FED action and the Demand for Pork

     As the US and global recession deepens, the monetary authorities in the UK, the EU and the US are driving interest rates to record low levels.  Today the FED cut the Federal Funds rate, the overnight lending rate to banks, to a range of zero to 0.25 percent which is the lowest rate on record.  The action is an effort to make holding cash by banks so disadvantageous that they are tempted to begin lending in order to earn a return.  The action is meant to increase the money supply, an action which is deemed safe now since its primary danger (inflation) appears as no immediate threat due to slumping demand and rapidly falling prices for everything from housing to gasoline. 

     In a normal economic environment, interest rates at this level would so dramatically expand the money supply that inflation would almost certainly accelerate and climb rapidly.  However, expansion of the money supply requires that banks lend money.  The FED tries to stimulate more lending by reducing the cost of access to cash to next to zero but it requires lending to increase the money supply.  Fear and the uncertainty of viability of borrowers is keeping bank vaults pretty tight.  Without expansion of the money supply and without the debt fueled purchasing to boost demand, prices will show little upward pressure and in fact will deflate as they are currently doing. 

     The real danger of inflation will appear as the economy begins to recover.  There will be a fine line to manage as the FED will have to then begin raising interest rates to contract the money supply and avoid the creation of another round of bubbles as cheap money begins to be invested in all sorts of activities and assets when the fear wears off.  Ramping up the interest rate will need to be in a fashion which stops bubbles but doesn't choke off recovery.  The fall in the value of the dollar which accompanies money supply expansion will be supportive of the export markets for agricultural commodities.  The problem currently is that demand is disappearing as global unemployment rises and wage incomes are cut.  Regardless of how cheap a commodity gets, if there is limited money for purchasing, prices will have a hard time being forced higher.

     China and India will have the largest declines in growth in a decade or more and signs of recession are abundant there.  Chineses exports in November actually shrank on a year over year comparison, which has not happened in many years.  Reportedly, thousands of factories are closing, at least temporarily,  and a new stimulus package along with allowing the Chinese currency to decline relative to the dollar are part of an emergency set of strategies being put into place to avoid widespread political instability.  Again, the Chinese have the same problem as US pork producers.  Their falling currency makes Chinese goods cheaper but there still may be little quantity demand response since US consumers have dramatically slowed buying. 

     Japan, our largest importer of US pork is also showing signs of a major contraction.  Wages are stagnant or decreasing and the value of assets, especially homes is declining.  The "wealth effect" which describes the correlation between current household spending and the value of household assets is in reverse in Japan, which will lead to a decline in spending, especially on discretionary items, which may very well include imported pork products.

     The 50 billion dollar Madoff ponzi scandal is just another example of the "land mine" mentality which is gripping US and world financial centers.  Fear of the future and wondering where the next blow will come from is continuing to cause a "siege mentality" among investors and lenders.

     In agriculture, banking regulators are breathing down the neck of chief credit officers and their lenders making it very difficult to borrow for new enterprises.  Increasing lines of credit to cover losses and to fund the high cost of production both in crops and livestock is about the limit to the risk most lenders are willing to consider, and that, only for their most durable producer clients.

     All of this has brought us back from the many "stocks-to-use" crises which were driving commodity prices straight up.  As demand falters amid production declines, the US pantry is likely to be well stocked with feed grains, gas and building materials for many months.