In the past 15 years, several states have passed laws regarding the amount of space that specific types of farm animals- pregnant sows, veal calves and laying hens- must be given. The constitutionality of one of these laws, passed as a ballot proposal in California, will be considered in October by the Supreme Court of the United States (“SCOTUS”).
“Prop 12” was passed in 2018 and required that eggs produced and sold in California be from cage-free hens. Additionally, it required that pork and veal sold in California come from farms without veal crates or gestation crates. These requirements apply not only to California producers, but also to producers across the country (and the world) selling products into the large California market. While Prop 12 took effect in January 2022, a California state court has prevented its enforcement until six months after the regulations outlining its administration are finalized.
Prop 12 was also challenged in federal court. In one case, the National Pork Producers Council and American Farm Bureau Federation (“NPPC/AFBF”) argued that it violates the “commerce clause” to the United States Constitution. The commerce clause gives Congress the right to pass laws affecting multiple states. On the flip side, the “dormant commerce clause” limits state legislatures, with some exceptions, to only passing laws affecting people located in that specific state. The NPPC/AFBF case argued that Prop 12 acted as a barrier to trade between states by imposing obligations on out-of-state competitors in order to assist local producers.
The plaintiffs lost at both the federal district court and the Ninth Circuit Court of Appeals. However, NPPC/AFBF requested that SCOTUS hear the appeal and that request was accepted. It will be heard at SCOTUS on October 11th. To see other states with similar statutes, click here.
International trade is pivotal to the U.S. meat industry. Yet, firms that engage in international markets differ widely in terms of their foreign market participation. Using transaction-level bills of lading for meat firms in the Southern United States, we calculated the destination and source market concentration in the meat trading industry. We used the number of firms and their meat trade share to measure market concentration in the meat export and import markets from 2010 to 2020.
We find that more than 60 percent of meat exporters and importers are engaged only in a single foreign market, while only a few dominant firms participate in more than ten foreign markets. These firms account for 5 percent of all meat exporting firms while being responsible for more than 80 percent of meat exports. Their trade share has increased by 10 percent from 2010 to 2020. In contrast, the export share of firms exporting to less than four destinations decreased from 20 percent to less than 10 percent in that period. The meat import market is less concentrated and more stable over time. Meat firms importing from only one source market accounted for 9 percent of all meat imports in 2020, while that share is merely 3 percent in the meat export market. The import market concentration is significantly larger than in the export market. Fewer than 2 percent of firms export to 10 or more markets, while they accounted for a considerably smaller share of overall meat imports (47 percent) in 2020.
A potential explanation for the high market concentration in the meat trading market is that firms face fixed costs in serving foreign markets and need to recoup sufficient revenue to cover the high fixed cost of serving multiple markets. Smaller firms that are not profitable enough to cover these fixed costs are less likely to build foreign distribution networks. In comparison, larger firms benefit from economies of scale in their international distribution network. Therefore, the observed market structure is likely a result of the domestic market concentration, which results in larger firms being more active in international markets. The benefits of global logistics operations are easier to reap for larger firms, making meat supply chains more vulnerable to domestic and foreign market shocks than other industries. The current supply chain crisis increased the costs of doing business, making it harder for smaller meat trading firms to stay in the market due to lower international profit margins. Southern meat firms must have access to reliable and economical transportation options to ensure their economic success.
Heidi Schweizer, Agricultural and Resource Economics, North Carolina State University, email: hschwei@ncsu.edu; Sandro Steinbach, Corresponding Author, Agricultural and Resource Economics, University of Connecticut, phone: 860-486-1923, email: sandro.steinbach@uconn.edu; Xiting Zhuang, Agricultural and Resource Economics, University of Connecticut, email: xiting.zhuang@uconn.edu. We are grateful to IHS Markit for facilitating access to the PIERS database and acknowledge financial support from the Storrs Agricultural Experiment Station for this study.
Interest rates and inflation are closely linked phenomena. As we discussed last week, expectations about inflation can provide insights to the direction of our overall economy. The yield curve is another place where the market interest rates reveal a sense of what the market expects with regard to inflation and future economic conditions.
The yield curve is simply the structure of market interest rates for instruments (treasury bills or corporate bonds) with varying maturity dates. Ordinarily, the yield curve is expected to slope upwards: that is, as maturity length on a financial instrument increases, the yield on that instrument increases as well, reflecting the normal expectation that investors have to receive a higher yield to commit to longer-maturing investments. In addition to the higher real interest and risk premiums associated with longer-maturing investments, expectations about inflation are embedded in the relationship between time to maturity and yield.
A steep yield curve (longer term rates are much higher than shorter term rates) can suggest the market expects higher inflation, economic growth, and/or volatility. A flatter curve (little difference between short and long term rates) can signal lower inflation expectations and more stability. Sometimes the yield curve inverts or slopes downward, with yields declining as maturity increases. An inverted yield curve signals expectations of deflation and is a fairly reliable indicator of an impending recession.
Figure 1 shows the yield curve for Treasury bills/notes with maturities from one month to 10 years for the last day of April 2022 compared yield curves from February 2020 and November 2007.
Figure 1. Treasury Yield by Maturity: Selected Daily Yields, 2007 to 2022
Data Source: U.S. Department of the Treasury.
Clearly, in the recessionary environments of 2007 and 2020, the yield on long-maturity instruments was much lower relative to short-maturity instruments than would generally be expected.
Recent changes in the shape of the yield curve trace out the development of inflation expectations in the post pandemic period. Figure 2 shows the daily yield curve in two-month intervals beginning with the last trading day in August 2021.
