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Manure - The New Hot Commodity

There simply wasn’t anywhere to hide this week as the markets began digesting first quarter earnings announcements coupled with a nagging fear that the Federal Reserve will be overly aggressive in the months ahead.  Today alone, most indices fell between 2.5% and 3%, with every sector, except for REITS and consumer staples, finishing the week in the red.  For the year, things look a bit more like a barbell with the energy sector up 37%, while the consumer discretionary, technology, and communication sectors down 14%, 19%, and 19% respectively.  If you’re counting on bonds to come to the rescue, that too isn’t working this year.  The Bloomberg U.S. Aggregate Bond Index is down 9.31% YTD.  Hedging against rising interest rates has helped significantly, but at the end of the day, this is a very turbulent market with a whole lot of pent up anxiety.  I expect this volatility to continue into the foreseeable future as earnings announcements continue, and the Fed moves forward with interest rate hikes.

What started as a fear regarding growing inflation, has morphed into a fear of the medicine the Fed is about to feed the economy.  Inflation is a bigger problem than the Fed had let on, and despite its admonishments to the effect that it would be transitory, we all now know that wasn’t true.  If anything, inflation has grown faster and more significantly than anyone predicted.  While supply chain issues persist, so too does the demand side of the equation.  Wage inflation is a substantial part of the inflation story and it does not appear to be abating.  This week we learned Verizon is raising its minimum wage to $20/hr while Fifth Third Bank announced a similar increase to $20/hr beginning in July.  And Apple employees, who are threatening to unionize, are now demanding a wage hike to $30/hr.  As long as there is an excess of jobs available, there will be a push to increase wages.  In fact, much of the churn we see in the labor market today is employees who are jumping between low-wage jobs for higher paying opportunities.

About inflation, we may have peaked in March or April, but it will likely be a while before it decreases in a meaningful way.  Corn and soybeans closed in on an all-time high this week as President Biden lifted the ethanol cap on gasoline from 10% to 15%, also known as summer-blend gasoline.  The Department of Energy released a report suggesting a 24% increase in bio-diesel consumption in the U.S. during 2022, following conversion of nearly 1mb/day of oil refining capacity into largely soybean-fed-bio-diesel production.  While the aim of these measures is to help reduce the price of gasoline, it will likely have the opposite effect of raising the price of many food items, not the least of which is beef, pork, and poultry.  Not to mention that vehicles run poorly on gas with a higher ethanol content, getting 15-25% worse gas mileage, and potentially dissolving rubber and plastic parts it meets.  

As is human nature, we tend to thrive on the sensational.  It is why the mainstream media continues to feed us a diet of doom and gloom.  Unfortunately, this has a negative effect on our moods, our behavior, and our way of thinking.  Recent headline I’ve come across include a story from Goldman Sachs which sees a 35% chance of a U.S. recession over the next two years.  Another story was out of The Federal National Mortgage Association (Fannie Mae) which predicts a modest recession in 2023.  All of this leads to the Fed saying it will work aggressively and tirelessly to stamp out inflation, which has the effect of scaring investors.  Jerome Powell confirmed yesterday, he expects there will be a 0.50% interest rate hikes in May which then caused analysts to immediately suggest there will be two 0.75% rate hikes instead.  These types of stories feed the fear and cause the wild swings we experienced this week.  Yes, we anticipate the Fed will continue to raise interest rates to bring inflation under control.  We also believe the Fed may finish its rate hiking well before the market thinks it should, setting up a potential boost of optimism later this year or early next year.  However, it is simply too soon to begin worrying about the next recession 12-24 months out.

In closing I turn to manure.  It seems manure is now a hot commodity, and not for the reason you may think.  It seems fertilizer is in short supply these days due to sanctions on Russia which is a major exporter of the stuff.  Fertilizer prices have risen so significantly that the U.S. government data now suggests it will lead to a reduction of American farmers’ corn and wheat plantings this spring.  As a workaround, farmers are now hunting for manure for this spring planting season, with some cattle feeders saying their manure is sold out through the end of the year.  Apparently, there are even wait lists for manure!  Ranchers, who in prior years had to pay people to take the manure off their hands, are now finding an eager market for the black gold.  It’s hard to imagine that manure can be so valuable, but I guess that’s where we are now.  Now you know.

Bruce J. Mason, MBA