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Paragon Commentary

Futures File: Grains, Wages, and Interest Rates Higher

Apr 27, 2018

Grains Bounce Back

With weather warming up, Midwestern farmers are just beginning to plant this year’s corn and soybean crops, but many are already thinking ahead to harvest, which is the only time they see income for a year’s worth of costs and hard work.

Luckily, harvest outlooks are looking brighter as the value of this fall’s crops are rising to recent highs, with December corn and November soybean futures trading for $4.14 and $10.47 per bushel, respectively.

Grain prices are rising as fears subside about the trade dispute with China after a recent statement from Chinese Premier Li Keqiang that China is open to negotiations and would prefer to manage conflicts through dialogue. China currently buys about a third of all U.S. soybeans and maintaining that relationship is critical to U.S. grain prices.

Meanwhile, South American corn and soybean crops that compete with U.S. exports are increasingly troubled by poor weather. Things have gotten so dire that Argentina, the third largest global soybean exporter, is now buying U.S. soybeans to meet its demand.

 

Wages Climbing, Interest Rates to Follow

On Friday, the federal government announced that employee compensation in the U.S. is rising at the fastest pace since 2008. Wages and salaries are up 2.7% over the last year, a sign that low unemployment is finally forcing employers to pay higher wages to hire and retain employees.

While everyone likes a bigger paycheck, the rising incomes hurt business profits and can also lead to inflation, where rising paychecks are eaten up by rising expenses.

Seeing these wage increases, the Federal Reserve is more likely to raise interest rates in its effort to control inflation. The Fed has already raised rates six times during the last three years, and has indicated that it will raise rates by 0.25% another two or three times this year. Higher interest rates make borrowing money more expensive, slowing down consumer purchases of appliances, furniture, vehicles, and homes.

Therefore, raising interest rates can temper inflation, but it also can threaten the economy at large, making these rate raises a high-wire act for the Fed. Too slow, and prices get out of control; too fast, and the economy slips into recession.

Markets so far have showed low concern about inflation risks, as gold traded near a one-month low at $1325 per ounce.

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