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Bank Collapse and WASDE · Professional Ag Marketing Podcast

• 0:01
  SPEAKER_01: Welcome to the Professional Ag Marketing Podcast.
• 0:04
  SPEAKER_01: If you want a deep dive into the ag markets and risk management strategies, your search is over.
• 0:10
  SPEAKER_01: Come here after every Friday to get your weekly commodity recap.
• 0:14
  SPEAKER_01: Trading commodity futures and options involves substantial risk of loss and is not suitable for all investors.
• 0:21
  SPEAKER_01: This is your host, Mike Minor.
• 0:22
  SPEAKER_01: Let's get started.
• 0:23
  SPEAKER_01: Today is March 10th, and I've got Pat with us here today.
• 0:26
  SPEAKER_01: How's it going, Pat?
• 0:27
  SPEAKER_00: Good, Mike.
• 0:28
  SPEAKER_00: How are you?
• 0:29
  SPEAKER_01: We are doing very good.
• 0:30
  SPEAKER_01: Uh, very good.
• 0:31
  SPEAKER_01: We've got a couple fun topics to talk about today.
• 0:34
  SPEAKER_01: We're going to talk about the WASDA report that came out this week and uh a little bit about what that has for implications on the grain markets going forward.
• 0:42
  SPEAKER_01: And then I want to start with talking about some of the Fed changes this week and a little bit of the Silicon Valley Bank and uh some of the uh some of the topics floating around to close out our week with that, Pat.
• 0:54
  SPEAKER_01: How's that sound?
• 0:55
  SPEAKER_00: Yeah, I appreciate the conversation, Mike.
• 0:57
  SPEAKER_00: I uh you know Chairman uh uh Powell was uh in front of uh Congress uh was it this week or last week?
• 1:04
  SPEAKER_00: This week this week uh with some conversations, and then as you as you mentioned, there was a fairly significant uh uh issue in Silicon Valley as it relates to banking and lending.
• 1:15
  SPEAKER_00: And so I am interested to hear your thoughts and and uh analysis on those subjects because we all know that uh you know the impact of these outside markets, the impact of you know the economy and and all of that has a has a a major uh impact on uh our commodities.
• 1:34
  SPEAKER_00: And so uh looking forward to that discussion.
• 1:36
  SPEAKER_01: Awesome.
• 1:36
  SPEAKER_01: Well, let's start with the Fed here.
• 1:38
  SPEAKER_01: So Fed Chair Powell uh he spoke earlier this week and uh basically said that the latest economic data came in stronger than expected.
• 1:47
  SPEAKER_01: And uh that kind of suggests that the ultimate level of interest rates is uh likely to move higher than what they previously anticipated.
• 1:57
  SPEAKER_01: So uh the data so far is indicating that faster tightening is probably warranted uh and they would increase rates further coming forward than previously expected.
• 2:09
  SPEAKER_01: Uh we're looking at a reversal pretty much from what they expected probably about a month ago after that economic data.
• 2:16
  SPEAKER_00: Right.
• 2:16
  SPEAKER_00: So now the the opinion is then, well, Powell's saying we have to continue to raise interest rates.
• 2:21
  SPEAKER_00: So we will likely get another rate hike when?
• 2:24
  SPEAKER_01: Uh March 21st and 22nd is the next meeting.
• 2:27
  SPEAKER_00: So coming up pretty quickly here.
• 2:29
  SPEAKER_00: And then the jobs report.
• 2:31
  SPEAKER_00: Do you know that off the top of your head?
• 2:32
  SPEAKER_00: Didn't we we we had a few more job starts this week than what was expected as well?
• 2:37
  SPEAKER_01: Yes, they were expecting like 225,000 uh 225,000 added jobs and they added like 315 or so um or something like that.
• 2:45
  SPEAKER_01: So it was more than expected, um which is still problematic.
• 2:50
  SPEAKER_01: So like in Powell's terms here, that that data came out today or this morning here, so he didn't know that, for example, but but it goes right along with in line of there's no data right now that shows him that they've tightened too much.
• 3:04
  SPEAKER_00: That's working even.
• 3:05
  SPEAKER_00: Yeah.
• 3:06
  SPEAKER_00: Is that true?
