Fed rate cuts continue: Just when we thought things were improving, volatility raises its ugly head

Strong yields, speedy harvest turns farmers’ attention to cash flow; Grain elevators benefit

The name of the game for marketing the 2023 crop was to wait it out, higher prices would come. 

Unfortunately, they didn’t. Farmers were essentially forced to move their inventory to market prior to harvest, relying heavily on deferred price contracts to buy more time for a price recovery that has yet to materialize. 

Acknowledging the reality of the sustained low-price environment, farmers appear to be taking their 2024 harvest to market sooner, looking for cash flow to manage their operations and living to farm another day. Their decision is being abetted by an uncommonly fast harvest and strong crop yields in many areas.

“By all accounts it was a record pace for harvest,” said Marcus Wilhem, Western region president of CoBank’s Agribusiness Banking Group. “There was no downtime, no breaks for weather. The lion’s share of the harvest was done in just three weeks.

“That’s good for our grain customers because, if farmers are going nonstop for three weeks, they have the speed and space to handle large volumes of grain quickly to keep the farmer in the field,” he continued.

The news isn’t as good for ethanol producers because they are unable to grind corn during weather delays and create more space to capture bushels directly out of the field. 

“The ethanol plants and end users will plug up in a fast harvest like this because they’re unable to grind as quickly as the grain arrives,” Wilhelm added. “In a fast-paced scenario, grain elevators benefit because they get the volume that can’t be handled by end users.”

Wilhelm noted that farmers did get some benefit from the 2024 harvest in the form of strong yields.
 
“In general, yields were strong,” said Wilhelm. “Some areas were hit with drought issues or floods, but yields were relatively strong, especially in the Midwest. Farmers have been especially quick to sell some of the so-called bonus bushels. If they penciled in, for example, 200 bushels per acre of corn and yielded 220, the extra 20 is a gift. They’re selling those first to get some cash going and ease their interest payments.”

Making it rain: $50 billion and nuclear energy enter the AI data center fray

Just a few months ago, data center growth was just plain explosive. Now it’s gone nuclear, literally and figuratively.

At the end of October, global investment giant KKR and Energy Capital Partners, the largest private owner of power generation and renewables in the U.S., announced a $50 billion strategic partnership to invest in data center deployments and power generation to head off a power crunch that could inhibit the AI industry’s growth.

A few days earlier, Amazon and Google announced their respective investments in the nuclear energy industry looking for a carbon-free solution to meet their rising power demands.

Microsoft went even further by entering into a 20-year agreement to purchase energy from the infamous Three Mile Island power plant. Constellation Energy, the plant’s owner, plans to restart the facility’s remaining reactor, which it shut down in 2019 because it was losing money. 

“We're seeing a remarkable amount of capital and a pretty significant change in thinking on the energy source side of things related to nuclear,” said Jeff Johnston, lead economist, Digital Infrastructure at CoBank. “The nuclear power developments are still a few years off, but these agreements show a dramatic shift in thinking about nuclear energy, which is actually quite safe, but has had such a terrible brand since the 1979 accident.

“All of this speaks to the insatiable demand that companies have for AI and the impact it's having on data center growth and energy demand,” he added. “Big picture, these deals are all about the convergence between energy and digital infrastructure. It’s all new territory for our customers, and right now there’s no end in sight.”

U.S. Supreme Court ruling introduces greater uncertainty in the P&E sector

The U.S. Supreme Court has declined a bid by electric utility trade groups to temporarily halt implementation of an Environmental Protection Agency rule that would require certain coal and gas-fired power plants to capture 90% of their carbon emissions by 2032 or be shut down.

The decision does not mean that the rule will be implemented immediately. A note by Justice Brett Kavanaugh said the affected power plants have until June 2025 to begin compliance work on the rule while the issue works its way through a lower court. 

Kavanaugh also stated in the note that “the applicants have shown a strong likelihood of success on the merits as to at least some of their challenges to the Environmental Protection Agency’s rule." He added that the petitioners are "unlikely to suffer irreparable harm before the Court of Appeals for the D.C. Circuit decides the merits."

“The biggest impact of the Supreme Court’s decision is the uncertainty for the power generation industry as it grapples with unprecedented load growth,” said Brock Taylor, managing director and head of Power, Energy & Utilities at CoBank. 

“It takes years to plan new power resources,” he added. “And depending on how the rule ends up, it also could affect existing resources with the possibility of having to retire them sooner than expected or running them at lower capacity. 

“It’s particularly challenging now because we’re seeing more demand for electricity than we’ve seen in 15 years,” Taylor concluded. “More data centers coming online, the reshoring of some manufacturing, and beneficial electrification—where we're using more electric appliances and electric vehicles—are all driving up the demand for electricity. It’s difficult to plan when there’s so much uncertainty about the rules.” 

Despite a promise by the D.C. Circuit Court to move quickly, the issue could well end up back with the Supreme Court.