts...

Casey Seymour:

That was bad. Yeah.

Tanner McKee:

... That were underwater. I mean that was systemic, that was an absolute collapse in the market. Fast-forward to today and what do you have? Well, you've got some badly managed banks dealing with a rising interest rate environment. And so in my mind, and from what I'm reading with other economists and other people in the marketplace out there, this is not a contagion. It is going to be contained. And this is what you would expect after so many years of near zero interest rates. There was going to be some reckless banks out there, banks that were not being smart with their money. And so now we're seeing the effects of it.

Now when the Fed starts pulling back again, bringing rates back in line to where they should be, you're going to see those banks that were reckless shake out of the marketplace, they're going to be falling out of the competition, if you will, just out of incompetence of leadership and management is what this comes down to. It's so it's not a contagion. And so I think the Fed probably sees it that way. All of those folks lived through 2008, they were around, they know what a true contagion really looks like. And that's not what this is. They're entirely different. So I think the Fed's going to move ahead with a rate increase next week. But I think right now with the banking situation as we'll call it, and then also inflation coming in at six on the CPI, 6.0, I think that really takes the wind out of the sales, if you will, of doing a 50 point increase. I think they're going to say, "Okay, let's just stair step it up to 25," a little bit more cautious and then we'll see where we go from here. I think that seems like a reasonable expectation for the Fed next week in my mind.

Casey Seymour:

Right on. That makes sense. You're right, I mean the things that were going on 2008 where woefully under...

Tanner McKee:

Oh, right.

Casey Seymour:

Nice people were getting loans for houses that there's no piece of paper anywhere that showed that they could actually pay for it and their credit risks and everything else that came on, it was just a disaster waiting to happen. And it happened. And I think you're right here. I mean they've got a lot regulations, a lot of bank examiners and those kind of things, a really watchful eye of what's going on. And I think the one thing about banks like Silicon Valley Bank is that they're not your traditional bank. Their whole business model was based around the venture capital startup thing where you had the assets but not necessarily the cash, and your profits may or not have been as high as they wanted, but they were willing to step in and help some of these people out. And with this stuff happening, there were plenty of folks that were signing up that were standing up saying, "Hey, if Silicon Valley Bank would not have given me this loan, there's no way that I would be what we are now." A Chewy or somebody like that, these bigger startups that you've seen that have become very successful. So it's a niche market for sure, but it was very risky of what they were doing for sure.

Tanner McKee:

And the way they were managing their funds, they were so exposed to 90 billion in long date bonds that were falling in value.

Casey Seymour:

Yeah.

Tanner McKee:

I mean, don't tell me they didn't see this coming in a rising interest rate environment?

Casey Seymour:

Yeah.

Tanner McKee:

This one economized readings was saying that it wasn't bad management, it was horrendous management. And that's not normal. And most, unfortunately, the cost is going to be born by well-managed banks, their cost of insurance is going to go up. But that sounds like a headache to be born by healthy banks, but it's not a contagion. And I think that's what has to be stressed here. We're not in 2008. It's an entirely different environment.

Casey Seymour:

Right, yeah. And the other thing too was, I think the big takeaway from all this, too is one tweet brought that place down and then obviously other guys piled onto it. But it was just one tweet really started that fire, and then a lot of people threw gasoline on it after that. But was pretty impressive.

Tanner McKee:

I think Moody's had also downgraded them. Moody's downgraded then added it. That was added to the fire, I guess. But no, the tweet and then everyone piling on in the social media environment. "Oh my, let's..." It just kind of snowballs from there.

Casey Seymour:

Yeah, somebody made somebody mad, that's for sure. So anyway, all right, so let's step over and talk about what we see happen with USDA moving into '23 and what their outlooks are there. Still a lot of positivity out there, what we're seeing, they've talked a lot about crop prices and what they might look like there being, not a significant, it's not the right word, but lower than what we seeing them now moving into that. But we are seeing a lot of pressure taken away on the input side compared to what we saw last year. So I guess, what are your thoughts there, Tanner?

Tanner McKee:

Well, when you look at USDA's latest forecast from the AG outlook, that's my go-to for the next year ahead. I look at the global stocks use and they're expecting corn and wheat, the grains at large to be tightened, whereas soybeans not so much. And that's because of the record crop in Brazil. Now that being said, there's still a lot of things we're dealing with. There's drought in Argentina, there's drought on the planes here in the US, you still have the Black Sea Corridor issue, a lot of production lost in Ukraine. And so those factors are going to be hanging on in the grain markets for quite some time. I mean, those are not things that get reversed easily. And so I think we're going to be in this situation and USDA agrees where we're going to be a little tight on grains globally for the year ahead.

