Federal Reserve trade talk on #2 partner - Mexico with Nathan Kauffman

Paul Yeager: Hello, and welcome to the MtoM Show podcast. I'm Paul Yeager. This week I had to get outside. These are satellite dishes. These are beaming information from here to everywhere around the world. And the last couple of episodes, we have been very busy talking about things around the world. Last week, it was India this week, it's Mexico, Nathan Kauffman is with the Federal Reserve of Kansas City. And he is in their Omaha office. We're going to talk about Mexico, and how agriculture and Mexico trade with each other. What goes across each border? How significant is the business between these two countries. That's the discussion this week, we find out focus heavily on agriculture. We'll talk a little bit about vegetables and some other food items. But it's going to be heavy corn and beef this week when we talk about Mexico and the United States. If you have any feedback for me or the podcast, send an email to Paul.Yeager@IowaPBS.org. We get a lot of great ideas from all of you. We always appreciate them. And maybe you can watch us on satellite somewhere. Let's talk to Nathan Kauffman. Well, Nate, I know you've spent a lot of time across the Midwest. As a Michigan, man. There's no sign stealing in this interview. Okay, with that?

Nathan Kauffman: I'm good. Thanks. 

[Yeager] I know that's a sore subject in Nebraska right now. But we'll save that for another day.

[Kauffman] Okay, that's fair enough.

[Yeager] You have spent the last time you visited, we learned about your background, Michigan, to Iowa to Nebraska, give me a sense of the Regional Federal Reserve again, for those just to who may need a refresher. 

[Kauffman] And people will be forgiven for not knowing what that structure is like. So I'm glad you started off with that question. The Federal Reserve has been designed to be regional in nature, which means that we have offices scattered throughout the country. As you mentioned, I'm actually located in our Omaha Office of the Federal Reserve Bank of Kansas City. And our region is seven states in the middle of the country. So a big part of my job is to provide input from the state of Nebraska, and then also a bit more focus on agriculture and playing more of a national role in that regard. 

[Yeager] And as the Federal Reserve, there's blackout periods, because you're all putting data together. And you need to kind of be coordinated on some things, is there weight given to any one region over another during those discussion and filter up periods?

[Kauffman] You know, we spend a lot of time trying to understand what's happening in different segments of the economy and as many regions as we can, and ultimately, all that information is used to try to better inform an economic narrative that would be useful for those policy discussions that you mentioned. So it's not necessarily that there's a weight that's given to any one of them, but rather, they all combined together to hopefully lead us to a narrative that we think is the best one for how we would see the economy unfolding.

[Yeager] How do you see the economy unfolding right now?

[Kauffman] You know, the word that I think we've been using a lot lately has been resilient. I think there was probably some expectation going back to the beginning of last year, as we at the Fed started raising interest rates and quite sharply at that, that we would see more pressure. And there has certainly been some places where you could say there's cracks, we of course, are familiar with the the bank failures earlier this year. But at the same time, you know, growth here recently has been pretty strong labor markets are still very strong economic activity is good. And you know, there's definitely risks to be aware of, but for the most part, the economy has been performing pretty well lately.

[Yeager] I think I even said this the last time we chatted behind you is the skyline of Omaha. Also in Omaha, Creighton University, Ernie Goss is someone we look at his couple of surveys. It's not. It's scientific and academic in nature. It's different from the surveys that you do among people. How important are other surveys to help provide your report to people up the line?

[Kauffman] You know, we often say that there's both a science and an art to the work that we do. And the science portion of that, of course, is we're collecting data, and we have economic models, and we do forecasts of all of the things that you would expect that the Fed is doing on a regular basis to try to better understand from hard data, what the economy looks like. The art part of that, though, is sitting down and visiting with people and asking questions, a lot of them very subjective questions of how do you see the next three to six, six months unfolding? And what are some of the things that are maybe top of mind as it relates to risks? So there's a place for both data that comes by way of again, you could think of transactional data or economic data that comes in as numbers that we can run those models on. Surveys can also be used that way but the other part of the surveys and this is maybe where the art portion of that comes in is asking the right questions and then by asking questions getting a better understanding of how others might see things playing out. So we use, we use both of those, as you mentioned, there's others that would do something similar to try to understand things in more real time.