Figure 2. Treasury Yield by Maturity: Selected Daily Yields, 2021 to 2022
Data Source: U.S. Department of the Treasury.
Not only have rates increased since last summer, but the slope of the yield curve has changed. For maturities ranging from 1-month to 2-years, the curve has grown considerably more steep as of June 2022, likely indicating expecations of a continued struggle with inflation in the near term. However, for maturities over the range of 1-year to 10-years, the curve has become flatter (compare October 2021 with June 2022). The yield curve has not inverted as, for example, in 2007, which would suggest strong expectations of an imminent recession. However, the longer term portion of the curve becoming flatter suggests an outlook of at least a slowdown in the economy that eventually gets inflation under control.
Cattle producers should see a bit of relief from high feed expenses over the next few months. The CME DEC ’22 Corn contract has fallen from a contract high of $7.64/bu. on May 16 to $6.23/bu. Some other commodities used in feed rations, such as distiller’s grains, have seen similar downward moves. These feed price changes can have a compounding impact on feeder cattle prices. As inputs become cheaper, feeder cattle become a relatively more profitable investment which lifts their value. It is common to see corn and feeder cattle prices move in opposite directions.
In the chart below, the CME DEC ’22 Corn price (black line) has declined significantly from mid-June to now. Corn is a significant input in feeding cattle and the CME OCT ’22 Feeder contract (green line) experienced a corresponding increase in value.
Since the contract high two months ago, cost of gain (COG) has fallen significantly while feeder cattle also became relatively more profitable. If COG is calculated:
then estimated COG, including yardage, fell from $1.11/lb. to $0.90/lb. from mid-May to the present, providing at least $0.20/lb. additional revenue before even considering the change in value of feeder and fed cattle. This also makes dry-lotting cows and placing lightweight cattle on feed a more feasible option given low pasture availability and historically high price of forage.
The cotton futures market is on the decline, having experienced a dramatic selloff starting June 17, 2022. As shown in Figure 1, December 2022 Cotton Future prices dropped from the May 17, 2022 high of 134 cents per pound to around 120 cents per pound on June 15, 2022, only to be followed by a plunge to a low of 91.2 cents per pound on June 28, 2022. The selloff has created concerns among cotton producers about this year’s profitability. What was the cause of the recent market plunge?
Figure 1. December 2022 Cotton Future Prices for the Past Year
Source: barchart.com
Since September of last year, the cotton futures market experienced an inflow of speculative money, which pushed cotton prices to levels that exceed those indicated by supply and demand fundamentals (more information here). The flow of speculative money in and out of cotton markets makes prices unpredictable and volatile. However, with the recent speculative money leaving the cotton market, prices fell sharply, possibly with a temporary correction below the price supported by global cotton supply and demand fundamentals. What caused this sudden withdrawal of money from the cotton market?
Cotton and cotton-related products are discretionary items. Thus, cotton prices tend to follow the economy, with cotton prices rising during economic growth and declining during recessions. Many economic indicators point to the direction of a global economic slowdown, with the possibility of a recession in the United States. The S&P 500 index, one of the main indexes for the U.S. stock market, recorded a 20% drop in June from its January closing peak to confirm a bear market. Meanwhile, soaring inflation put extra pressure on consumers. The annual inflation rate in the U.S. accelerated to 8.6% in May of 2022, the highest since December 1981. Embedded in inflation, energy prices rose 34.6% and food costs surged 10.1%. Severe supply disruptions caused by geopolitical tension and Covid-19 reduced global economic productivity, hindered the ability to meet consumer demand, which resulted in an economic slowdown and high inflation rates globally.
The soaring inflation, especially for food and energy, reduced consumer confidence and forced the consumer to rebalance their budgets for spending. This could lead to consumers reducing the purchase of apparel and apparel-related products. Meanwhile, in response to high inflation, the Federal Reserve increased the federal funds rate to tamp down inflation – on June 15th the Federal Reserve increased interest rates by three-quarters of a percentage point, its largest rate increase since 1994 and the third rate increase in 2022. The Federal Reserve’s commitment to bringing inflation back down to its target of 2% indicates a strong possibility of further interest rate hikes in 2022 and 2023. The rising interest rate further accelerated the appreciation of the U.S. dollar, as the U.S. Dollar Index reached its three-year high at 104.01. Cotton is a global commodity; on average, over 80% of cotton produced in the U.S. is exported. The appreciation of the U.S. dollar increases prices paid by foreign consumers and makes U.S. cotton less attractive. All of these concerns contributed to the withdrawal of money from the cotton market and the recent decline in cotton prices from the peak.
The impact of this year’s global cotton production on prices is yet to be seen. High cotton prices during the planting season attracted more cotton planted acres globally. However, the Southwest United States, the major cotton-producing region in the U.S., is experiencing severe drought and is anticipating lower production this year. Globally, the USDA June forecast for cotton production could reach 121.3 million bales, 4 million bales larger than last year. The projected USDA global ending stocks are maintained at a relatively low level at 82.7 million bales. Lower cotton production in the U.S. could provide some support for harvesting prices domestically. However, with a higher global cotton production forecast, global cotton prices could drop further if the global economy enters a recession and stock markets continue to experience losses for the remainder of this year.
Producers who are not in a marketing pool are encouraged to develop a marketing plan to protect the harvest price, as it is risky to lock in high input prices without a marketing plan for the crop. In addition, producers can adjust their harvest price expectations and manage their in-season production decisions accordingly.
