July 10, 2022 – On Friday, two closely watched government reports were released; Consumer Price Index (CPI) data from the Bureau of Labor Statistics and World Agricultural Supply and Demand Estimates (WASDE) from the USDA. The CPI from BLS is considered the benchmark measure of inflation, and with prices of food, fuel, housing and nearly everything else on a tear over the past 18 months, traders and economists were watching closely to see if the worst of the inflation is in the rearview mirror. Unfortunately, we still seem to be in the thick of it.
Government data showed headline inflation increased 8.6% year of year, and up 1% month over month. Those figures outstripped analysts’ expectations of 8.3% and, in news that I don’t think will shock anyone, the great bulk of price increases this past month were in food and energy categories. In fact, of the 10 economic sectors who saw price hikes over 1%, 8 of them were food or energy related. Fuel oil prices are up 16.9% for the year, airline fares up 12.6%, gasoline up 4.1%, dairy products saw price hikes of 2.9%.
It’s worth noting that there are two CPI numbers – headline and core. Headline CPI includes food, and energy, while Core CPI excludes those categories due to their volatility. With energy and food prices excluded, prices were up 6% year over year. The consensus earlier this spring from economists at the Fed and other government agencies was that March was likely to be the month with the highest level of price increases, but this May figure topped March, putting fresh pressure on the Federal Reserve to continue hiking interest rates. Chairman Powell of the Fed has told the market to expect a 50 basis point hike in the Fed funds rate at next week’s FOMC meeting.
A little later on Friday morning, USDA released their June WASDE report, and it didn’t cause near the stir that the CPI data did. On the soybean front, USDA lowered both old and new crop carryouts in the US, but did increase the global bean ending stocks slightly. In the old crop, traders and analysts expected to see a bean carryout of 217 million bushels, but USDA brought that figure down to 205 million largely on the strength of exports.
On the corn side, it was another snooze of a report from a market perspective, with a 40 million bushel bump to carryout expected for the 22/23 marketing year, taking the carryout to 1.4 billion bushels and putting the projected stocks to use ratio at 9.6%. If that holds (and these figures were based on 89.5m planted acres, which will likely change after the Final Planting numbers are released June 30th) this will the third year in a row with a stocks-to-use ratio sub-10%. The last time stocks were this tight in the corn market were ’10, ’11, ’12, and ’13, indicating that demand is still strong even at these elevated prices.
But there is some concern about that very same demand; Chris Swift, of Swift Trading Company joined AOA on Thursday and spoke about the tremendous prices being paid for weigh cows and bulls, and how those prices, combined with continued dryness, are continuing to encourage aggressive culling in the Plains. This certainly could be the summer that sees a large drop in total beef cow numbers, shrinking the calf crop for next year and denting corn for feed demand.
The other wild card on the demand side continues to be ethanol. With gasoline setting record high average national prices almost every day for the past 2 months, drivers are looking for ways to save money at the pump, and ethanol certainly lets them do that in most locations. With emergency E15 use guaranteed over the summer and bills pending in Congress to allow sales of that product year-round, the outlook would appear to be rosy; though if gasoline and diesel prices continue their march higher (and there’s no reason currently to suggest they won’t) the threat of recession could become very real as the summer goes on; which would likely see miles driven collapse and ethanol demand soften. The risks of that happening are growing, with National Park Service reporting that visits to Yellowstone National Park over Memorial Day in 2022 were down 28% from the same weekend in 2021; and Bloomberg reported this past week that past due utility bills were standing at $22 billion this year, up from the average of $12 billion. These higher prices are going to change the way Americans shop, eat, and travel; and the trickle down impacts of these changes might not always be apparent at first glance.