Instability at some high-profile financial institutions is on growers' minds. Should we be worried?
The Silicon Valley Bank collapse, and the sudden perception that there’s instability in the banking system, has a lot of us thinking back to 2008 and the financial crisis that spurred the Great Recession.
And, whether it’s the war in Ukraine, lingering supply-side issues from COVID-19, or high-interest rates, we are all feeling the effects of the world economy a little more acutely this year.
So are we staring down another financial crisis, or just feeling a little economic speed bump?
For some perspectives on those questions, and what it means for corn growers, we’re joined in this episode by Krista Swanson, the National Corn Growers Association’s lead economist.
She provides some much-needed context, and an informed take on what the farm economy might have in store for us over the next few years.
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Krista Swanson:
These recent bank failures, the Silicon Valley Bank, as well as the few others that we've seen with problems. When I think about the impact on rural banks that serve our agricultural community, I really don't think that this is a situation that impacts otherwise healthy institutions.
Dusty Weis:
Hello and welcome to the Cobcast, Inside the Grind with the National Corn Growers Association. This is where leaders, growers, and stakeholders in the corn industry can turn for big picture conversations about the state of the industry and its future. From the fields of the Corn Belt to the DC Beltway, we're making sure the growers who feed America have a say in the issues that are important to them, with key leaders who are shaping the future of agriculture. So make sure you're following this show in your favorite podcast app and sign up for the National Corn Growers Association Newsletter at ncga.com.
I'm Dusty Weis, and in this episode, the Silicon Valley Bank collapse and the sudden perception that there's instability in the banking system has a lot of us thinking back to 2008 and the financial crisis that spurred the Great Recession. And whether it's the war in Ukraine, lingering supply side issues from COVID-19 or high interest rates, we're all feeling the effects of the world economy a little more acutely this year. So are we staring down another financial crisis or just feeling a little economic speed bump? Well, for some perspectives on that question and what it means for corn growers, we're joined today by Krista Swanson, the National Corn Growers Association's Lead Economist. Krista, thank you for chatting with us here today.
Krista Swanson:
Yeah, Dusty, great to be here. Thanks for having me on.
Dusty Weis:
So Krista, before we launch into all the dynamics of the current economic situation, can you tell us a little bit about yourself and how you made your way to the Corn Growers Association?
Krista Swanson:
Sure. So I have a master's degree in agricultural economics from the University of Illinois Urbana Champaign and-
Dusty Weis:
Oh, go Fighting Illini. Got to point out, my old man was an Illini.
Krista Swanson:
I've worked for more than a decade in the industry providing economic analysis. Most recently I served as a research specialist for the Gardener Agricultural Policy Program at the University of Illinois and was part of the farmdoc team. So got to be a part of a lot of the excellent research that team does there. Aside from working for National Corn Growers Association, I am actually also a corn farmer. My husband and I farm in Illinois where we grow corn and soybeans. So I had worked a lot with National Corn's growers, both as a grower member and as a consultant with some of my colleagues at the University of Illinois. So when this opportunity for the economist position opened up, I jumped on it and I'm happy to be here.
Dusty Weis:
Well, and we're happy to be talking to you today as well. Certainly a great perspective that you're able to bring to this discussion here and a lot of people asking questions and wondering how the current economic situation is going to affect their farming operations. So that farm to farm perspective, definitely appreciate it as well. But let's start with the most pressing issue here, the failure, the high profile failure, I'll add, of Silicon Valley Bank and the fear that this crisis could affect other banks. How bad is this situation and how is it going to impact particularly the rural banks that serve the agricultural community?
Krista Swanson:
So first I guess I want to address what is bank failure. And the most simple way to put that is that the bank can't make its obligations to depositors and creditors. And certainly the actions of the Federal Reserve over the past couple years have put some pressure on banks, but I wouldn't say that that's the main reason that SVB has had the problems that it's had. So when we think about what can cause a bank failure, it's often a combination of things like poor management, lack of diversification, being invested into high risk investments, economic downturn, and then of course things that the Federal Reserve is doing can also be contributing factors. I would say it's a little bit early to say how deep is this situation? If we think back to 2007 to 2009, it took a year and a half after the first institution failure before that really ballooned into a full-blown financial crisis.