[Yeager] Farmland is a big part of your region. Interest rates and how it relates to those who are able to make purchases on land is similar in a way to how residential people make housing purchases, we know what the housing market's been doing. How is it in relation that you share? When a farmland sale top 1718 $19,000 in North Dakota, South Dakota, Iowa? How does that translate to again, an overall picture of the resilient US economy to use your word?

[Kauffman] Yeah, you know, I think there are some definite parallels, as you mentioned, farmland and even some other broader markets. And one of those is recognizing how strong things were in 2021. And now I know it's 2023, I didn't forget the year, but in 2020, and then through 2022, the ag economy was exceptionally strong. And that was consistent with some of the broader strength that you saw in the economy and 21. Also, sharp gains and economic activity, much of that, of course, driven by some of the fiscal stimulus that would have been put out following the pandemic. But it's important to understand the threats of the strength of that time that led to where we are right now. Because a lot of the strength that we see in farmland as an example, I think, is coming on the heels of what has been a very strong ag economy for the past two years. And again, that's in spite of the increase in interest rates, it's in spite of costs that have not come down much. And you could add a number of risks to that as well. So we still see land values holding up pretty firm. And you could apply the word resilient there, too, I think, exports.

[Yeager] Our neighbors to the north and to the south, we're still trading heavily with them. Is that accurate? 

[Kauffman] Yeah, trade has been strong. And in particular, as you noted there with both Mexico and Canada, some of that is consistent with the rebound that we experienced following the pandemic, of course, there was a pullback in 2020. But export activity in both directions has been fairly strong. And you know, some industries may be a bit more than others. But I think that's been a positive also.

[Yeager] Is there one particular reason that there's been strength, but with these two neighbors.

[Kauffman] You know, I think the strength and and not to overuse that word resilience, but the strength really does come by nature of how the economy has unfolded here, the last couple of years following the pandemic, consumers have been in a pretty good position to continue to spend despite the inflationary pressures, I think, that are being felt not just in the US, but elsewhere. And so as we talk about supply chains that are, yes, globally integrated, and following some disruptions of the past couple of years, more linked than ever, I think, to what you would see with respect to Mexico. And so that's, I think, where some of that's coming from just the strength in consumer spending, household savings and an ability to be able to continue to push through despite those pressures.

[Yeager] Okay, you can get nervous here for a moment politically, what matters with our trade. And the reason I asked that is, NAFTA was one administration several, several years later, we have the USMCA, then we have transitions in leadership in one country, and in another country. How does that change and interweave when you try to keep track of federally Federal Reserve only? Gosh, that's a new word, and making sense of trade.

[Kauffman] I think the way that I would answer that is by trying to understand the components of what leads to a stronger environment for both exports and imports. And free trade agreements are a part of that. We know going back to 2018, with some of the trade disruptions with China that started in the increase in tariffs. And you know, despite China's participation in the WTO, as an example, some of the tariffs that would still remain in place today between the US and China, I think, would be fair to say that those are headwinds to trade in both directions. As we've had free trade agreements with Mexico and Canada, of course, others that presented an environment where the flow of goods and services between the two is less restricted, and there would be incentives to explore trade opportunities there. So the first way I would answer that, I think, is just by recognizing the role of what those free trade agreements might be in providing an environment for trade in both directions. The other I would then add to that is, and this is maybe a longer discussion, but you know, one of the challenges that we hear a lot about from businesses with respect to labor, and we're in an environment now with with very low unemployment rates, that there is demand for labor, you know, from different places, and so thinking through that out not to go too far into what that might mean politically, but more just recognizing it as something that has to happen for there to be economic growth and thinking through what immigration and some of that might mean is important in the context of how firms think about their own labor.

[Yeager] You are several 100 miles from Mexico. But that is an area of your expertise in what you're watching. Let's start in Mexico with this. A few months ago, there was a story that Mexico has done, they no longer want United States corn that has GM interests. What does that mean?

