Welcome everyone. My name is Hannah Scott. I'm the program director for the Center for Cooperatives in the College of Food, Agricultural, and Environmental Sciences at Ohio State University and we're so excited that you've joined us this afternoon. I'm going to turn it over to Tanner to talk to us about the rising cost of Carry for Co-op Grain Elevators. What we can learn from that and some of the action steps that we can take away from this information. So, Tanner I'm going to turn it to you to share your slides.

Well, thank you Hannah and welcome to all of you wherever you are I'm in Denver Colorado at the moment. I don't have a lot of slides. I'm not going to beat you over the head with too much information about what's going into the marketplace today but we are going to talk about why the cost of Carry is so high and what what our outlook is for the year ahead and then in the discussion with a few points on how you can manage that. Some of you are probably wondering well what can we do precisely to manage cost of Carry. It kind of is what it is. Now we'll have some thoughts on that and I'm just going to share my slides right now and all right now we need to go to presentation. If I can get that excuse me folks just technology is awesome. I need to get my slide here we are. Slideshow. Okay, all right.

Look's great! Alright, thank you. Thanks Hannah. Alright. So, just first of all talk about the grain markets, grain and oil seeds, and just to see where we're at because that is a huge influence as you all probably know on your cost of carry. You're going to be borrowing money against that commodity that you have in storage and what's the value of that commodity that's going to be impacting the cost. So. first all the just one slide here on just the basic supply demand fundamentals of corn soybeans and wheat. The balance sheet for corn and soybean, corn and soybeans globally is looser this year. So what that means is we're going to have downward pressure on prices. It's basic economics 101. Wheat on the other hand, has a tighter balance sheet and we should be seeing higher wheat prices. So, what's going on with wheat? Well, we have Russia that's been exporting record amounts of wheat this past year and they have a very cheap currency it's the ruble is down about 25 to 30%, so not only is that wheat abundant and they had a record crop last year record they had almost a third biggest crop this year on record and a very cheap currency and so they've been very competitive so far this marketing year. That's what's been the anchor on wheat prices. However, our concern here going forward is that competitiveness is going to go away for Russia their as their stocks are depleted where perhaps as things change with their currency and we could see a rally in wheat and a lot of you who remember the Russia's invasion of Ukraine, what that meant when wheat prices came up so sharply so fast it was a lot of margin call credit requests we had at co-bank that time or that period. Right now, the issue is prices have been held under because of or have been pulled lower because of Russia. For corned soybeans a similar story except it's coming from Brazil. They had record crops, both corn and soybeans. They've been very competitive in their fob prices at the go at their ports and that has really suppressed our export programs and this is coming at a time when we have very strong very strong currency ourselves and so that's been a very strong headwind to anything that we export. That's especially a headwind for agriculture and very much true for wheat. Excuse me. I do have to warn you I have a cold you're going to hear me clear my voice. I hope I don't annoy any of you to the point of leaving the webinar. This is a bit of an annoying thing. So, where are we at on prices? So, if you just focus on the right side of the graph you can see corn soybean and wheat prices are all projected to come down this year. These are the annual numbers, annual projections from USDA for annual prices of each of those commodities. For those of you in wheat, this is all wheat including spring wheat, hard red winter wheat, soft wheat, white wheat, Durham, you name it. All of that is rolled into one and presented as one number. We're going to break out the cost of or the Carries on the classes of wheat later on. As you can see here, even though prices are down this expected to be down this year from last year they're still fairly high historically, and you can see that long-term trend for corn soybeans and wheat. I added those trend lines for each one and they all go up okay, as prices go up. What happens? Farmers bid in, bid those inputs higher, things like land, machinery, in addition to fertilizer, seed, chemical, and the cost structure fundamentally changes and so once the cost structure changes for commodities and now you've hit that new floor and so the floor rarely ever goes down. It just tends to go up and if you look over time there commodity prices even when they come down they hit a new floor, which is a higher bottom from what we've seen from the previous model okay. So, the long-term trend is higher on prices. So, even though we are seeing a price correction across the commodity complex this year with corn, beans and wheat all showing negative movement compared to the year prior, we are still higher historically. Okay. So, whatever our notion is of what commodity prices should be really is all relative to the cost of production and that is generally going to be pushing those commodity prices higher. So long and short of it is prices are higher or excuse me lower year-over-year for the current marketing year 2023 to 24 but historically the cost of owning those commodities tends to rise over time and that means the cost of borrowing against those commodities is going to go higher as well. Also, I'll pause there for a moment before we move to talk about interest rates.