• 3:06
  SPEAKER_00: Yeah.
• 3:07
  SPEAKER_00: Do you think it's working?
• 3:08
  SPEAKER_01: Uh in ways, and we'll get to that in in by the end of all this.
• 3:12
  SPEAKER_01: But um, yeah, they're they were expecting uh a quarter um uh hike here coming in March at the end of the month, and they'll they're expecting a half of a percent hike now.
• 3:25
  SPEAKER_01: So uh they essentially have moved the peak of the Fed funds target from 5.1% is what they're expecting going into this year, to all the way up to 5.75 now.
• 3:37
  SPEAKER_01: They thought the peak could go up to.
• 3:39
  SPEAKER_01: And uh right now the current Fed funds rate's at 4.625, and uh, you know, just a year ago it was like 0.375%.
• 3:48
  SPEAKER_01: So uh they raised really quickly, but a lot of people would say they probably started raising too late, uh you know, so to each to their own.
• 3:56
  SPEAKER_01: But some of that has kind of spurred into the talk now of uh today was a big day in history.
• 4:05
  SPEAKER_01: Um the Silicon Valley Bank is the second largest bank failure in USA history, and that happened this week, today actually.
• 4:15
  SPEAKER_01: The uh the largest casualty so far from the free m free money printing spree of the government during COVID, uh, which triggered inflation.
• 4:25
  SPEAKER_01: This is the first casualty of it.
• 4:27
  SPEAKER_01: And you know, the Silicon Valley Bank, they uh they've been closed by California regulators now.
• 4:32
  SPEAKER_01: It it's seemingly owned basically by the FDIC at this point by the end of the week.
• 4:37
  SPEAKER_01: And for them to come out at the end of the week, too, with all of this, kind of in the 11th hour of trade, uh, they also said isn't the very isn't the best signal going into the weekend um for for the status of how this bank is uh sitting currently.
• 4:53
  SPEAKER_01: So a very uh interesting topic that does not happen every day.
• 4:59
  SPEAKER_01: Um for for example, if if we're looking at um the size of this bank failure, um they're right around uh$209 billion.
• 5:10
  SPEAKER_01: The 2008 Washington mutual collapse, that was$307 billion.
• 5:16
  SPEAKER_01: So like the next one under this would have been$40 billion that collapse.
• 5:19
  SPEAKER_01: So I did the bank fail.
• 5:21
  SPEAKER_01: So uh there's a couple different items.
• 5:24
  SPEAKER_01: So the Federal Reserve has been raising interest rates from the record low level since last year in a bid to fight inflation, like we just talked about.
• 5:32
  SPEAKER_01: And investors have less appetite for risk when it comes to money available to them because it because it bec it becomes expensive due to the higher interest rates.
• 5:43
  SPEAKER_01: And this has weighed on the technology startups especially hard.
• 5:47
  SPEAKER_01: And uh the the primary clients of Silicon Valley, uh of the Silicon Valley Bank, um, because of their investors are more risk uh adverse in nature, or risk averse in nature.
• 6:00
  SPEAKER_01: So uh the a lot of these tech startups had started to raise money in 2021 and spell and spend a bunch of money to build their businesses, and the second round of that money would have been going on right now for them to raise to start their businesses, and that money just hasn't been available to them at all since these uh rising interest rates, and um uh people just don't want to put that risk on their plate.
• 6:26
  SPEAKER_01: So, in a sense, someone like JP Morgan or someone uh like that of a bigger, more diverse nature will likely get the money for them instead.
• 6:37
  SPEAKER_01: Um it does leave a huge hole in the tech tech sector in the meantime.
• 6:42
  SPEAKER_01: Um the banks are influenced by this.
• 6:45
  SPEAKER_01: Um they're heavily concentrated in just the tech sector and venture-backed tech, for example.
• 6:53
  SPEAKER_01: Um so it's not one of those things like one bank fails, they all bail uh all fail, like we saw in 2008, right?
• 6:59
  SPEAKER_01: It was uh a situation then that the the government really needed to bail us out, or some would say we'd probably still be in a recession today if they didn't.
• 7:08
  SPEAKER_01: This is very concentrated on just the tech sector, for example.