And I don't want to imply that that's in store here because this is a much different set of circumstances, but I think it's important to remember that we're only a couple weeks into this. When I think about the impact on rural banks that serve our agricultural community, I really don't think that this is a situation that impacts otherwise healthy institutions. And again, SVB was doing some things a little bit different than maybe what we would see some of our banks that are serving the ag community doing in terms of their type of investments and really their overall loan portfolio and the deposit side of that as well.
Also, there were some tweets happening leading up to the SVB situation that sort of caused a mass panic that led to a mass withdrawal of deposits. And so one thing I want to remind listeners is if this situation has you feeling anxious, you could always review your institution's financial report, look for things like strong credit metrics, low delinquencies, contact your bank officer if you're looking for some peace of mind. Overall, I would say that the banks that farmers are dealing with are probably not impacted by the same set of circumstances that SVB was.
Dusty Weis:
Right. And I want to come back to this notion of deposits being protected in a little bit here, but first I want to sort of dig in on the mechanics of a bank run. And again, not an economist, but I did see It's a Wonderful Life when I was a kid. And so I think back to that famous scene where there's a bank run there and in the heart of the Great Depression and Jimmy Stewart jumps up and says, "Your money's not here. It's in Bill's house and it's in Joe's house." And a bank like SVB, they hold the money from depositors and invest it to earn interest and dividends. And so if there is that sudden surge of people who want to withdraw their money and those investments can't be cashed out to pay everyone, you've essentially got a recipe for bank failure. Isn't that essentially what happened with Silicon Valley Bank here?
Krista Swanson:
Yes. But again, to be clear, they had some other sort of credit management issues happening. But yeah, like you mentioned, It's a Wonderful Life is probably the easiest way for people to understand this concept. And I mean the way that banks normally operate is they take in those deposits and then they loan out that money. That bank isn't just holding that money forever until a person comes back to withdraw it. And again, this is a normal practice for banks, kind of like the Bailey Brothers Build and Loan. Banks just don't have that cash available to repay depositors if a large number of people want to come in and make withdrawals all at the same time.
So even otherwise healthy banks can be destroyed when we have this crisis of confidence. And it's really important to have diversification in that loan portfolio. So SVB was heavily invested in tech and venture startups. A lot of the depositors were all of the same sort of circle, so to speak, and they were heavily invested in treasuries. Banks can have a wide range of earning assets as opposed to just in treasuries. So while it's true that that's how banks make money is by loaning out, that money lent out could be diversified into other types of assets.
Dusty Weis:
Right, instead of just having all their eggs in one basket. I think some of the irony there too is that treasuries are typically considered a really safe investment unless the interest rate goes up a whole lot suddenly and then they're not providing the sort of yield that other investment opportunities are. That created the perception of weakness then that caused all of the depositors to essentially say, "I'm worried about my deposit, I'd like to take that out now." And the whole house of cards came down just because they weren't properly diversified.
Krista Swanson:
Yep, and that's true. So treasuries would normally be considered a relatively safe deposit, but I think that a well-managed financial institution would also see the value in diversification beyond just that. Again, you just don't want all of your eggs in one basket.
Dusty Weis:
Right. Now, another point that you mentioned here is the protection for your deposits. As I understand most accounts are insured by the Federal Deposit Insurance Corporation, more commonly called the FDIC, which is an independent agency created by Congress. What does that insurance cover exactly?
Krista Swanson:
So that insurance covers deposits of up to 250,000 per depositor, per bank and per ownership category. So if you have a person with say, $1 million to deposit into a bank, that person may want to consider putting 250,000 into four different banks just to be sure that they are not exceeding that insured level of deposits. But a lot of times if you're working with a financial institution, you have a relationship with someone there and they want all of your business. And so like with SVB, they had a lot of wealthy depositors and businesses that had deposits exceeding that 250,000. They actually had an extremely high rate of uninsured deposits, which is extremely, extremely large. Most banks have much, much lower rates of that.