Hannah, if there have been any comments or questions or anyone who wants to call BS on me you're free to do that as well. It's happened before, I'm used to it. There are not any calls in the chat but you can also feel free if you'd like to unmute yourself if you're comfortable doing so and asking a question.

Okay. We'll just move on if somebody wants to comment on something later on we're just going to move on to the interest rate environment. So, obviously as we all know we are in a rising industry environment and this is the libor one month annual average. Why are we using libore? If you borrow money from Co-bank you know that we're switching to Sofer okay. Because libore had its issues of being manipulated. Libor being the London interbank offering rate which the banks in London charging each other to loan from each other or to borrow from each other. Well, that number was being manipulated and they found out and we found out about it the market found out about it and so we're transitioning to Sofer. The reason why I show live or on the screen is because it's got a historical track record that we can compare cost of Carry to whereas Sofer does not have that track record that Libore does. So, going forward, we will be using pricing off of Sofer but as you can see here even Libore um is rising very quickly on the on the right side of the chart and I think we all know the reasons there. Central banks namely the Federal Reserve are in a tightening path quantitative tightening which means they're rolling off their balance sheet and reducing how much assets they own because when during the pandemic how did they print money? They bought US Treasury and printed money that way. Well, now they're rolling off that balance sheet and they're not buying those bonds anymore and so at the same time they're raising the interest rate, the effective rate, and as you can see again on the right side of the chart there we are at the highest level in quite a long time. Historically always keep this in context when you go back several decades back in the 1980s we were up around 20% under Paul Vaulker that was a long time ago. Are we going to go back to those levels? I would say that is a far cry. We are a far cry from going to those levels of you know 20% but needless to say, given where we have come from where rates were near zero the rate increases that the Federal Reserve has done over the past several months are still quite high given the recent history of where we've been as you can see on this on the chart right here. Where are we going in the future on interest rates this is the Federal Open Market Committee dot plot. Each one of these dots represents a vote from one of the members of the FOMC, one of the directors or presidents of the regional federal banks or Federal Reserve Banks and the trend what they think over time is for rates to come down and then longer term they see rates coming down to about 3% ish in the longer term 2024 that's really hard to say but basically given the recent and persistent comments from Jay Powell, chairman of the Federal Reserve and other members of the FOMC we are going to be higher for longer. Words that I'm sure that you have all heard heard consistently over time we're going to have higher be in a higher rate environment over the long term. The Federal Reserve does not think it's done yet on in its job to stop inflation because remember the Federal Reserves mandate is a dual mandate full employment and stable prices. Now, inflation is still coming down that's a positive news. That is positive news but it has not yet reached the Federal Reserve's target of 2%. Now it's arguable. It can be argued that maybe 2% is no longer even a viable number maybe that's impossible to get down to 2%. Nonetheless, that is their stated goal and inflation is still quite a bit higher than 2% although it is coming down. So, they are not going to be deviating from their path anytime soon. The Federal Reserve does not want to make the mistake it made made back in the 1970s under Arthur Burns. He was the chairman of the Federal Reserve in the 1970s. Inflation had come down, the Federal Reserve thought they had slayed inflation. They started printing money again, and lowering rates, and what happened? Inflation came back and it came roaring back and Jimmy Carter appointed Paul Vaulker to finally stop that train and he did it in a manner that a lot of those of you who are alive at that point in time remember what that environment was like. That was very, those rates were very, very high for a very long time. Quite a painful period in our country's history and the Federal Reserve remembers that they know what the consequences are of putting their foot back on the gas too soon and so they're going to keep their foot on the break on interest rates. They're going to keep them elevated. Perhaps even with some of the latest data that we've seen not only on interest or excuse me on inflation but a very strong economic growth here in the United States which is very surprising. We still have not had a recession. So very strong job growth as well. Surprising or shocking high numbers on the hiring rates and inflation or rate wage are still fairly strong as well they're growing. So all the signals here are for the Federal Reserve to maintain high interest rates for a prolonged period of time and perhaps now they have the ammunition to raise interest rates yet again perhaps before the end of the year or perhaps even in 2024. At that point the Federal Reserve would be more likely to really put the stop on interest rate increases because the country will be in its political cycle deep into the political cycle with Republicans and the Democrats having their conventions to select their Presidential nominee and the Federal Reserve does not want to be perceived as meddling in elections. The Federal Reserve is going to try to preserve their credibility and so they're probably going to step away and they have a history of doing so anytime there's an election. The Federal Reserve takes a break on interest rate increases or touch or changing interest rate policy. So at any rate that's where we're at I think the the consensus from the number of people I speak with is we're we're probably going to see at least one more rate increase and then they're going to really put it on hold.