And not nearly as much for soybeans, but those headaches are going to be there, especially for the end users. And although grain soybean prices have come down from their highs, we're still high historically speaking. And so that's going to be impacting your end users. Now, for the crop farmers out there, this is great news, especially as we start to see input prices come down. There's been some concern that with commodity prices coming down that we're going to start to see a squeeze on net farm income, and that's to be expected, but the world is still tight. So I wouldn't really say that we're going to be in a terrible financial situation in agriculture in the year ahead. It's just going to be a tighter cash flow for a lot of farmers with inputs still fairly high historically, and commodity prices have come off the peak. So that's going to stretch the margins a little bit.

Kim Schmidt:

We'll get back to the discussion in a moment, but first, I wanted to thank our sponsor, Agri Solutions. Improve performance and durability with a wide range of premium tillage parts and extended life solutions with Agri Solutions. As the market leader and wearable parts, components, accessories and solutions for tillage, seeding, planting and fertilizing, Agri Solutions is proud of their purpose to build and feed the world. To learn more about Agri Solutions and their globally recognized brands such as Bellota, Ingersoll, Tillage, and Trinity Logistics. Visit agrisolutionscorp.com. Now back to Casey.

Casey Seymour:

All right, so let's talk about what we see. So the Ukrainian Russian Black Sea grain corridor.

Tanner McKee:

Yeah.

Casey Seymour:

That's a tricky situation. More so than I think we've seen in the past. Two things I think that are really going to make it, back to what you said about tight stocks, especially in wheat. Russian wheat crop so far is predicting to be somewhere between 15% and 20% down, where you look at. And Ukraine is just, no matter if they had the best crop on the planet ever for the next 10 years, they're still going to struggle to get things out of Ukraine. So I guess as you're looking at that situation there, which at any time that whole grain corridor thing could just be shut off totally. And you know what that looks like. But I guess as you're looking at that and you start looking at the Northern African countries, Asian countries that are reliant upon that wheat that comes out of that area, what are your thoughts there and how do you think that affects the long term effects of what we see happen in the US and in South America, as well?

Tanner McKee:

Well, there's one thing I want to point out here back on the grain corridor out of the Black Sea, that Russia has allowed shipments of grains and oil seeds out of Ukraine to move out of the Black Sea. That is contingent on the agreement here for the next 90 days on that remaining open. And what's important here about 90 days, why 90 days? Why don't they just say, "Let's just keep it open so people can be fed. We can avert a crisis globally. Why don't we just keep it open the whole time?" Why are they agreeing to 90 days only? There's something else we got to watch. And that is the election in Turkey. Why does that matter? It was President Erdogan who put that deal together.

Casey Seymour:

Right. Yep.

Tanner McKee:

Turkey and Russia are still buds, even though Turkey is NATO, Erdogan and Putin are allies-ish, kind of. And so Erdogan unfortunately, or fortunately, depending upon your political stance looks to be politically in trouble. He looks to be behind in the polls and they have an election coming up. And so Russia would be worried about that, that they might potentially lose their ally that they have in President Erdogan. And so that's why they're not wanting to extend it beyond that. They're only extending it 90 days. And then the Russians are going to take a look and to see what happens with the Turkish election. And if their friend Erdogan is removed from office, then we have reason to believe that perhaps the political support there for that Green Sea corridor goes away, or, excuse the Black Sea corridor, goes away. And that would really shake the markets. So there's a lot here to watch ,all these moving parts politically that are going to be affecting the grain markets.

So over the next 90 days, we need to keep an eye on what happens over in Turkey, and if Erdogan loses, how are the Russians going to respond? Are they going to pull the plug on the Black Sea grain corridor. Given that they've decided that they were insisting on 90 days and not any further than that would lend the idea here that that corridor perhaps could be in trouble if they're not willing to commit to it. So that's something we're going to need to watch.

This is in addition to the drought that we have on the planes here in the US, it's in addition to the drought in Argentina. And now you start to see a situation here where we could get really, really tight on grain really, really quick. Oil seeds, not as big as a deal because of the record crop coming out of Brazil. But definitely when it comes to corn and wheat, we could be in a situation where all of these things align on supply. And then politically, out of the Black Sea, that would quickly tighten supply instantly where we could have a dramatically different market environment unfold for grains. So there's something to watch. I think there's a lot of points that we got to align it all. It's all going to be impacting really on the grains, corn, wheat.

Casey Seymour:

Yep. I didn't really put those two things together, but Erdogan's election and what that looks like, that would be a big deal. And if they shut that down, I mean, like you said, it's already hard enough to make it work the way it is much less completely turning it off. That'd be a big deal. A very big deal.

Tanner McKee:

Plus the fact that acreage is down in Ukraine. We know that that's happening, and so we're already going to be in a tighter environment. Now you add in the political situation and wheat and grain stocks globally, tradable wheat and grain stocks globally, could tighten pretty quickly.