• 7:12
  SPEAKER_00: So so it it's um they they announced um I'm not sure the timing earlier this week a big loss on bond holdings, and so therefore had some plans to raise capital.
• 7:26
  SPEAKER_00: As the word got out that they were starting looking for plans to raise capital, that uh impacted the confidence the depositors had in that lending institution and uh it uh resulted in sort of a run on withdrawals.
• 7:43
  SPEAKER_00: Yeah, trying to fold pull pull deposits.
• 7:46
  SPEAKER_00: And so um so I apologize just putting you on the spot here.
• 7:49
  SPEAKER_00: I didn't talk about this before we started the podcast.
• 7:51
  SPEAKER_00: But um why did they have a big loss on bond holdings?
• 7:56
  SPEAKER_00: So they had their assets tied up in bond holdings, what happened there?
• 8:02
  SPEAKER_01: They they uh couldn't raise the money acceptable with what interest rates were doing to justify their business, essentially.
• 8:10
  SPEAKER_01: So as interest rates went up, they couldn't get enough money raised to satisfy the businesses that they were um uh raising capital for.
• 8:20
  SPEAKER_00: Okay.
• 8:21
  SPEAKER_01: So it it it was just not they couldn't find the money available at at this point.
• 8:25
  SPEAKER_00: Well, regardless, at the end of the day, they had they had overvalued assets on their balance sheet.
• 8:30
  SPEAKER_00: Yeah.
• 8:30
  SPEAKER_00: Like no matter how it all happened, they had overvalued uh uh assets on on balance sheet and and uh needed to raise some capital as a result, and uh those efforts well um may or may not have ended up uh ultimately being successful.
• 8:47
  SPEAKER_00: It uh didn't matter once everyone said I gotta get my money out of this place, right?
• 8:52
  SPEAKER_00: And so um so anyway, I I think it's um I think it's good that we try to talk through all of that.
• 8:58
  SPEAKER_00: I appreciate your observation as it relates to um a lot of these things happening uh towards the end of market trading on a Friday.
• 9:05
  SPEAKER_00: So we'll see how how markets react uh going into next week.
• 9:09
  SPEAKER_00: But uh this is uh another example, and so anytime you're talking about the second biggest ever, and the last one was 2008, that kind of thing, um, yeah, anytime you're talking about these things, those those are at a at a minimum noteworthy, and at a maximum, um uh it's uh is it it's concerning, right, as it relates to just how uh uneasy, unstable uh these macro outside markets are.
• 9:37
  SPEAKER_00: And so when Chairman Powell is is uh presenting in front of Congress this week, Mike, and and uh talking about his uh the the need for him to continue to raise interest rates, perhaps at a faster pace than had had previously uh been advertised, as is what I heard you say earlier in this conversation.
• 9:58
  SPEAKER_00: Um it uh is another reminder for me at least that this is still the great experiment, right?
• 10:04
  SPEAKER_00: I mean, we've talked about this a lot over the last couple years, but you know, we're still coming off of a hundred-year pandemic, not a four-year cycle, not an eight-year cycle, not since 2008.
• 10:16
  SPEAKER_00: It's uh hopefully once a century pandemic that we're that we're coming off of.
• 10:21
  SPEAKER_00: And this is a uh a great experiment in terms of printing money uh and uh encouraging folks to stay at home and and shut down the U.S.
• 10:32
  SPEAKER_00: economy to you know to a point where it's on life support and then kick it back into gear and uh and and try to to get it back up to speed again without without speeding too much, right?
• 10:44
  SPEAKER_00: And I don't know if that's a great analogy or not, but for me me at least, in my simple mind, it makes some sense.
• 10:49
  SPEAKER_00: And and so we're hitting a rough patch this week, right, in terms of of getting this economy back up to a speed that's the right speed and not going too fast.
• 10:58
  SPEAKER_00: And and so um maybe it's as simple as uh you know the Silicon Valley Bank uh got got caught up in the in in going too fast and and uh is going to to to uh have to have to uh go broke because of it.
• 11:14
  SPEAKER_01: So I know we had some podcasts before this too, based upon like the cryptocurrency market.
• 11:19
  SPEAKER_01: Like that collapse was right in Silicon Valley in the last year, and we talked about some of the implications something like that would have.