We're not done we got to talk about a few other things these really fun topics about our national debt. If you haven't been paying attention in the news you might want to check this out. This country spends a lot of money a lot more than we take in and so this is a problem and it's going to be impacting borrowing as well. These are the numbers from the the Congressional budget office the CBO they are a nonpartisan organization and they're they just take the data of the number of retirees they're going to be needing Social Security payments, all the number of sole servants that are going to be receiving retirement packages. What they perceive as the future in terms of total debt needs going forward with a growing entitlements with Social Security, Medicare, Medicaid, National Defense all those other things and they put these charts together so they're not co-bank numbers. Don't blame me. Don't blame us for this. These are the government numbers from the government themselves and as you can see the federal deficit from last year projected into the year 2033 is expected to continue growing. So right now we've got almost one and a half trillion a little over one and a half trillion dollars of deficit spending this year. Which is just mind-blowing. It's just absolutely mind-blowing the amount of money we're spending and the federal debt the chart of the right is expected to continue growing. Right now we're just over 30 trillion dollars of debt. The US economy as a whole. I'm gonna get this wrong it's less than that. The US's entire GDP is about 25 trillion. Our debt is 30 trillion. Would you loan money to this country when you've got more debt than you have assets if you were a business? That would be a no right. You would have a hard time explaining that to your banker but here we are. We've got over $30 trillion of debt and it is expected to grow to more than 50 trillion in the next decade. Why does this matter to you and me? It all comes down to the price of money. We are going to talk about US Treasury yields. Why are our treasury yields going so much higher? This is the price if you will, or the the yield on U.S. debts okay, and it has risen quite sharply over the last year and it's just a matter of supply and demand. This is economics 101. As the supply of debt increases and as the Federal Reserve is no longer buying debt, so demand is going down. Supply is going up. What happens to the price of those bonds? They go down, okay. Supply up. Demand down. The price of the debt has to fall. Yields and price of those bonds are inversely correlated and now yields are now rising quite sharply. So play this forward in the decade ahead and we continue to see deficit spending growing. 
The amount of debt growing as well. Where do you think yields are going to be going in the future? The cost of funds for us to borrow money from banks, they're going to be going higher okay, and so it's hard to predict anything like this because there's always things that can change geopolitically. Perhaps the U.S. government decides to spend less which is doubtful. Perhaps the U.S. government may decide to raise taxes and try to fill this hole. Less doubtful but also not extremely likely given the dysfunction in Washington DC. So, what is government going to do? Probably issue more debt because they're not going to decrease spending and they're not going to increase taxes because of, excuse me little one moment I got to take a break. Because of the lack of fiscal discipline on spending in taxes, what that means then is the supply of debt is going to continue to grow that's going to lower the price of the bonds and thereby put upward pressure on those yields. So the cost of funds for us to buy will only get more expensive over time.