So in this case, FDIC has taken over Silicon Valley Bank to cover all of their deposits in a reaction to this situation. And I just saw the other day that FDIC reporting that no depositor has lost any of their insured money because of bank failure since FDIC insurance began. So again, a little bit of a peace of mind statement and knowing that this is something that's been put in place and is working as it should covering that, if you're depositing in a way that you're keeping in mind what that insurance provides.
Dusty Weis:
Now the FDIC stepping in to insure all deposits, even beyond that $250,000, what is typically considered the limit there? That's sort of an extraordinary step that they took there, but just so we're clear, that extra coverage, that's not coming from our tax money, right?
Krista Swanson:
No. So that money is going to be coming, there actually is what's called a deposit insurance fund, which I just read in the past few days, currently has $128 billion in it. So there is an existing fund to provide a backup for a situation like this. Where that money and that fund is coming from is quarterly fees levy on banks. It is not something owed by taxpayers.
Dusty Weis:
So looking ahead to the future then, and certainly as someone who remembers the Great Recession of 2008, as you do as well, how can we prevent these types of situations from happening again? Didn't we have safeguards in place after the financial crisis of 2008?
Krista Swanson:
Yeah, you're right. There were some safeguards put into place after that financial crisis and I think that these recent bank failures, the Silicon Valley Bank as well as the few others that we've seen with problems throughout the month of March here, these recent bank failures do raise some questions. And so I don't know that I really have the answers, but I would say that this situation is certainly an opportunity to evaluate why there were no red flags raised before we got to this point, and it's an opportunity for improvement for the future. I will note that the Federal Reserve announced on March 13th that it would review the supervision and regulation of Silicon Valley Bank and release the report prior to May 1st. So that is something that we can watch for that maybe will help us answer some of these questions.
Dusty Weis:
Might be able to learn a little bit more about what happened. And again, hindsight being 2020, maybe we can apply a little bit of that facing the future here as well. I read somewhere that Silicon Valley Bank was the 16th largest bank in the US when it failed, which is kind of spectacular, but it is still considered a mid-sized regional bank in the grand scheme of things. Now I know a lot of growers who prefer to do business with their local small town banks, which are usually also considered small to mid-size. So how are they different than from Silicon Valley Bank, both in the investment strategies that they utilize and in their management structure?
Krista Swanson:
So Silicon Valley Bank, like you pointed out, even despite being the 16th largest bank in the US at the time that it failed, is still sort of in this mid-size regional bank group. I think when we talk about mid-size regional banks or smaller to mid-size regional banks, I feel like that's a really huge spectrum. When we think about some of our smaller or community type of banks that a lot of farmers or those involved in agriculture may deal with, it's sort of a different type of category. Another thing to keep in mind is that SVB was heavily invested in technology and venture type of startups and so had a lot of the same type of, their portfolio was very heavily concentrated, which is something that most of the time the management strategy would be to avoid that. So when I think about some of the smaller and mid-size community banks in my area, I guess as an example, they have loans that are deployed into agriculture, other types of small businesses, residential mortgage.
They are sort of spread out among a bunch of different types of industries where if there were challenges in that particular industry, it wouldn't necessarily wipe out such a large segment of their portfolio. So I think that's an important thing to know. And again, this is something that you can either ask of your bank officer or investigate yourself. If you're wanting to know what type of portfolio your bank has and evaluate some of their management on your own, that is something that you can find available online or talk with someone at your bank and say that you want to know how is your bank managed differently than SVB, for example.