• 11:26
  SPEAKER_01: This could probably be one of those.
• 11:28
  SPEAKER_00: Yep, exactly.
• 11:29
  SPEAKER_00: So we'll stay tuned, see what happens.
• 11:32
  SPEAKER_00: Let's talk uh let's get back to our world of uh corn and soybeans and hogs and cattle and wheat and those sorts of things.
• 11:39
  SPEAKER_00: WASDY report this week.
• 11:40
  SPEAKER_01: Wazday report this week came out.
• 11:42
  SPEAKER_01: Uh we've been experiencing a little bit of a corn to lap uh collapse here recently, and uh part of that struggle's been just demand in general.
• 11:50
  SPEAKER_01: So the WASD report, when that came out and showed that export sales were 75 million bushels lower than last month, it it wasn't uh it was expected to an extent.
• 12:02
  SPEAKER_01: Uh they finally did it.
• 12:03
  SPEAKER_01: We've been kind of waiting for that as we've been trending quite a bit below the pace needed to hit the USDA's projections.
• 12:10
  SPEAKER_01: So for them to come out and finally do that, that was good.
• 12:13
  SPEAKER_01: The other major change we saw in the report on uh out of the USDA was the adjustment in the Argentina number down to 33 million metric tons of soybean production, which that gets them very close to where private analysts have been trading.
• 12:27
  SPEAKER_01: It was a big move from last month's 41 million metric tons.
• 12:31
  SPEAKER_01: So those were the two main hitters in the report that I caught, Pat, as uh most people would have caught as well.
• 12:37
  SPEAKER_01: But I I don't think there is any major shocks to it.
• 12:40
  SPEAKER_01: It was just a little bit like, huh, that those are pretty good moves for the USDA compared to what they normally are.
• 12:44
  SPEAKER_00: Yeah, not a lot of ton of argument on the numbers, other than it seems uh pretty obvious that the 75 million drop in exports isn't enough.
• 12:54
  SPEAKER_00: Yep.
• 12:55
  SPEAKER_00: Right?
• 12:55
  SPEAKER_00: So um we're probably that number's probably gonna get adjusted smaller yet as we go through this old crop marketing year.
• 13:03
  SPEAKER_00: So that means that projected ending stocks for the crop year that we're in probably continues to creep higher here.
• 13:10
  SPEAKER_00: You know, we we've worked from 115, 12 up to 135.
• 13:15
  SPEAKER_00: We're gonna end up potentially over 1.5 billion, or or or better said, it's better to express these things in terms of stocks to use percentage.
• 13:25
  SPEAKER_00: We're more and more than likely going to go from you know around an 8% projected stocks to use ratio up over 10% stocks to use.
• 13:35
  SPEAKER_00: And that does two things for you, right?
• 13:37
  SPEAKER_00: It it uh it uh changes the old crop balance sheet, but it also increases the carry-in for next year and starts to make the next balance sheet potentially uh uh bigger, more comfortable, what however one sort of looks at those things.
• 13:54
  SPEAKER_00: And so um that's worth uh that's worth observing, I think.
• 13:58
  SPEAKER_00: The other observation I'd like to make about that is I'm uh you know the the the market doesn't always get everything right.
• 14:05
  SPEAKER_00: It's the market's job to get prices levels up to a an appropriate level that rations demand to the point of meeting the available supply.
• 14:19
  SPEAKER_00: Pretty simple comments.
• 14:21
  SPEAKER_01: And they're kind of doing that.
• 14:22
  SPEAKER_00: They they may have overdone it, is the point, right?
• 14:25
  SPEAKER_00: So the market works, but it's possible since we're increasing ending stocks already in March, right?
• 14:31
  SPEAKER_00: Like I didn't go back and look this up, but I suspect that I'm right about this.
• 14:35
  SPEAKER_00: If if you go back to previous years when when this when the market was needing to ration, right?
• 14:43
  SPEAKER_00: Supply was lower than last year's demand, again to oversimplify this observation.
• 14:48
  SPEAKER_00: It usually didn't have it all rationed out and over-rationed by the time you got to March, right?
• 14:54
  SPEAKER_00: I'm thinking it would take until May or June or July before we actually got the ill crop balance sheet to fit the supply.
