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Too Many Dollars Chasing Too Few Goods

After years of stable and low inflation and an almost unprecedented stretch of steady economic growth, our economy is now experiencing the highest inflation we’ve seen in over 30 years.  No doubt you have seen Jerome Powell, Chair of the Federal Reserve System Board of Governors commenting on actions taken to curb inflation.  With recent inflation running in the neighborhood of 8% as measured by the Consumer Price Index (CPI), response by the Federal Reserve (Fed) will continue to be front page news and will be critical to economic conditions moving forward.  In that light, I thought a brief overview of the players, tools, and terms might be helpful.

Inflation most simply defined is a general rise in prices of all things, including consumer goods, manufacturing goods, and labor.  The simple cause has been described as “too many dollars chasing too few goods.”  Right now, we have that problem from both sides.  Goods and labor are both in short supply, while there is an abundance of consumer demand and government spending (dollars eager to be spent).  Limited supplies of goods and labor push up prices and wages.  Higher prices and an abundance of dollars effectively lowers the value of each dollar.  Inflation is mostly problematic because it happens in “spits and spurts” with some prices rising faster than others creating winners and losers, instability, and economic uncertainty.  Uncertainty drags down consumer confidence, business investment confidence, and therefore economic growth.  The scary part about inflation is its ability to gain momentum as a vicious cycle or a self-fulfilling prophecy.  As people and businesses adjust to rising prices, they often do so by raising other prices to compensate for the increased expense.  People’s expectations also play a huge role.  If everyone expects inflation over the next year or two, their business negotiations and price setting choices will reflect their expectations and some portion of inflation can be blamed on the fact that people “thought” we would have inflation.

The Federal Reserve System is our country’s central bank responsible for managing, among other things, our currency, or the money supply.  From the Fed website, their purpose is providing “…the nation with a safe, flexible, and stable monetary and financial system.”  They have a few tools in their belt to manage the money supply, influence the value of the dollar, and keep a check on inflation.  In a recession or slow-moving economy, a central bank may push monetary policies described as expansionary or accommodative.  In other words, they are doing things to stimulate activity such as business investment, employment, and consumer purchasing.  In our current situation, to fight inflation the Fed has started actions to tighten the money supply, or what is called contractionary policy.

By far, the tool you will hear the most about is what the Fed is doing with short term interest rates.  The Fed sets a target range for the Fed Funds Rate, which is the interest rate banks pay to borrow overnight funds.  As a benchmark, the Fed Funds Rate establishes the availability of money and influences other short term cash markets.  When inflation is driving down the value of the dollar, the Fed will increase interest rates to make borrowing more expensive, slowing down the supply of money to increase or support the value of the dollar.  Since the onset of the pandemic, the Fed Funds Rate sat on a range of 0.00% – 0.25%.  On March 17, 2022, the Fed bumped the range up a quarter of a percent to 0.25%-0.50%.  The have also announced their intention to continue increasing the rates steadily throughout the coming year.  They will often signal their future actions to avoid surprising financial markets, instill confidence, and dampen inflation expectations.

Open market operations refer the Fed buying and selling of treasury securities.  The buying or selling of short-term securities are moves used to help achieve the targeted Fed Funds Rate.  The Fed may also buy and sell longer term assets, such as 10-year Treasury Notes.  In either case, Fed purchases pump money into the system and the Fed holds the security as an asset.  On the other hand, if the Fed is fighting inflation, they may sell securities and park the cash on their balance sheet to effectively reduce the supply of money floating around in the economy with the intent to make each dollar more valuable.

On the surface the problem seems basic.  When there are too many dollars as we have now, you take some money out of the system.  In reality, the system is incredibly complex and drives much more like a barge than a sports car with the Fed nudging the money supply, interest rates, and the economy in one direction or another.

Klose, Steven, and George Knapek. “Too many Dollars Chasing Too Few Goods.” Southern Ag Today 2(15.3). April 6, 2022. Permalink

April 6, 2022
March Cattle on Feed Sets a Record

The latest Cattle on Feed report was released last Friday and reported a record high level of cattle in feedlots for any March. The March 1st total of 12.16 million head was up 1.4 percent above a year ago and is the highest total since the data series began in 1996. Placements during February 2022 totaled 1.85 million head which is 9.3 percent above placements during February 2021. It is important to note that February 2021 was unique because of the major winter storm that affected cattle markets and limited cattle transportation among many other impacts.