[Kauffman] Yeah, so in terms of agriculture, you know, that would represent a significant source of demand, for example, for US corn. And you know, of course, there's been a decent amount of back and forth around that announcement, and maybe some exceptions to what was originally stated, and maybe some extensions in terms of what the timing might be, and ongoing political negotiations, that would be beyond the things that I would have visibility into. I think, at the end of the day, what it does represent, though, is the fact that we have a decent amount of trade between the US and Mexico that's focused on food and agriculture, and seeing it as a source of demand. From a US perspective, but then also, you know, from a Mexican perspective, I think, looking at what their needs might be with respect to their own production, their own industries, and how they think about that. So as an economist, we think about it a lot in terms of the potential for economic growth by way of exports. But just to add a little more color to that.

[Yeager] Do you anticipate if you know, some type of resolution or a two a six to 10 year change in the way that policy would go? From an economic standpoint? How do you see the growers of the corn shifting? Do the United States? Does the US farmers say, Okay, I need to lean into this? Or do they hold firm? And what does that mean, policy wise, and you're trying to make sense of it economically?

[Kauffman] One of the challenging things about answering that question is that we have to start by recognizing that this is very much a global market, you know, corn can be produced in lots of places, South America has a growing presence, of course, both Brazil and Argentina. And so we'd have to better understand what the global market is in terms of demand for those products alongside you know, the more conventional or traditional products. Because if it's possible for example, some amount of production is just shifted elsewhere. And then the original product that was always grown in the US ends up somewhere else, then we haven't really done much other than just shuffle the deck and shuffle the chairs around the deck, so to speak. So that, of course, has implications for the flow of trade. And we see that often. But it has to be understood in the context of a global marketplace and how those demand trends are shifting across regions, and which regions are better positioned to provide that product if there is a change in policy.

[Yeager] So with a change in policy with Mexico matter, then?

[Kauffman] I think that it could matter as you talk about some specific products. And certainly, it would matter if ultimately what a change in that policy would lead to is a universal reduction in demand for United States corn as an example. But if what happens is, you know, Brazil or Argentina fills that gap. And, you know, neither Brazil or Argentina can supply the rest of the world, then, you know, the global nature of that market would suggest that there would be other market opportunities elsewhere. I think from again, from a US perspective, the best case scenario is to have as many global export opportunities as possible, but it's not quite as simple as just saying, you know, this will will universally lead to something that, you know, you could kind of map out over six to 10 years because it has to be considered alongside other other parts of the world.

[Yeager] So what happens if there is a change politically in Mexico, and the United States? How do you factor in those moving targets? In the discussion we're having?

[Kauffman] I think one of the places that it shows up is around uncertainty. Going back to some of our earlier discussion, when we talked about sitting down and visiting with businesses and industries to understand how they're thinking about their outlook for the next year. One of the regular pieces of context in those discussions has to do with uncertainty and how they go about making plans for investments. So I would say that's probably first and foremost is thinking through even the environment right now, when there's a lack of clarity. It creates a more difficult environment for making decisions and marketplaces tend to not like uncertainty. So I think that's one of the places where it shows up when it comes to our discussions about how we provide that information. Even In a broad context, economic information, that source of uncertainty can be what we would describe as a downside risk to economic activity. So that's how we think about it. We don't really have the ability to map out different scenarios on the basis of hypothetical political situations, but rather to take the information that we do have and then as best as we can understand, what are the near term or longer term implications of that?

[Yeager] It is apart, but it's not and it can't be today? Is that kind of how I think you just answered it?

[Kauffman] It's a part of how we think about the outlook. But again, we can't really speculate on what policy decisions might be made, but rather, with the information that we have right now, what are those effects? So, you know, until there is a policy change, you know, it's hard to factor that in outside of thinking about the risk. Often that comes again, by way of uncertainty.

[Yeager] You mentioned labor, and we traditionally think at least around here, labor with Mexico is a manufacturing issue. But there's also labor on farms closer to Mexico. Let's talk California, Arizona, New Mexico, Texas. Where is the labor? The day labor type that we've been seeing impacted with immigration discussions? Polit? Again, I don't know if it's a policy answer. But how do you make sense of labor? In this equation?

