Inflation eases; Fed signals continuing, but potentially smaller, rate increases; ’23 recession remains likely

Grain prices: Balancing on the tip of a pencil

Eric Gorman is not a meteorologist, but he has an apt outlook for the state of global grain prices: mostly cloudy with continued volatility. Gorman, a senior transaction origination management officer in CoBank’s Capital Markets division, says prices are literally at a tipping point, set to increase or decrease, based on the slightest bit of positive or negative news. 

“I tell people we're balancing on the tip of a pencil, and anything could sway us one way or the other,” said Gorman. “As long as we have unknowns like we have in the world right now— particularly with the situation in Ukraine—and tight grain and food supplies, any news can set prices on a path up or down.

“There are certainly differing opinions,” Gorman continued, “but I still believe that commodities—corn, soybeans and wheat—while still historically high, are at the lower end of their pricing threshold. I see reasons for prices increasing further, including being at the tail end of the harvest.”

Gorman says the domestic production picture is mixed, with some regions having an excellent year and others a poor year, drought being the culprit.

“We have pockets that are very good on the farmers’ side, and other pockets, including some large producing areas, that were heavily affected by drought,” Gorman said. “Nebraska, Kansas and western Iowa had drought issues, and the wheat crop was light. But eastern Iowa and Illinois were unaffected and had a good yield.

“On balance, I think production is likely to come in close to the USDA forecast,” Gorman concluded.

Gorman also said the higher-price environment led many farmers to sell their 2022 harvest early and—because of their generally strong cash positions—opt to defer payment until January 2023. Federal tax law permits such deferrals for cash-based tax filers. 

Infrastructure funds pivot to fiber-to-the-home

Even before the pandemic, infrastructure funds sought alternatives to their investments in toll roads, railroads and other transportation assets. When the pandemic hit, and people curtailed their travel, the issue became more acute. 
 
Their answer? Fiber-to-the-home.
 
“Infrastructure funds were already seeing the potential of Tier 3 markets and rural FTTH before COVID,” said Lennie Blakeslee, managing director, Communications division of CoBank. “Then, what had been accelerating interest has turned into something of a land-grab mindset where infrastructure funds and private equity sponsors are acquiring companies they can utilize as a platform for growth. And that growth is primarily FTTH expansion.”
 
Blakeslee says the interest is driven more by quality of potential acquisition targets rather than a certain area or region of the country.
 
“It's not so much particular parts of the country, but rather attractive companies that cover good and growing markets, where there is an opportunity to deploy fiber quickly,” said Blakeslee. “They tend to be companies that already have a high level of fiber penetration with significant adjacent markets and rural areas that can be added efficiently.
 
“We have recently funded transactions where smaller-sized companies were acquired by larger private equity funds that have retained the respective management teams,” continued Blakeslee. “In each case, these were rural markets where the existing owners may not have had the capital to take advantage of the market opportunity.
 
“And we are, of course, working with existing and prospective customers to be a dependable source of financing to accommodate investments in FTTH, while also supporting other communications industry sectors,” Blakeslee concluded.

Money center banks feel the squeeze; CoBank remains open for business

When an economic downturn knocks at the front door, many investors allocate more resources to support the power and energy industry. Predictable demand gives it a stable, low-risk profile during turbulent economic times. So, when it comes to investment grade syndicated lending, utilities and energy companies generally are considered favorable customers that should garner attractive rates from lenders.

Conventional wisdom says the lending market should be flush with cash for power and energy providers looking to expand, right? Nope. At least not right now. 

Many large money center banks that have committed large sums to several large, high-profile leveraged loan deals have become oddly more selective in their loan activity. 

Enormous loans to Twitter, cloud-computing provider Citrix, automotive components manufacturer Tenneco, and others, have certain money center banks licking their wounds from substantial losses. The result? They are leaving many less-risky, investment grade borrowers out in the cold.

“Power and energy borrowers are in a strange environment right now,” said Bill Fox, managing director of Capital Markets with CoBank. “The large, highly leveraged loans to Twitter and the others, of course, have nothing to do with the energy industry. But these companies have, in essence, sucked up the funding resources, and now are giving some large money center banks pause on other activity, even to low-risk borrowers.

“With their significant leveraged loan losses, some commercial banks have suddenly found themselves unable to freely lend because their capital levels have shrunk,” Fox continued. “Unless they can get incremental economics or ancillary business to make up for some of their losses, they’re often unwilling to lend in the current environment. The result is that the pool of capital available from commercial banks appears to be shrinking.

“CoBank, of course, is unaffected by this because we’re a mission-based lender focused on agriculture, infrastructure, and rural economies,” Fox concluded. “We’re open for business and ready to help our customers with their financing needs.”