The biggest percentage increase in placements was seen in cattle weighing 800-899 pounds. Placements of this category were up 12.5 percent compared to a year ago. However, other weight groups were also up sharply with the less than 600 pound group being the smallest increase but still up 7.5 percent above year ago. The 600-699 group was up 10.2 percent and the 700-799 group was up 8.6 percent. Marketings of fed cattle during February totaled 1.83 million head. This was nearly 5 percent above February 2021 which included the winter storm.

Dry conditions in many grazing areas likely contributed to some feeder cattle being placed sooner than normal. Looking ahead, the expectation of tighter supplies is still looming, but it is not clear exactly how or when those tighter supplies will be reflected in feedlot totals. Drought concerns remain a critical factor overhanging the cattle sector.

Maples, Josh. “March Cattle on Feed Sets a Record“. Southern Ag Today 2(15.2). April 5, 2022. Permalink

April 5, 2022
Indirect Effects of the Eastern European Conflict on Cotton

The conflict between Russia and Ukraine has direct implications on the global supply of corn and wheat because of the relatively large quantities of those crops that those two countries produce and export. It is not surprising then that grain futures have risen sharply since the conflict began.

Neither Russia nor Ukraine are importers or exporters of cotton.  So, the war and potential disruption of Black Sea shipping should have little direct effect on cotton trade.  The impact on world cotton markets is more indirect, with a cotton price impact delayed and uncertain.

Relative prices of major U.S. crops have changed since the conflict began.  For example, during January and early February, the ratio of CBOT Dec’22 corn to ICE Dec’22 cotton futures ranged between 5.7 and 5.9.  Historically that outcome would have been associated with 12 to 13 million acres of all U.S. cotton planted (Figure 1).  Such a level conforms to the early grower surveys of intended plantings, and also to USDA’s Outlook Forum forecast of U.S. cotton planted acreage.

More recently, however, as corn prices have risen, the corn: cotton futures price ratio has shifted higher, e.g., as of March 14, it was 6.3 (see Figure 1).  The associated level of cotton acreage is roughly a million fewer acres compared to predictions from earlier in the year.

Now, the previous change can only happen if growers have enough time and the right technology (e.g., herbicide programs, seed availability) to adjust crop mixes at this late date.  This point highlights the generally uncertain outlook picture for 2022.  Assuming fewer cotton acres, the result would tighten up the U.S. cotton balance sheet and support summertime futures prices at higher levels than previously expected.  Over the past 10 years, U.S. cotton has been responsible for a third of global cotton exports. The weather market volatility implied by the drought in the southern plains could be significant for prices and be further exacerbated by uncertainty about input decisions.  The latter includes fuel and potash fertilizer, the costs of which could rise directly from trade disruptions out of Russia.

Robinson, John. “Indirect Effects of the European Conflict on Cotton“. Southern Ag Today 2(15.1). April 4, 2022. Permalink

April 4, 2022
The 10th Circuit Dismisses “Product of the U.S.A.” Mislabeling Claims

On March 11, 2022, the United States Court of Appeals for the Tenth Circuit dismissed a case holding that beef products labeled as “Product of the U.S.A” are not misleading. Thornton v. Tyson Foods, Inc., — F.4^th —, No. 20-cv-2124, 2022 WL 727628 (10th Cir. 2022). Robin Thornton, one of the plaintiffs, is a beef consumer and claimed that “Product of the U.S.A.” labels deceived her into thinking the labeled beef originated from cattle born, raised, and slaughtered in the United States. The other plaintiff, Michael Lucero, is a beef producer who claimed he was paid less for his domestic cattle as a result of Defendant’s labeling practices. Both plaintiffs claimed that “Product of the U.S.A.” labels are misleading when the beef is derived from cattle either imported live or imported post-slaughter. Both plaintiffs brought their claims under New Mexico state law, not under the Federal Meat Inspection Act (FMIA). However, the main issue in the case was whether the FMIA preempts such state law claims.

This case dealt with two provisions of the FMIA. Under the first provision, meat labels must not be “false or misleading” and must be “approved by the Secretary” of Agriculture. 21 U.S.C. § 607(d). Secondly, the FMIA prohibits states from imposing any additional requirements which are “in addition to, or different than” the requirements imposed by the FMIA. 21 U.S.C. § 678.