[Kauffman] Yeah, you know, I think that labor for the last several years has been a real prominent factor that's driving the the conversations that we have with with businesses and ag even specifically, in terms of what their challenges are, we tend to think about that, I guess, in terms of the both the geographies and the industries that are maybe most impacted when when they feel they have a scarcity of labor. You know, there are, of course, some products and ag that require more labor than others. And when we talk about specialty products, fruits and vegetables in California, or Texas and other places that require more manual labor, I think the experience that they're having around the shortages is probably more significant than elsewhere. Dairy would be another example of where there's been some issues with labor, you know, so I think that's experienced also in the Midwest, especially with some of those industries, like dairy or even as you get into talking about food processing. But it's part of a broader discussion, I think that a lot of businesses are trying to have around how they're solving their labor scarcity issues, some of them are making investments and other sources of technology that they can try to offset some of that. But immigration, I think, is often a part of the story and what we hear from businesses. And of course, then, like I said, some businesses are much more effective than others.

[Yeager] What is the biggest? What, what are we sending to Mexico the most stuff besides corn?

[Kauffman] Well, from the US economy perspective, a lot of the market back and forth between the US and Mexico does have to do with transportation and vehicles, there's a there's been a pretty well established supply chain where a number of parts, for example, produced out of the US manufactured parts would would go to Mexico, for production as it relates to vehicles and then sent back this direction. So that's a big industry. There's a number of others - electrical equipment, and you know, petroleum products. Of course, as you think about Texas, and places further south. It's been a pretty broad trading relationship, but food and ag, of course, are important for the Midwest and the region that we cover.

[Yeager] Do you see a certain sector of Food and Ag that's changed? I think the last time we talked was early pandemic time. Now that we're a little bit away from that, did we see are we accepting more Mexican grown fruits and vegetables in this country than maybe we used to? 

[Kauffman] You know, generally what I would say is that we've seen a pretty noticeable increase both in exports from the US to Mexico, but then also when reverse importing products from Mexico to the US. Some of that's fruits and vegetables, some of it is processed products that could be food and beverages as part of that as well. So yeah, there has been an increase in both places. We've actually been exporting more corn to Mexico the last few years in addition to some other things, poultry products, of course, soybeans, there's more that's connected to I think energy, also than what we've seen in the past. More pork is going to Mexico, I think than what we were before the pandemic so you know, there's a number of opportunities. There are both directions that we've seen an increase here lately.

[Yeager] You mentioned poultry, let's talk about other livestock, beef, pork, you kind of talked about pork, where are we at beef wise with our trade with Mexico?

[Kauffman] You know, I'd have to look at the numbers. One of the challenges in the beef market specifically is drought. I mean, we've had substantial drought in areas of the country here that are known for raising cattle and producing beef. And we've seen some pretty significant declines in inventories on the basis of that drought, which of course, has then corresponded to pretty sharp increases in cattle prices and beef prices. What that means then is just a more limited product to be able to son, you know, back and forth either direction. So I think that probably is one thing that has weighed on some amount of export activity in that market. And as you look at the other protein markets, like poultry, and, and pork, you know, they may be often viewed as a cheaper alternative, given some of the price increases that we've seen here lately for beef.

[Yeager] So it does go back to dollars and cents, then not necessarily trade relationships, we're still looking for the cheapest option at the grocery store, no matter where we live.

[Kauffman] Paul, you know, I'm an economist. And when you say that everything comes back to dollars and cents. I mean, a lot, a lot of the decisions, I think, are driven by the economics of things and what makes the most sense based on what the market is demanding.

[Yeager] This is way out of the area here of what we're talking about. But the discussion we had recently on this podcast was about India. And it is emerging that more and more people who show up on Market to Market are talking about India as a destination for US agricultural goods, the from what I'm hearing on those who've traveled to India, that they're really Yes, they have relationships with Russia, and China, as well as the United States. But at the end of the day, they go back to dollars and cents. So do you see that more dollars and cents matter, globally, and trade deals be darned?

[Kauffman] I think it depends what sorts of products we're talking about. Because I think there is significant demand for some products that are grown or produced here in the United States that are at a higher price point, because purchasers overseas know that it's a very high quality product that they can sell to a higher, you know, higher pricing point and their market. There's a market for that. But there's also a market for you know, to your point, those that are relatively cheap source of food or fuel for that matter, coming out of the, you know, the war with with you, between Ukraine and Russia, and concerns about global food security and seeing prices of food rise globally, I think that was a significant concern that caused a lot of countries to start to think more carefully about how they're monitoring their own food security within their borders. So that's, that's growing, that's been a conversation, especially for the last couple of years. But you know, to the point about India, part of that is also demographics, I think looking at where there might be opportunities based on population growth, longer term.