I hope I haven't made any of you depressed at this point in time. Now what does this mean on cost of carry? So we talked about the price of commodities for corn weed and soybeans and then, the cost of borrowing against those commodities is going higher as well. So when you do the the arithmetic, excuse me, on the cost of borrowing whatever it is in, whatever rate you it is that you negotiate with your banker, it's going to be the libore rate or the sofa rate rather plus that spread whatever that is however many basis points 250, 275 basis points and then you apply that arithmetic to the value of the commodity that you are going to be owning and the cost of carrying or the cost of owning that commodity over time to carry it for weeks and months into the future is going up. As you can see on the chart you see on the screen right now the estimated financial cost of carry by crop crop here and I emphasize financial cost of carry. This is not including your cost of operations with labor, transportation, insurance, diesel fuel, electric power, all those things are costs as well. This is looking only at the financial cost of carry. Where you apply the interest rate on the the value of the commodity and what we have here is about 7.8 cents of bushel per month for soybeans, 5.2 cents for wheat, and 3.1 for corn. These numbers will change as interest rates change as well and as commodity prices change. So please keep that in mind if you're saying well that's not right. Well in your specific situation it may not. It very well probably is not right. These are we're talking in broad terms here though and as you can see, historically we are very high on the cost of owning and carrying commodities.

I can pause here very quickly Hannah, unless if there's anybody who would want to say well this is not exactly my situation you're free to mention that. We can go forward on this concept here I do want to talk about what's happening in the spreads though. This is integral to the cost of carry. So that the cost of carry for instance, we're going to go back one chart again. What's the cost of carry on corn? Just a little over three cents a bushel per month based on that math. So what is the market going to pay you to carry it? These are the the new numbers I just pulled from the Chicago Board of trade this morning. Taking the spread between December corn to March corn. To March and then you do that math however many cents that is divided by 3 months and right now excuse me, the cost of carry for corn from December to March is 4.7. Okay. That is excuse me, the carry is above the cost of carries. So you're going to make 4.7 cents to carry corn to own it from December to March. The financial cost of carry is 3.1. Great news. You're going to pocket a few cents there you're going to pocket on this math. You're going to pocket 1.6 uh cents per bushel per month on that carry. So we're in the money on corn. How about soybeans? Remember soybeans? The cost of carry we figured was 7.8. Well, if we take the cost of ownership from from November to March then divide that by four, you get 9.1 cents per bushel per month. Which is over your financial cost of carry of 7.8. Again great news. The market is paying you more than it cost to borrow against that commodity. So you're going to make money based on this math. Again, we do this with the qualification that everyone's scenario may be different but broadly speaking soybeans will even pay to store. Wheat, I break this out based on the three major classes that are traded in Chicago, Kansas City, and Minneapolis. We get a mixed bag. The financial cost of carry for wheat, again we're using USADA's broad numbers on all wheat which is 5.2 cents per, excuse me per bushel per month. If you look at the cost of or the the carries in Chicago wheat SRW, there's a lot of money to be made in owning and storing Soft Red Winter wheat and indeed all of our customers in that neck of the woods out there back East that have wheat are sitting on it and they are going to carry it for as long as they possibly can because of that, you're almost at twice the cost of carry not quite but 9.2 cents a bushel per month right now on the on Chicago wheat. That is the best game in town right now is storing wheat. You are not going to go wrong doing that. Spring wheat in Minneapolis, hard red spring wheat again, not as big of a carry as soft bread winter weed in Chicago. Six point five cents per bushel per month. Not as profitable as soft red winter wheat but it is still above the cost of carry of 5.2. Kansas City HRW wheat not so much folks. The cost of carry right now from December to March is currently 3.3 cents a bushel a month. That is under the financial cost of carry of 5.2 unfortunately. So, different story there for HRW. Positive stories there for SRW and spring wheat.