The court reasoned that there is a presumption that labels are not false or misleading if the Secretary of Agriculture, through the Food Safety and Inspection Service (FSIS), approves the labels. Because FSIS approved Defendant’s labels, the court found that the labels were not misleading. Therefore, the court held that the plaintiffs failed to state a false advertising claim.

Additionally, the court found that the plaintiffs’ state law claims are expressly preempted by the FMIA. The court explained that if a federal statute expressly preempts state laws, then the corresponding state law must be interpreted and applied the same way as the federal law. Therefore, the court held that the FMIA expressly preempts state laws, and therefore, New Mexico state law must be interpreted and applied exactly as the FMIA.

However, not all of the Circuit Court judges who heard this case agreed. One dissenting judge disagreed with the majority opinion, and argued that just because FSIS approved a label does not mean that the label is not false or misleading. The dissent focused on the language of the FMIA, which states meat labels must “not [be] false or misleading and … [must be] approved by the Secretary.” Thornton v. Tyson, (quoting 21 U.S.C. § 607(d)). The dissent argued that the use of “and” to connect these two requirements suggests the FMIA “contemplates the existence of—and indeed proscribes—labels that are both misleading and approved by the Secretary.”

If the plaintiffs choose to, they can appeal the 10th Circuit’s opinion to the Supreme Court of the United States. However, the Supreme Court only hears a fraction of the cases appealed to them. Also, regarding “Product of the U.S.A” labeling, FSIS currently has an information collection request awaiting approval from the Office of Management and Budget (OMB). FSIS is seeking approval to conduct a “web-based survey/experiment to help gauge consumer awareness and understanding of current ‘Product of USA’ labeling claims on meat (beef and pork) products and consumer willingness to pay”.

Caracciolo, Jana. “The 10th Circuit Dismisses “Product of the U.S.A.” Mislabeling Claims“. Southern Ag Today 2(14.5). April 1, 2022. Permalink

April 1, 2022
President’s Budget: Does it Matter?

It’s around this time of year – with the release of the President’s budget – that we start to get a lot of questions about what’s going to happen with Federal spending for the year.  The questions are quite natural given the amount of attention the release of the President’s budget generates and the enormous volume of pages it fills (i.e. this year the Appendix alone spans 1,400 pages).  It’s somewhat ironic, then, that the Constitution gives no formal role to the President in the federal budget process.  In fact, the Constitution vests the authority to “lay and collect taxes” and to authorize the withdrawal of funds from the Treasury exclusively in the U.S. Congress.

While Congress controls the power of the purse, for the past 100 years – since passage of the Budget and Accounting Act of 1921 – there has been a statutory role for the President in establishing a budget and presenting it to Congress.  For the past 30 years, Federal law has stipulated that the President is to submit the budget to Congress “on or after the first Monday in January but not later than the first Monday in February of each year” (we’ll save the discussion about whether they are submitted on time for another day).

If Congress controls the purse strings, then what’s the point of the President’s budget?

First, it kicks off the Congressional budget process.  In exercising the power of the purse, Congress establishes a budget resolution, which is a broad revenue/spending framework (which is also the basis for budget enforcement) that also provides spending allocations to the Appropriations Committees.  The budget resolution can also include reconciliation instructions, which featured prominently in last year’s debates on the Build Back Better Act.

Second, the President’s budget is an overview of the President’s policy vision.  Often, that vision includes proposing significant changes to existing Federal programs.  With respect to agriculture, notably, the last two budget cycles broke with recent tradition which had proposed a litany of ways in which farm policy could be slashed to save money.  Last year’s budget was silent on the matter and this year is no different.  With that said, the budget does hint at other significant changes that could have a major impact on agriculture.  For example, the so-called Green Book –the Treasury Department’s explanation of this year’s revenue proposals – contemplates imposing capital gains at death.  The Agricultural & Food Policy Center (AFPC) reported last summer on the enormous impact that the elimination of stepped-up basis (or the imposition of transfer taxes) could have on agricultural producers.  While the President can propose changes, only Congress has the power to actually change the law.

Bottom line:  the President’s budget kicks off the budget process and signals the policy priorities of the Administration, but it’s Congress that ultimately controls the purse strings.

Fischer, Bart. “President’s Budget: Does it Matter?“. Southern Ag Today 2(14.4). March 31, 2022. Permalink

March 31, 2022