The Federal Reserve Bank and central banks in Europe and other developed countries use multiple strategies to try to tame inflation. Those strategies, and the reality of their impact, are perplexing and difficult to understand. As you well know, interest rates have been at historic lows for many years. To stimulate growth in the economy, the Federal Reserve Bank took deliberate actions even before the pandemic but certainly during the early phases of the pandemic.
One of the principal ways the Federal Reserve Bank controls the money supply, and therefore the interest rate, is to buy or sell treasury securities and other financial instruments. Without getting too complicated, when the interest rate is near zero and the economy stalls, the Fed can increase the liquidity of banks by buying these instruments and providing the system with more money to borrow at very low rates.
During the past several years, this policy artificially stimulated growth. When the pandemic happened, even more stimulus was needed because people were leaving work in droves and businesses were closing. The government flooded citizens and businesses with handouts and “loans,” which did not need to be repaid if used to hire people. All those actions set up what we are experiencing now: runaway inflation (too much money chasing too few goods). Now the Fed has reversed course and is selling back the securities it previously bought (which takes money out of the system) and raising interest rates to make everything more expensive to curtail spending. Eventually, it will all work out, but it will be difficult to fine tune, so we do not enter a serious and extended recession.
How Does this Affect Pork Producers?
It lowers both demand and quantity demanded at previous market clearing prices. Yes, every bit of pork produced will be sold or frozen but not at previous prices. Even though average retail prices are rising, this is measured from a sample and while it tends to be directionally correct, as you can imagine it’s not very accurate for any one location or region. For instance, ground beef was recently $1.99 per pound at one of my local stores and bacon was $2.99 per pound. The temporary price drop is to encourage you to purchase more. A very sharp reduction in a lot of global trade is about ready to unfold.
High interest rates, and right now, 100% guaranteed new issue CDs of various lengths can be purchased at 4.5% interest, induce U.S. and foreign investors to sell stocks and invest in “cash” and U.S. treasuries. This takes “spendable money” out of the economy and does not directly stimulate business growth. These purchases create a demand for dollars to buy them and the value of the dollar soars against other currencies, which do not have as good a risk-free investment opportunity.
U.S. pork export sales are down except for Mexico. The Peso is a special case and in high demand for investments throughout Latin America and South America, so it has maintained its value to the dollar. Therefore, Mexico keeps buying U.S. pork like crazy because it has not become more expensive, at least in the exchange of currency.
On the other hand, the Euro, normally trading at $1.12 to $1.20 is currently below 97¢. Same goes for the Pound Sterling, which normally trades at about $1.30 but came very close to par with the dollar before bouncing back to about $1.10. It’s time to vacation in Europe. Since oil is priced in U.S. dollars worldwide, the rise in the value of the dollar makes energy more expensive at a time when global energy supplies and trade are being dramatically disturbed by the war in Ukraine.
Why the Dim Outlook?
Since hog inventories are going down, why do futures traders have a dim outlook for late fall 2022 and early spring 2023? They see continuing trouble in the export markets and increasing unemployment, which might exceed rates we have not seen for many decades. There is no good news either in terms of cost of production for next year, plus farms still can’t get enough workers. Regardless of the shrinking pork supply, the Fed is going to make it difficult to continue making purchases by slowing business development, raising the cost of everything and probably creating a substantial amount of unemployment.
Yes, people will still eat pork and other foods, but you might be surprised at how middleclass and lower income households remix the dinner table and “stretch” what used to be two pounds of pork at dinner to one pound with more filling and low-cost side dishes, such as rice and potatoes, or blended carbohydrates, such as pork stews.
Read More:
Don’t Underestimate Inflation in Your Forecast Model
Meat Values Stoke Revenues; Inflation Offers Pause, CoBank Says
Sustainability: Where Should Pork Producers and Allied Industry Focus?