Dusty Weis:
And I think for a lot of people who are layman like me, I think it's just enough to know that it is being managed differently from SVB. Getting into the details of exactly how it's different is maybe not something that I'm going to comprehend necessarily, but knowing that that money is being spread out as loans to my neighbor and mortgages for the folks down the street and equipment loans for the grower down the road, it's a lot easier to comprehend exactly where that money is and again, the Bailey Bros. Building and Loan, that's something that I understand.
Krista Swanson:
Yeah, for sure. I think that that's where your relationship with your bank and I feel like farmers, that's probably something that's really important to them. I imagine that virtually all farmers probably have a relationship with the person that they're banking with where they can call them up and ask these types of questions and get those answers. And I'd venture to say that most will be pleased with what they hear in terms of how they're being managed well and differently than what we saw with SVB.
Dusty Weis:
Probably not a lot of cryptocurrency in the investment portfolio. Like your small town community bank.
Krista Swanson:
Probably not as much. Yeah.
Dusty Weis:
Shifting focus a little bit then to the broader economic landscape. It's an interesting economy right now. It's kind of tough to describe. In a lot of ways, it appears pretty strong; in other ways, there appears to be some shaky ground. The job market, very steady right now, but interest rates are sky-high and grocery prices have been through the roof. Everything is expensive right now because of inflation. So how do we get in this situation, Krista?
Krista Swanson:
Yeah, so like you mentioned, we're certainly getting some mixed signals from the current economy. Like you noted, the labor market is strong both in terms of job growth and wage rates. It's really exceeding what would be expected in this inflationary environment and given the Fed's efforts to combat that with those interest rate pikes. You mentioned grocery store prices. I have four children and a husband who all like to eat. So when I go to the grocery store, I feel like I'm buying about the same amount of food as I did a year ago, but it's costing twice as much. And when I'm buying groceries, I think baseball great Yogi Berra, known for saying "A nickel ain't worth a dime anymore," and if I were to relate that to my grocery bill, it might be $100 ain't worth 200 anymore.
Dusty Weis:
I've just taken to asking the cashier for a blindfold and a cigarette with every bill that I get. It's just ...
Krista Swanson:
Yeah. But what I've tried to convey here is that the purchasing power of money has declined as inflation has increased over these past few years. And you asked, how did we get in this situation? I really feel like it's a chain of events that started all the way back with COVID and really particularly more so than COVID, the shutdowns that resulted and we had this really short but severe recession that happened, and at that time inflation was near 0% and so the fed's target rate of inflation is actually 2%. And if you look back from the mid-'80s all the way up until pre COVID, we were really close to that 2% line for that almost four decade period. And so we saw inflation drop down to about 0% and then we had what I'll say three things happen. First we had supply chain disruptions, which changes in consumer demand and both of these impacted prices to an extent.
Second, we had an influx of government spending, so we had these huge spending packages that were COVID related aid and recovery legislation pieces, which spurs government spending into the economy. And then third, we had the Federal Reserve. One of their tools is called open market operations, and they were utilizing this tool to increase the money supply. So what they were doing was they were purchasing treasuries and other bonds from financial institutions and they did this aggressively, they increased the money supply by 40% in a two-year period.
I would say that this is probably the biggest driver in getting us into this really high inflation environment. And so these tools are great to use to pull us out of a recession, but the goal was to get back to a 2% inflation rate. The problem with the tools is that you can overshoot pretty easily. So that's sort of what we saw happen here is that the Fed increased the money supply to such a great extent, and as the economy reopened and we had consumers with pent-up demand and all these things happening at the same time, we blew right past 2% and went far above that.
Dusty Weis:
Right. Well, and now it seems like the Fed is using these interest rate hikes and big ones and coming in really quick succession as well to sort of try to put the brakes on that inflation after it's kind of gone crazy. Is that the right approach here or are there other tools in the Fed's toolkit to head off inflation that did not involve these higher interest rates that admittedly are tough for everybody?