Casey Seymour:

Yep. All right. Let's jump over. And I'd like, because this is your area of specialty here, so let's talk about the dairy market for a little bit. They are still... I don't know if it's gotten any better since the last time we talked. It's still a struggle to make that dairy market work. And I guess as you're looking out through '23, what are some of your expectations for that? And with China coming back on board, hopefully getting the stuff grounded. They're such a huge buyer of milk powder, I guess looking at that and our relationship with China at this point. What's your outlook for '23 in the dairy market?

Tanner McKee:

Well, I think the consensus is that we're going to be seeing a tightening of the herd later this year. I don't know how fast we're going to tighten, but because margins have been eroded, we're definitely going to see some pressure there. And we've seen slaughter rates among dairy cows up near record highs. And so that would indicate that we're heading into this transition here where we're going to see tighter milk supply in the US, which would coincide with a recovery in the Chinese economy. And now I think the World Bank was forecasting a faster recovery in the Chinese economy now that they're kind of coming out of this COVID lockdown period and their economy is expected to show faster growth. China, which is the largest dairy importer in the world, would be seeing stronger economic recovery later on at a time where we would see tightening supply.

So right now, yes, milk prices have been under pressure. A lot of that is due to the fact that not only here in recent months, we've expanded production and productivity at the same time. But over in Europe, they've had phenomenal weather and we've had very mild weather here, too, historically speaking. And so that's been a positive on production. But those fundamental factors are going to go away if we start to see persistent erosion of margins for producers, and then what you're going to see is a shrinkage in the herd as you see slaughter rates increase. At the same time, heifer prices are still extremely high. And so the cost of replacing that milk cow is going up. And so it's going to be harder and harder to rebuild a herd with these elevated costs. So I think further out, given these supply demand fundamentals, it looks like, although we're in a period of depressed prices right now, that may change in short order later on this year.

Casey Seymour:

Yeah, there's a lot of moving parts out there right now. A lot of stuff going on.

Tanner McKee:

They're all connected.

Casey Seymour:

It's amazing how interconnected all this stuff is. So one last topic here. Let's talk about this a little bit, and you brought it up. I was going to talk a little bit about China, what you see there with the reopening and what we see happening there, that reopening is not happening as fast as they make it out to be. We're still seeing a lot of delay, a lot of drag. They're buying a lot of stuff out of South America, which you would expect, but they're buying a lot of beef, a lot of pork and a lot of soybeans out of the US, too. So I guess as you're looking at that, Tanner, do you feel like this is a ramp up for what they're expecting? Or do you really feel like that demand's actually there for what we see happen and with Chinese imports?

Tanner McKee:

A lot of those purchases tend to be strategic, from China's strategic reserve. And so when they see commodity prices down, then they would be motivated to take a jump into that, put it into their cold storage for later use or replenish their stockpiles. So it's hard to bet what the Chinese government's going to do. So that being said, we are in a position here where you brought up livestock. Our economist who covers ammo protein, Brian Ernest, he covers that very well. And he's pointed out the tightness and supplies and how we're going to be in this situation going forward where it's more of a supply situation more than it is anything else because of the drought here in the US. And then when you talk about the grains, which we discussed a little bit ago, a lot of that is drought related. So on the supply side, it is just tight because of those fundamentals.

That being said, the demand side looks to be improving longer term, especially for China. We'll see what happens with this rising interest rate environment. It's going to slow down growth globally for a lot of other countries, including China. They're going to be impacted by this. And so I think that's one thing you got to watch. So they're recovering from their COVID lockdowns, and that is a process. It doesn't happen overnight. There's a lot of stumbling blocks along the way, but you can't grow an economy when everyone's locked down at home. And so the upside here it's now been opened up now with those policies going away. So that's been a positive, but we got to keep an eye on what's going on with interest rates. And perhaps there may be more bank issues globally or economic issues like over in China that we got to watch with the real estate market. Is that going to be the next thing to go that can be impacting their economy? There's a lot of moving parts here that we just got to keep our eyes on. And until we see it, we have to assume that China's reopening of their economy is going to be positive for their growth. We'll just have to watch some of these black swans, like their real estate market that could be in trouble in a rising industry environment.

Casey Seymour:

Very much so. Tanner, a lot of moving parts there, a lot of good stuff going on. You guys have tons of information over at CoBank. What's the best way for folks to go find that information?

Tanner McKee:

They can find our research at cobank.com, and our research is under the Knowledge Exchange tab.

Casey Seymour:

Right on. Tanner, if they want to reach out to you, what's the best way to do that?

Tanner McKee:

Just find us on the website and you can find our contact information there.

Casey Seymour:

Right on, man.

Tanner McKee:

Well Tanner, I appreciate you being in the podcast.

Casey Seymour:

Yeah, thanks Casey. Thanks for having me back.

Kim Schmidt:

Thanks to Casey for sharing his conversation with us. You can keep up on the latest industry news by registering online to receive our free newsletters. Visit www.farm-equipment.com. For Casey as well as our entire staff here at Farm Equipment, I'm Kim Schmidt. Thanks for listening.