What Lies Ahead for Ag Commodities as Interest Rates and US Debt Ceiling Find Stability?

Author: Doug Christie

There is significant attention lately on macroeconomics. Although the Federal Reserve rate and debt-ceiling dialogues are becoming more settled, the impact on commodity markets still remains uncertain.

As markets head into the summer, two major aspects of the macroeconomic framework appear to be fitting into place.

The steady pace of interest increases from the US Federal Reserve seems now set to slow and perhaps even stop all together. After implementing a .25% increase at their May 2023 meeting, Fed commentary has suggested in some of its language a willingness to reduce the pace of further increases. The May meeting notes omitted any commentary on the likelihood of additional increases, suggesting to some that a summer vacation might be ahead for the rate raises. And while a pause in increases does not preclude further reaction at some point down the road it seems clear that the crop year ahead will see less upward movement in interest rates than current crop.

In a similar vein, a deal to extend the debt-ceiling appears imminent. While not likely to be a game-changer for the economic environment, taking a wild-card out of play is reassuring to all market participants as any US-debt default would undoubtedly trigger a massive risk-off reaction in commodities.

What will it mean for commodity markets now that there is more clarity with two macro items? Perhaps we will see some renewed interest in commodities from fund traders. It’s interesting to note that managed money interest has consistently waned over the rate hike period. If rates stabilize perhaps the speculative appetite for commodities will increase. More immediately however, expect supply-side fundamentals to dominate. Memorial Day marks the unofficial end of planting season and the beginning of transition to growing the crops. Corn and Soy crops have gotten in the ground on time (92% and 83% percent complete as of this week) so growing weather should be the prime driver with weekly crop conditions scores being closely watched.