Krista Swanson:
Yeah, so the fed's focus has been on using interest rates and admittedly I feel like as just people in the United States, that's what we're hearing a lot about. But the Fed is actually also using another tool. I talked about open market operations being a factor in how we got to this point. The Fed did reverse course about a year ago in late spring 2022, so they had been from the 2020 recession up until that point, increasing the money supply, they reversed course and began to tighten the money supply by selling treasuries and bonds and letting some of their matured bonds fall off their balance sheet. So again, the opposite action that they were taking to increase the money supply. We aren't hearing as much about that, but they are utilizing that tool as well. Again, interest rate increases are what we tend to hear a lot about, and I feel like that's what we see.
If you're a consumer, and we talked about purchases at the grocery store, or if you're a farmer in you're borrowing money to operate, that's where you're feeling the pain is on those interest rates, whereas those open market operation actions are impacting our day-to-day pocketbook to the same extent. I would say that we're likely to continue to see interest rate increases a little bit more before we see a reversal in action on that. So at the March 2023 Fed meeting, we did see a 25 basis point increase in interest rates, and I feel like that was a tough situation.
The Fed had been using this data-driven approach. We've heard that a lot from the Federal Reserve over the past year in making those calls on interest rates. This whole banking situation definitely influenced their action. Prior to that emerging, they had been talking about a 50 basis point increase. So we did see them sort of find a happy medium between 50 basis points and no action, which could have had some repercussions in the marketplace as well. Anyway, I think we'll continue to see that bump a little bit higher before we see relief on interest rates.
Dusty Weis:
So for those of us who are in a position where my wife and I, we've had three kids in the last five years, and that old house that we've had for a while is starting to feel a little bit small. It doesn't sound like there's much hope of an interest rate decrease in the immediate future.
Krista Swanson:
Well, I'm not sure on that. Let's talk about the consumer price indexes, one of the measures of inflation, but it's sort of the one that we utilize the most often. So we reached the high point, consumer price index was at 9% in summer 2022, and in the most recent February 2023 index, it was down to 6%, and that's a year-over-year change in this consumer price index. So it took us about a half a year to drop from about 9% to 6%. And like I mentioned earlier, our target rate, our goal rate is 2%, and so we still have another 4% to go to get down to that 2%. Now, I think that this 4% will happen faster than what we've seen so far because we sort of have this lagged impact. The Fed keeps raising interest rates and sometimes it takes a while for the impact of that to sort of flow through the economy.
So I do think that throughout 2023 we'll start to see the impact of some of those increases that we've had already, where they're not going to need to act to the same extent that we've seen, thankfully, aside from some other major unforeseen thing in the economy. It does seem like from what I'm reading from experts in this realm of economics, that we could start to see an increase late in 2023. More likely we'll see the Fed reach this point where they stop raising rates maybe mid-year and then continue to hold for a while before they start to reverse course, sort of a holding period to allow the impact of what's going to happen to happen. But again, the banking situation has sort of changed up maybe how they would've normally acted. So something to watch is certainly comments coming from the Fed over the next few months that provides some indication of where they're heading.
Dusty Weis:
Well, I'll probably plan to just hunker down and enjoy the pandemonium in the small house for at least another year here then, but good to know that there might be relief in sight down the line here. Let's change it up a little bit. You and your husband are growers. Let's take a quick walk through the farm field here. Tight margins continue to be a concern for farmers. Over the last year, we've faced skyrocketing prices of inputs, fertilizer especially. Can you tell us why fertilizer has been such a hot-button issue with corn growers?
Krista Swanson:
Yeah, so fertilizer has been a big issue for corn for a few reasons, and I would say it's an issue for all farmers, but corn maybe feels the pain of this a little bit more. First of all, when we think about some of our primary plant nutrients like nitrogen and phosphorous and potassium, there really is no substitute in growing a healthy plant to those. And so having access to those nutrients is really important and that comes at a high cost, especially for corn. That's because corn has greater relative fertility needs than some of our other commodity crops. Fertilizer is normally about one-third of the total operating cost incurred in growing a corn crop, but we saw fertilizer prices increase rapidly from late 2020 through spring 2022, and in recent months, we've seen fertilizer prices decline from those highs, but they're still quite high compared to 2008 through 2020.
