Markets signal aggressive rate cuts, Fed says hold up; volatility persists

Grain sales dry up, but the clock is ticking

With global grain prices still dropping and many U.S. farmers sitting in a strong financial position, grain sales have essentially dried up, according to Marcus Wilhelm, western region president of CoBank’s Agribusiness Banking Group.

“Prices are down dramatically year over year and continue to plummet,” said Wilhelm. “So, farmers’ prevailing mindset is not to sell at current prices, lock the bin doors and wait it out for a period of time because they don’t need the cash right now. 

“For many commercial grain elevators, this isn't a terrible thing because they're earning storage income from producers just to hold the grain,” Wilhelm continued. “But my fear is that when farmers do sell—if only to clear space for next season's crop—they could flood the market, leaving grain companies stuck with inventory they can't move quickly because the processor doesn't need it yet, and they didn't appropriately structure their bid to cover the high cost of carry themselves.” 

Wilhelm expects sales to increase as the year progresses, which will depend, among other factors, on farm storage capacity and cash flow. He noted that fertilizer contracts for the 2025 planting season will come out in the July/August 2024 timeframe, which will force a critical sell/borrow decision because of the large expenditure.  

Opportunities abound for fiber networks serving AI data centers; electrical grid challenges likely to abound, too

Data centers are on fire. Figuratively, of course. The figurative arsonist is artificial intelligence, which is set to have a transformational impact on society and boost economic activity.

AI’s impact on the digital infrastructure market is going to be far-reaching, said Jeff Johnston, lead economist for Communications with CoBank. Johnston points to the explosive growth of NVIDIA Corporation, dominant manufacturer of the graphical processing unit (GPU) chips that run AI applications, as a proxy for infrastructure and, especially, data center growth.

Sales at NVIDIA, which currently has a market cap that exceeds $1.3 trillion, grew a whopping 200% in the third quarter of 2023.

“When we think about the impact AI will have on the digital infrastructure market, it's profound,” Johnston said. “The size and scope of the new data centers we're going to see over the next few years will be enormous.

“And that has implications for companies that build fiber networks,” Johnston added. “These data centers need to be connected with fiber to other data centers and other networks, so there's going to be huge upside demand for fiber infrastructure.

“The scary part is that the electrical grid isn’t ready for this kind of load increase,” Johnston concluded. “The servers running these NVIDIA chips require an enormous amount of electricity, and the grid is not ready.”

Given the explosive growth from AI applications, the impending power grid issues, and the fact that it takes about three years to build a data center, navigating these dynamics to ensure market demands are met will be a major challenge.

Commercial banks express optimism; CoBank remains a steady capital provider

As is typically the case, the new year brings new optimism. In recent memory, however, optimism among commercial bankers and their ability to provide capital hasn’t lasted much beyond the first quarter. 

A year ago, rising interest rates inhibited borrower demand. The same rising rates put banks’ Treasury portfolios deeper underwater, squeezing their capital positions and making them leery of doing much lending.

But now that two years of Fed tightening appears to have ended, and with potential rate cuts in the offing, 2024 feels different, says Bill Fox, managing director for Capital Markets with CoBank. Commercial bankers, he says, are responding positively to the improving market conditions. At least for now.

“We're hearing positive words from our commercial bank contacts,” Fox said. “There's been a large rally in many of the markets these bankers cover. The stock market generally has performed well, certainly through the fourth quarter. And the Fed has stopped raising interest rates, which has caused loan rates to come down and become more attractive to borrowers. 

“The lower rates have also boosted the capital positions at some banks,” Fox continued. “Many of them owned Treasury securities, which were well underwater when the 10-year was at 5%. Now with the 10-year at 4%, they're less underwater. So, it makes you feel better, and maybe you can lend a little more.”

While things feel better, Fox expressed caution about the potential conflict between the views of commercial bank relationship managers and their internal credit or capital committees. Despite improving conditions, capital remains tight at some institutions. 

Meanwhile, he said, CoBank is insulated from these impediments, and has the capital and lending capacity to prudently help qualified customers.