• 15:03
  SPEAKER_00: And so I think it's possible that uh uh well, just make that observation that the market this year uh probably got prices up to a high enough level where it rationed demand, and it may have it may have over-rationed demand.
• 15:18
  SPEAKER_00: In fact, that's what the balance the last two months is saying.
• 15:21
  SPEAKER_00: You the month over-month balance sheet is saying.
• 15:23
  SPEAKER_00: We're actually increasing ending stocks now without adjusting supply.
• 15:27
  SPEAKER_00: So we've we've maybe taken prices up recently to levels that over-rationed against the available supply.
• 15:33
  SPEAKER_00: And so I don't want to beat that up too much, but I think it's worth I think it's worth observing.
• 15:38
  SPEAKER_00: Um, and it will be interesting to see what the reaction is.
• 15:42
  SPEAKER_00: Um part of the reason why we had some higher markets this afternoon is rumors that that uh you know China might be looking at some U.S.
• 15:51
  SPEAKER_00: corn here.
• 15:52
  SPEAKER_00: Um is rumors that uh you know maybe the Russian-Ukraine crisis is gonna create some challenges as it relates to a Black Sea uh wheat movement, those sorts of things.
• 16:00
  SPEAKER_00: So we'll see how that plays out next week.
• 16:02
  SPEAKER_00: But we might, you know, these levels that we traded down to might start to stimulate some old crop demand that that otherwise would have been unexpected.
• 16:10
  SPEAKER_01: And I don't want to overlook the Russia and wheat situation because wheat's still extremely overpriced compared to the Black Sea region.
• 16:18
  SPEAKER_01: So Russia has been having a lot of cheap wheat that they can export out, and uh as we're pulling this wheat market down, it seems like every other day of 20 cents here, 20 cents there, uh, that has a very direct correlation to the corn market.
• 16:33
  SPEAKER_01: So as money pulls wheat lower, so it pulls corn lower as well.
• 16:38
  SPEAKER_01: And uh, you know, Russia maybe doesn't necessarily need to sign the grain export corridor extension, but I know China would really like them too.
• 16:49
  SPEAKER_01: And uh China likes to buy a lot of grain from Ukraine, and uh Russia might want to give China a little bit of favor to sign that deal, get it get it through.
• 16:58
  SPEAKER_01: They got a lot of grain they got to export to, anyways.
• 17:01
  SPEAKER_01: Uh so that'll be something uh to kind of help their buddy out.
• 17:04
  SPEAKER_00: There's a geopolitical issue with all of that too, right?
• 17:07
  SPEAKER_00: We're we're uh uh supporting in in many different ways the uh uh the the the Ukrainian side of that conflict.
• 17:15
  SPEAKER_00: At the same time, the Chinese are benefiting greatly from the Russian-Chinese conflict, cheap oil, cheap wheat from from Russia and Ukraine specifically.
• 17:23
  SPEAKER_00: And so there you connect all the dots as it relates to uh uh increased geopolitical tension between the US and China, right, Mike?
• 17:30
  SPEAKER_00: And so um so I don't know how good a job we just did there, sort of going from uh macro to micro back up to macro again, but uh um hopefully uh um it's uh we can at least appreciate how intertwined all of these things are that we're talking about.
• 17:46
  SPEAKER_00: And you know, just to sort of wrap things up here, Mike, I would just say that uh, you know, it's just uh I guess this week is another reminder of uh the uh uh the high level of volatility that uh are associated with all of these markets.
• 18:00
  SPEAKER_00: And and uh fortunately we have many different tools at our disposal to manage those things, and uh we sure look forward to the opportunity to visiting with anybody as it relates to uh uh the best ways to apply those tools in a way that makes sense for your operation.
• 18:18
  SPEAKER_01: Thank you, Pat.
• 18:19
  SPEAKER_01: And thank you to all our listeners.
• 18:21
  SPEAKER_01: Please reach out to us at professionaleggmarketing.com.
• 18:24
  SPEAKER_01: Check out our other podcast as well, Professional Egg Marketing, that's released every Friday.
• 18:30
  SPEAKER_01: Trading commodity futures and options involves substantial risk of loss and is not suitable for all investors.
• 18:36
  SPEAKER_01: See you next time.