Regardless of which side you were on, it’s safe to say we can all agree that the debate over raising the U.S. debt ceiling was a painstaking process. Now, with some time having passed since Standard & Poor’s downgrade of the United States’ debt rating from AAA to AA+, we have seen some unprecedented volatility in the stock market. That was especially the case during the first week following the downgrade, when for the first time ever, we had four consecutive moves in the stock market surpassing 400 points. This is volatility to an extreme. But what impact do the financial markets have on your pork operation?
Last month’s announcement that the United States’ national debt is 100 percent of the Gross Domestic Product makes the math pretty simple. Both figures are in the $14.5 trillion range. GDP growth of 1 percent to 2 percent annually adds from $145 billion to $290 billion per year to the GDP. We are running annual deficits exceeding $1 trillion. The debt-to-GDP ratio can only go higher and that’s bad news for any economy. It becomes exponentially difficult to turn things around, especially if you have to fight the headwind of higher interest rates. The Federal Reserve has indicated that it plans to keep rates low at least into mid-2013.
The United States’ advantage today is relative to other economies that are worse off, but it’s a preview of things to come. The competition from governments for capital can only go up, and that squeezes out businesses and, likely, hiring.
If the GDP goes backwards, it becomes a disaster. If things are not managed better going forward, prepare for a major interest rate spike because loss of confidence is an elevator up in that world.
With the weakened U.S. credit rating, smart producers are eliminating their risk of rising interest rates. If you haven’t taken advantage of the lower fixed-rate environment over the last few years, now may be the time.
There has been a lot of finger pointing at S&P from the White House and the U.S. Treasury and among politicians. But that’s nothing new; it’s how we got here in the first place. It has been a 50-year journey to get to this point on debt and the GDP. In S&P’s defense, they took a lot of heat for not downgrading mortgage-backed securities in 2008 — now they’re taking heat for calling a spade a spade.
Congress now has to negotiate additional cuts of $1.5 trillion. A committee of 12 lawmakers, evenly divided between the two parties and two chambers, will decide the next round. They must have their cuts completed by Thanksgiving or it will trigger automatic cuts totaling $1.2 trillion. If Congress cannot come to an agreement, consumer confidence will erode further.
So, what other economic factors might impact your operation?
The first thing to watch for is a slowdown in the U.S. economy. If this occurs, negative sentiment will follow and could push the United States into a double-dip recession, which could impact the foodservice industry and some domestic meat demand.
With the debt-ceiling crisis resolved, it will allow Congress to finish other business. Currently the United States exports more than 20 percent of its annual pork production. Three pending free-trade agreements are extremely important to U.S. pork producers. It’s now expected that the FTAs will be addressed this month, as Congress needs to create some positive news. Plus, they have bi-partisan support. So, keep an eye out for this development.
The possible good news is that all of this volatility does create opportunities. As we continue to stress risk management to our clients, be sure to monitor, collect and use information to make the best decisions for your business. PK
Editor’s note: Each week an AgStar financial and market expert will blog on current topics in the pork industry. You can view the blog at agstar.com.