Now, moving on to some of these points. How do you manage a rising cost of carry? What strategies do you have at your disposal to control your cost? Well, number one you got to work with your banker. You got to talk with your bank on interest rate management. So for instance, if we think that interest rates may go higher yet again with the Federal Reserve and that's going to be raising our cost of funds. You got to work with your banker on what you can do to get ahead of that. Perhaps you can lock in a more favorable rate today before things get worse later on. So interest rate Management number one. You got to control the cost of borrowing money. Excuse me. Now, what about some of these other strategies? If you're in a situation where the cost of carry exceeds the carry on the board and that would be Kansas City wheat, in this instance. Then you're going to trade shorter dated Hedges. You're not going to be carrying it out for several months. You're going to try to get rid of it as fast as you possibly can. Okay. and indeed over the last couple of years we had inverse had an inverted market across the board for corn, soybeans, and wheat. A lot of our customers got used to that environment. They got very good of moving grain. Selling it as fast as they can. Getting those train cars in. Getting them loaded, getting them out. They became really good traders. Now we're in an environment with a carryback in the marketplace. They don't have to get rid of that grain so fast. Now, the Kansas City wheat is a different story but otherwise for corn and beans and soft winter and spring wheat the board carry exceeds the cost to carry and so you don't have to try this method of trading shorter dated Hedges or trying to move the grain as fast as possible. Another one, the main, excuse me, the other tool at your disposal is the basis that is at your control. You can widen your bases as far as possible without losing the farmer. That's kind of key. You got to keep the farmer. If you know your farmer and what their pressure points are and how there's a level of basis where they just say you know what I'm not taking it to this elevator anymore. That's going to be important. You got to know your farmer. Your customer. So as you enter into those discussions about basis that's going to be key. What is the realm or the threshold of pain I guess if you will for the farmer because that cost of carry ultimately is going of have to be priced into your local basis. You can ship it into other locations. So if you have multiple locations like a lot of elevators do, what are your key locations that are low cost? Perhaps your Hub locations. You set your basis accordingly to incentivize delivery of grain to those low-cost areas and then try to minimize the usage of those high-cost locations. Some of our borrowers are are doing that. It takes a little bit of work to figure that out. You got to know the cost of the each of your locations when it takes to keep them operating and then set your bases accordingly. A lot of other methods you can try to lower your overhead that's just hard to do. Transportation just kind of is what it is. You can work work with Transportation Brokers or your freight brokers and to try to manage that cost. I know rates been coming up a little bit. Try to get ahead of that if you can. Labor, that's something that all of us are dealing with. You don't have to be a co-op to know that labor is scarce. Labor is tight and wages are going up. So, how do you manage an operation or a facility without labor? You can't. You have to have at least two people on site, I think is what OSHA requires. Bare minimum of two people in an elevator location. Way out in the country when I when I was in college I worked at an elevator and one of the things that we learned early on, is you have to have two people there, always. Doesn't matter even can sit there and play cards all day long. You have to have two people there on site and they're going to be earning a higher salary today than they did yesterday. So labor is going to be a hard one. We can try to do more automation, more investment in automation, more things to mechanize or to reduce the need for labor. But some labor cost you just can't get rid of and as we know those labor costs continue to go up especially the benefits packages, health insurance. Never goes down folks. On that note, insurance out of the third bullet I have there it's been a remarkable year. Painful year for insurance premiums across the board .You name it insurance premiums are going up. How do you work on that? You got to go talk with your insurance company. You got to work with your board about what can we can do. Maybe share and work out an arrangement with other co-ops and trying to get more group plans or something like that. You have to get innovative on how to manage these costs and other things like energy those costs just kind of are what they are. The power bill, the electric bill, if you look historically those price of electricity only goes up over time. Fuel prices are going to fluctuate. Natural gas prices are going to fluctuate. So hopefully perhaps on those things with fuel and natural gas that are more volatile, perhaps you can do some hedging to lower those costs. One thing to keep in mind, I had one more bullet there. The end user is going to try to push their cost of carry down to you the elevator. Okay. So if they're full up on grain they're not going to take anymore. They're going to make you hold it or they're going to be try to be hand to mouth if they can because they don't want to shoulder that expense of carrying too much inventory at their locations either. So what they're going to do is they're going to be slow buyers. They're going to be slow to buy if they can. Now you talk to any ethanol company out there that's not the story they're in right no. They're trying to get corn. They're trying to chase bushels because the margins on ethanol are so strong and so they're they're motivated to go chase bushels. But if an end user is in a position of delaying those purchases then they will and so you the elevator have got to go try to find perhaps more bids more customers. The last bullet there find other ways to monetize assets. I throw that in there because we've got some very Innovative customers who have found ways to monetize their storage rather than just buying rather than owning it and then trading the basis and the carry. They found other ways. We have some other companies that they trade more grain than they than the farmer brings into them. They're buying and selling grain from high cost to low-cost areas. They're arbitraging and they're basically Freight Traders is what they're doing. Moving grain from a low cost to a high cost area and so they've been very Innovative in that regard. They've kind of stepped out of that traditional elevator role of being a storage facility and a marketer for Farmers. They've gotten to that level where they can deliver more grain than they bring in to their end users that rely on them. So now they've become a resource. A greater resource for end users by providing that service of looking at what grain prices are doing around the country and trying to arbitrage
that.