[Yeager] Does it matter in the US geographically, okay, if I'm a corn grower in say, Ohio, am I impacted as much by what goes on in Mexico, as I am, say, Canada, and as it is based on geography? 

[Kauffman] Then it can potentially be based on geography based on how the transportation networks are aligned to be able to serve those respective markets. So just to give an example, you know, producers in Iowa that are located next to the Mississippi River, are going to be more dependent on what happens in the global market because of the use of the Mississippi River to move product both up and up and down the river to a global marketplace. So you might see prices for those producers that are located next to the Mississippi River be impacted more or less by what's happening globally than what you might elsewhere. And the same would be true for producers, you know, located in Texas versus producers that might be somewhere else, you know, the transportation links to and from those trading partners will matter and the prices that they might Garner for their products would then be more impacted relative to others based on the transportation network.

[Yeager] Again, tying back to COVID You know, the buzzword you know, we talked about resilience was one word it was transportation, infrastructure supply chains that was the big has that sorted itself out with Mexico and the United States and us getting product to them and then back to us.

[Kauffman] Uh, you know, I think globally the supply chain disruptions that we had seen really in full force through much of 2021 and then and then into 2022 have been resolved for the most part and I say for the most part because there probably are still some specific types of products or industries where it may be an issue and it may still come down to labor it did even then during the the core of the supply chain issues a lot of it had to do with labor. But in terms of the cost, for example, to transport something from one part of the world to another, we've seen that come way off of the highs that were experienced during those most significant issues a couple of years ago, so I think it's gotten a little bit easier. Some of the backlogs and delays off of products, we don't hear the same kinds of anecdotes there.

[Yeager] What's going to be looking forward the biggest. I don't know if it's the right word, but what's the biggest storyline between the US and Mexico when it comes to trade in the next two to five years?

[Kauffman] You know, I think a big part of its going to come down to prospects for economic growth to continue to support that trade. Again, going back to what I mentioned earlier, the strengthen economic growth in 2021, and really, even through 2022. And now this year has been pretty good. And it may be even in some places stronger than what might have been expected. So that that is supportive of them than have an environment that has export activity in either direction. If we were to see, for whatever reason, a more significant economic slowdown, whether it's in Mexico or the United States, some of that ties back to how we at the Fed think about monetary policy and interest rates, we know that effects associated with increase in interest rates don't happen immediately, it can take some time for those effects to play out. So if we were to see a more substantial, you know, macro economic slowdown that would have certain implications for trade. And I think Mexico would feel it in terms of their own economy. It's an economy that's dependent to some extent on remittances from the United States. The strength of their economy is, I think, tied pretty closely to what happens in the US.

[Yeager] So when there are news reports about what goes on at border communities, and that back to that issue of immigration, I don't think you have a measure for angst that that might cause with a trading partner, do you?

[Kauffman] Do we have a measure for angst? Well, we look at lots of things that we try to angst is not an index I'm familiar with, we look at uncertainty and risk a lot. But no, you're right. I think that, you know, just the uncertainty of what might lie ahead, not just from an economic perspective, but going back to some of the discussion that we're having on policy, those policy decisions or changes to potential changes to policy will have implications and some may experience that much more severely than others.

[Yeager] Yeah, because I look at elections in Mexico and read the stories of well, you know, if the US doesn't do this, we're not going to do this. That has to make, I would think, and American farmer a little nervous because that's a big market for where my product goes.

[Kauffman] Yeah, you know, I think that's right. I think that businesses, farmers, others that are having to make investments and decisions about things, having to hire people and having to manage an operation day to day, it just gets more complicated. If there are things that make it uncertain as to what the future outcome is, and then how to move forward with something, especially as it relates to AG you know, margins are not probably as good as they had been a year or two years ago. So some of those decisions might get even harder going forward.

[Yeager] And I guess this is something maybe you can have a perspective, since you're not necessarily in like the Dallas Fed office, where you're that much closer to the border. But what is the implications of immigration challenges of people coming into the United States and having on a strain on services, a strain on this? And how does the Fed have to monitor and report what's going on and how it affects policy moving forward?

