Prolonged Shutdown Could Have Significant Effects

BMI View: Although we expect the stand-off to be resolved soon, a prolonged shutdown of the US federal government could have important consequences for the US agriculture sector as well as benchmark commodity prices. Although key essential services such as federal meat inspections remain in place, other functions such as data releases and oversight of commodity markets have been reduced, with staffing at a bare minimum. This could lead to volatility in CME grain and livestock prices over the short term as market participants look for alternative data and indicators.

The inability of the US House of Representatives and Senate to pass government funding measures for fiscal year 2014, which began October 1, has resulted in the shutdown of the federal government, the first such occurrence since 1996. While we expect the shutdown to be relatively brief, and while many government functions will proceed uninterrupted, there is the risk that it could drag on, weighing significantly on GDP in the fourth quarter and roiling financial markets. Since the mid-1970s, Congress and the president have failed 17 times to enact spending measures before existing funding ran out, and since 1980, funding gaps have required affected government agencies to cease operations until new funding is allocated. Exemptions are made for agencies and employees that are responsible for protecting life or property. Indeed, a substantial number of federal employees will remain on the job without pay, but many more will be furloughed ( see 'Shutdown Illustrates Political Risks To Economy & Markets', October 1).

In the event of a prolonged shutdown, the US agriculture industry and related financial markets could be significantly affected in two keys ways: data availability and regulatory enforcement. As part of the shutdown, virtually all US Department of Agriculture (USDA) and Commodity Futures Trading Commission (CFTC) employees have been furloughed because they are not deemed essential workers. In the case of the USDA, close to 90% of the staff is forbidden to work, including checking emails. Even volunteering is prohibited, and volunteers would be arrested under the 1884 Anti- Deficiency Act. For the CFTC, which oversees all the major CBOT and CME price contracts, only 28 employees (4% of its total staff) are considered essential, mainly to deal with 'emergencies involving the safety of human life or protection of property'. Although the Security and Exchange Commission (SEC) functions under a similar mandate to the CFTC, the SEC has released a statement saying it will be able to remain open for a few weeks but will soon run out of cash and force its staff to go home. In this case, the SEC would keep on roughly 6% of its workforce to oversee market activity and prevent technological glitches.

Funding Gap, Shutdown Could Be Short Or Long
US - Previous Federal Government Funding Gaps, Days

BMI View: Although we expect the stand-off to be resolved soon, a prolonged shutdown of the US federal government could have important consequences for the US agriculture sector as well as benchmark commodity prices. Although key essential services such as federal meat inspections remain in place, other functions such as data releases and oversight of commodity markets have been reduced, with staffing at a bare minimum. This could lead to volatility in CME grain and livestock prices over the short term as market participants look for alternative data and indicators.

The inability of the US House of Representatives and Senate to pass government funding measures for fiscal year 2014, which began October 1, has resulted in the shutdown of the federal government, the first such occurrence since 1996. While we expect the shutdown to be relatively brief, and while many government functions will proceed uninterrupted, there is the risk that it could drag on, weighing significantly on GDP in the fourth quarter and roiling financial markets. Since the mid-1970s, Congress and the president have failed 17 times to enact spending measures before existing funding ran out, and since 1980, funding gaps have required affected government agencies to cease operations until new funding is allocated. Exemptions are made for agencies and employees that are responsible for protecting life or property. Indeed, a substantial number of federal employees will remain on the job without pay, but many more will be furloughed ( see 'Shutdown Illustrates Political Risks To Economy & Markets', October 1).

Funding Gap, Shutdown Could Be Short Or Long
US - Previous Federal Government Funding Gaps, Days

In the event of a prolonged shutdown, the US agriculture industry and related financial markets could be significantly affected in two keys ways: data availability and regulatory enforcement. As part of the shutdown, virtually all US Department of Agriculture (USDA) and Commodity Futures Trading Commission (CFTC) employees have been furloughed because they are not deemed essential workers. In the case of the USDA, close to 90% of the staff is forbidden to work, including checking emails. Even volunteering is prohibited, and volunteers would be arrested under the 1884 Anti- Deficiency Act. For the CFTC, which oversees all the major CBOT and CME price contracts, only 28 employees (4% of its total staff) are considered essential, mainly to deal with 'emergencies involving the safety of human life or protection of property'. Although the Security and Exchange Commission (SEC) functions under a similar mandate to the CFTC, the SEC has released a statement saying it will be able to remain open for a few weeks but will soon run out of cash and force its staff to go home. In this case, the SEC would keep on roughly 6% of its workforce to oversee market activity and prevent technological glitches.

USDA To Feel The Effects
Select US Federal Departments - % Of Workers Furloughed During Federal Government Shutdown

The effects of enforced staff reductions could be significant. Key services, such as federal meat inspections, would remain in place. However, the USDA is one of the world's largest agricultural data providers and releases various updates and reports every week on livestock and grain items, which will not be published during the shutdown. The effect on prices may vary depending on the extent to which US-related data affects prices. For example, sugar prices may be less affected than lean hog prices, since sugar prices are significantly affected by supply developments in Brazil, whereas lean hog and cattle prices place a relatively greater emphasis on US developments. Moreover, should the shutdown last more than a few days, the USDA may be forced to delay its monthly flagship World Supply And Demand Estimates (WASDE), which is scheduled for release on October 11.

Regulatory enforcement may also be a concern. Although broader oversight of the US banking system would remain in place since the US Federal Reserve is self-funded and unaffected by the shutdown, enforcement of commodity markets could become an issue. With few staff at the SEC, financial crime investigation and initial public offering filings would be delayed. Indeed, the head of the CFTC recently suggested that the shutdown could have 'disastrous' impacts on consumers. All of these issues could lead to significant volatility in prices over the short term. Although there have been several government shutdowns dating back to the 1970s, capital flows into commodity markets have increased exponentially since the last government shutdown in 1996

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Sector: Agribusiness
Geography: United States
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