That is basically the end of the presentation folks. We did a report on the rising cost of carry earlier this year. You can see that on the screen that's a snapshot of the report. The URL for that report is on the right side of the screen. You can just go to co-banks website cbank.com, click on knowledge exchange and you'll find that list of reports you're going to have to scroll down on the website to go find it or you can just click on that link right there. With that, Hannah I believe we are just actually I think we're right on time and I will turn it over to you.

Excellent! Thank you so much Tanner and I did put in the chat the link to Co-banks knowledge exchange. Just the the kind of front page there for all of Co-bank knowledge exchange reports where you can find some more information there. Feel free to put questions in the chat for Tanner or feel free to unmute and ask those questions directly. You can also raise your hand if you are planning to unmute and would like to jump in on audio there. I did just want to ask Tanner if you would share any other resources and reports that might be useful to the group. I know you know, you mentioned insurance as one of those particularly difficult cost of operation to manage particularly this year and I just wanted to point out to folks that your team released another report on insurance and ag co-ops earlier this summer. Your colleague Ken Zuckerberg has a report there as well. So any other reports information webinars that we should be aware of. Yeah. That one report you just mentioned Hannah is a very important report that's all it addresses that Rising insurance premium issue and you can find that report online as well. Again, that's authored by Ken Zuckerberg. Update on Ken, unfortunately he is leaving Co-bank and going to one of our customers. We're happy for him. Sad to see him go but he's going to be going to one of our co-ops to manage the research division. I'd say that report and then every every quarter we come out with our quarterly report and we cover all the major Commodities. I of course, cover the grains and oil, seeds, corn, wheat, beans, cotton, sugar, or rice but all the animal proteins and other commodity markets and plus we have a macro section provided by or written by our director. So that is a key report that we come out with once a quarter again that's online. If you have not signed up for our research you can sign up to have those reports delivered to you your inbox on our website.

Excellent! Thanks so much for sharing and again feel free to put any questions in the chat. I'm going to pause to see if anybody wants to come off of mute and ask their question with audio. Okay, I'm not seeing anybody coming off.

I love that when I answer everyone's question.

Yeah, you've done such a great job that nobody has any questions to jump in with at least on audio or they're shy which is also Fair. So I was hoping Tanner you could talk a little bit more about you know, you mentioned in 2024 we're launching into that deep political cycle deeper political cycle and you talked a little bit about what that might mean for the FED and interest rates, but I was wondering if you care to particularly thinking about the political cycle and and or the current state of the farm bill. What that might do to this picture that you just outlined for us if you want to add anything. Small question there right.
Well, I mentioned they're going to be we're going to be higher for longer we have one more bump on interest rates between now early between now and the end of the year perhaps early 2024. As for the farm bill, now that we have a speaker we'll see what happens. There's some hope that's going to go through finally. I would say though you know the impact from the farm bill on directly to the issue at hand on cost of carry is would be hard to discern. You know within the farm bill we need to address reference prices for Farmers on crop insurance. Does that have any impact on cost of carry? Only in the regards to how may impact acreage and how it might impact Supply. That's a longer term view going forward but I wouldn't think that that's really going to have a major Impact right now. There is one issue with a lot of our borrowers in regards to the farm bill is that a lot of our customers haven't had access to the CCC funds for borrowing and so if you don't have access to those loans then you got to go to the marketplace. Got to go place like to a place like Co-bank or some other bank to replace the loss of those CCC programs and what that ultimately does then is that's going to raise your your borrowing cost and that will tie directly into or that ties directly into your financial cost of carry because the CCC loans are so cheap without those funds our customers we're getting a little panicky. So that's one thing to watch is a CCC program and we're going to need to have that back online with the farm bill to lower those cost of funds for those borrowing costs for customers.

Excellent! Thank you.