[Kauffman] You know, I would say what, what we most often hear that's connected to that goes back to labor scarcity. We were dealing with labor scarcity, well before the pandemic, and then going through the pandemic, we started to hear even more about labor scarcity. And you know, I sit here in Omaha, Nebraska, they had an unemployment rate of 2.1%. It's just very, very low unemployment. So I think we factor into the kinds of things that we think about at the Fed is to understand what is the balance in the labor market that might allow the economy to progress in what we feel like is a sustainable fashion. We've been dealing with inflation for the better part of the past couple of years, and inflation that's higher than what the Feds target or goal would be. But to the extent that businesses still can't get the labor they need, they have to continue to raise wages and compete with a labor pool that's quite limited. You know, that has potential implications then for inflation. So those are some of the things that we would think about, but it's most often the question around immigration, in terms of where we hear about it is probably most often connected to the challenge that businesses face trying to find labor that they need.

[Yeager] So it's impacting the economy, not necessarily economic policy.

[Kauffman] Well, when we think about from from the context of of economic activity that then has implications for how we think about monetary policy, you of course know our role is not to think too much about what government policy might look like, but rather understand what those policies might mean for or for economic activity.

[Yeager] Inflation in Mexico? How has that compared? And how do you monitor those types of things? 

[Kauffman] To what I would say there is when we think about inflation here in the US, which again, just to remind people, you know, we have a goal for the for the Fed of inflation at 2%. And that's inflation over the long term. And last year, we peaked, depending on what measure you look at somewhere between seven and 9%. It's easy to look at that and try to understand what's happening in the US that's leading to that inflation. But the reality is that inflation has very much been a global phenomenon, the US has not been alone in this. And so what you see then is other central banks, and the Bank of Mexico would be part of this, but you would see it in Europe and Japan and elsewhere, of having to also increase interest rates to push back against inflation that they're experiencing. So it's not one that can be separated from another. And again, going back to our supply chain discussion, supply chains being linked means that a lot of those inflationary pressures are also then linked across borders. So it's, it's something that I think that's really being pursued globally, not just in the US in terms of inflation, and then higher rates.

[Yeager] Let's close with this. I asked you in the next two to five years about a relationship to Mexico, what's going to be the bigger trading? What's the story when we discuss all of commodities, global markets for the Midwest farmer, specifically, your region here? What's the number one story or two stories that we should be watching? We'll just say in the next year.

[Kauffman] I would say first is monitoring the global strength of demand for both food and ag products, because that's ultimately what supports commodity prices. That's what will support further strengthen things like farmland values, or the ability of farmers to take out loans and then repay those loans, the source of demand, not just in the near term, but how that demand is positioned long term has significant implications for commodity prices. So I think that's the first story that I would reiterate. The second one, I think, is again, in the context of how we've experienced agriculture, the past three years is remembering how strong the economy has been. And that that's not something that I think historically, a lot of farmers would say, has felt normal. incomes and agriculture have just been really quite phenomenal. It's and again, it's supported, strengthened farmland values, it's reasonable to expect that that might not be an environment that plays out, you know, in the next year or two. And probably the last one that I would add, and you know, we didn't spend a lot of time talking about this. But we of course, know that the Farm Bill matters for producers and thinking about managing their own risks and what crop insurance looks like. And that's still another source of uncertainty. But going forward for the next year could be an important thing to keep tracking.

[Yeager] Especially if it's an extension of the current and not a change in too much that way. So yes, again, a fun moving target for you, Nate.

[Kauffman] There's plenty of moving targets and targets and like I said, that's what makes economics interesting.

[Yeager] It is. Nate Kaufman, great to see you. Thank you so much for your insight. Appreciate the time. 

[Kauffman] Good to see you again. Paul. Thank you.

[Yeager] What do you make of those satellite dishes? I don't know. If you ever had a satellite dish send me an email MarkettoMarket@IowaPBS.ORG. New episodes of The MTM show. Come out each and every Tuesday. Subscribe where you get your podcasts. Watch us on YouTube or audio versions. Both are fine. Both are cool. We'll see you next time. Bye bye.