And so that's definitely hitting those farm operating budgets hard and on top of price increases, we also have growers are concerned about supply and availability, getting that fertilizer at the right time that they need, also some changes in fertilizer industry structure and tariffs on some imported fertilizers. So the US is in a good position where we have some resources domestically, but we do also rely on some imports of fertilizer. And so NCGA is advocating for fair and open access to imported fertilizers to help make sure that the growers have the inputs that they need to raise a healthy and productive crop.
Dusty Weis:
As we look ahead to the next few years here, then, for corn farmers, what are the economic indicators telling us that we can expect to see?
Krista Swanson:
Well, there's certainly a lot of general economic and geopolitical uncertainty right now, and some of these things, in particular, are out of the ordinary, but I always like to remember that farmers are pretty accustomed to operating in uncertain environments, so the dynamics of that environment are constantly changing and may be new, but farming, in general, carries a lot of uncertainty. So tying into the focus of today's discussion, I think farmers should expect interest rates at the current level to slightly higher for the next year and make plans for capital purchases or operating needs accordingly. Like you were talking about looking for more living space farmers, I would say apply the same to your business decisions. Sometimes you can't hold off on those things, but if you have that option, you may see some relief on the interest side as we look out over the next year.
So something to keep in mind if you do have some control over when to do those things. When we think about the farm operating budget, we already talked about fertilizer prices and the pressure that that's putting. USDA is projecting lower net returns than we've seen over the past two years, but still positive margins. So despite lower prices, there has been some relief on the cost side of the equation. Overall, though, we did come off of two very high-income years, and so we need to adjust to this tighter margin environment. I feel like one of the challenges that farmers will have specifically for 2023 and corn is this potential disparity between when inputs were purchased and when grain is marketed, because we've seen some large swings in fertilizer prices.
When we look at the fall contracts for corn and the volatility in those contracts, since I'm talking about December 23 futures for instance, you look at the range at which that contract has moved, if you made some early sales versus sales today, it makes a big difference in where your overall farm margin might end up. So again, this could be an issue for some farms, it may not be for others, and certainly, we have time left yet to be seen where maybe we'll see some good opportunities for higher prices for the '23 crop here before it's all said and done.
Dusty Weis:
Right. Yeah. Well, it's certainly a lot of plates spinning in the air here, and you've got your hands full, keeping an eye on them, and just because it's in the news every day and every other talking head has weighed in on it already, I'm going to ask you too, because I want to get your take here. Are we headed for a recession? Or can we still pull off that soft landing like the Federal Reserve says that they're shooting for? 30 seconds or less.
Krista Swanson:
Yeah, again, I would not say that this in particular is my area of expertise, so I'm sort of gathering my opinion from following a lot of what I would say are the experts. The things I'm reading more over the past, more recently since we've had this banking crisis, I do think that there's a lot of indicators that are showing that recession is coming. It may not be a severe recession, but it does look like that is likely.
Dusty Weis:
Right. Yeah, well, I'll take an unsevere recession, I guess, I suppose. Well, Krista Swanson, it has been an absolute pleasure chatting with you here. There's a lot of good information here, probably some things that are going to come as a relief to growers throughout the country as well. So thank you so much for joining us here on the Cobcast.
Krista Swanson:
Thank you so much for having me.
Dusty Weis:
And thank you for listening. We hope that you'll join us again next month for another episode of the cobcast, Inside the Grind with the National Corn Growers Association. If you're on Twitter, you can follow @NationalCorn. For more news and updates from the NCGA, visit ncga.com to sign up for the association's email newsletter and make sure you're following this show in your favorite podcast app.
The Cobcast is brought to you by the National Corn Growers Association with editing by Mackie Makunda, and it's produced by PodCamp Media, branded podcast production for businesses, podcampmedia.com. For the National Corn Growers Association, I'm Dusty Weis.