Fed makes smaller rate increase and signals more to come; interest rate and pricing inversions abound

Price inversion for some top grains sends strong sell signal

Significant uncertainty over the prospect of crop planting in Ukraine, questions about the size of the South American harvest, and China’s enigmatic supply-and-demand scenario, have the global grain market in a state of flux. 

According to Eric Gorman, senior transaction origination management officer in CoBank’s Capital Markets division, several years of drought and lingering logistics issues have affected grain production in Brazil and Argentina, two significant players in the global grain market. And Russia’s threats to escalate the war in Ukraine have created considerable doubt over whether Ukrainian farmers will plant any crops in the upcoming planting season.

As of early February, these global market dynamics resulted in price inversions for corn and soybeans, two of the three most heavily traded grain commodities. Wheat, also one of the big three, was seeing normal pricing dynamics where later-dated contracts are priced higher than close-in contracts.

“Purchasers want to lock in their supply, so the market is telling grain merchandisers to sell now,” said Eric Gorman, “In a normal pricing environment, grain merchandisers would sell in stages and hold some inventory for higher-priced contracts later in the year. With the price inversion, the carry in the market that compensates merchandisers for the cost of holding the grain just isn’t there. The message is, sell early, sell often.”

Pricewise, Gorman said grain prices have generally come down from their near all-time highs in Q4 of 2022, despite the current supply uncertainties.

Update: USDA ReConnect

The USDA established the ReConnect Loan and Grant Program to provide loans, grants and loan-grant combinations to facilitate broadband deployment in areas of rural America that do not have sufficient access to broadband.

In 2023, USDA will make additional funding available for high-speed internet in the fourth round of funding for the ReConnect Program. The department will award up to $150 million in loans, up to $300 million in loan/grant combinations and up to $700 million in grants. 

The department is using funds appropriated under the Bipartisan Infrastructure Law, also known as the Infrastructure Investment and Jobs Act. The Bipartisan Infrastructure Law provides $65 billion to expand affordable, high-speed internet to all communities across the U.S. The application deadline for the fourth round of funding was November 2, 2022. Awards will be announced in the coming months.

In October 2022, the USDA announced that part of its third round of ReConnect funding would provide $759 million to bring high-speed internet access to people in 24 states, Puerto Rico, Guam and Palau. The awards were part of $1.6 billion that was available from the third round of ReConnect funding, which supported 101 projects in 31 states and territories.

“CoBank is ready and willing to assist customers with potential ReConnect program needs, including letters of credit and necessary match funding,” said Gary Franke, managing director, Communications division with CoBank.

It’s a new year…but is it really?

A new year brings new budgets, new outlooks and, hopefully, some new optimism. The issue, of course, is that market conditions and deal dynamics don’t watch the calendar. A leveraged finance deal—say, a Twitter or Tenneco—that went south last year doesn’t begin to look any better just because the calendar flipped. 

Banks do watch the calendar, but some of them are operating with a sense of hesitance, as though it’s still 2022. Unfortunately, some of the dynamics of last year’s market caused some money center banks to temper their appetite for even investment-grade syndicated loan deals.

But, according to Bill Fox, managing director of Capital Markets with CoBank, there is room for optimism for an improving market in 2023.

“The question of whether commercial banks are approaching 2023 with a sense of optimism or a sense of fear is still unanswered,” said Fox. “However, we’re in a different time and place, and the banks are looking differently at the Twitter or Tenneco paper that last year was attracting offers of only 85 or 90 cents on the dollar. The market caused them to hold on to that paper with the hope of getting a better price later.

“Now, those lenders are in a position of having to move that 2022 paper in order to get on with 2023 business, so the question becomes not if but when they’ll make their move,” Fox added. “As that paper eventually moves through the system, it should remove some of the overhang—banks should become more willing to lend. There’s still some wait-and-see to be expected.” 

Fox also cited stronger equity market performance, easing inflation and an expected slowing in interest rate increases as signs that market conditions may ease somewhat.

While some power and energy providers have opted to keep large capital expenditures on hold, Fox mentioned that CoBank has been able to help other borrowers to keep moving forward with their expansion plans. Fox added, “The benefit to our customers is that CoBank and our partners in the Farm Credit System are not burdened with the overhang that many commercial and investment banks saddled themselves with in 2022, and we continue to be supportive lenders. We are willing to step up where others are stepping back.”