Evening Report | July 5, 2023

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Farmer sentiment rebounds sharply... Farmer sentiment rebounded in June as the Purdue University/CME Group Ag Economy Barometer rose 17 points (16.3%) to a reading of 121. The swing in sentiment was driven by producers’ more optimistic view of the future as the Index of Future Expectations jumped 25 points (25.5%) to 123, while their perception of the current situation was unchanged at 116.

The more optimistic view of the future held by respondents was reflected across the board as the Farm Financial Conditions, Short and Long-Term Farmland Value Expectations, and Farm Capital Investment indices all improved in June compared to May.

When asked to compare their farm operation’s situation today with a year ago, 40% of respondents said their operation was “worse off” financially than a year earlier vs. 37% who felt that way in May while just 15% chose “better off” vs. 17% in May. But when asked to look ahead one year, respondents’ attitudes changed. In June, 20% of respondents said they expected their financial condition to improve over the next year, compared with just 13% in May. Meanwhile, 32% expect their farm’s financial situation to decline over the upcoming year, compared with 44% in May. Producers improved perspective on the future was not focused solely on their own farms, but extended to all of U.S. agriculture. The percentage of producers expecting good times for U.S. agriculture in the upcoming five years rose eight percentage points to 33% while those expecting bad times fell three points to 41%.

Looking ahead, one-fourth of corn/soybean producers said they expect farmland cash rental rates to rise in 2024.

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Key trade policy issues in focus this week...

• Treasury Secretary Janet Yellen will leave Thursday for Beijing amid several fractious issues between the U.S. and China, which has fallen to third place behind Mexico and Canada relative to the United States’ largest trading partners. Yellen on Monday met with China’s new ambassador to the United States, Xie Feng. “The frank and productive discussion supported ongoing efforts to maintain open lines of communication and responsibly manage the U.S./China bilateral relationship, in line with Secretary Yellen’s upcoming trip to Beijing,” Treasury said.
• Agenda for Yellen’s visit to Beijing. Yellen will attempt to persuade her Chinese counterparts that U.S. efforts to deny China access to certain cutting-edge technologies are only intended to protect national security and address human rights concerns, rather than gain an economic advantage. Yellen will also stress the need for the two countries to work together to address global issues such as climate change and developing country debt, and try to tamp down concerns about the potential for a complete severing of U.S./China trade and economic ties. Bottom line: “We seek a healthy economic relationship with China… that fosters growth and innovation in both countries,” a senior Treasury Department official told reporters. “We do not seek to decouple our economies – a full cessation of trade and investment would be destabilizing for both of our countries and the global economy.”
• $182.91 billion: Amount Customs and Border Control has collected from importers because of the tariffs that former President Donald Trump imposed on Chinese goods under Section 301 of the 1974 Trade Act. 
• Valdis Dombrovskis, Trade Chief of European Commission, had discussions Wednesday with U.S. Trade Representative Katherine Tai and other officials regarding steel and critical minerals trade.
• Tai is traveling to Cancun, Mexico, for a dialogue Thursday and Friday with North American officials over topics like energy, automobile industry, agriculture and other regional trade matters. This is part of the U.S.-Mexico-Canada Free Trade Commission’s annual gathering.

FOMC minutes: ‘Almost all’ Fed participants wanted to pause... “Almost all participants judged it appropriate or acceptable to maintain” the federal funds rate at 5.00% to 5.25% following the June 13-14 Federal Open Market Committee meeting. “Most of those participants observed that leaving the target range unchanged at this meeting would allow them more time to assess the economy’s progress,” the minutes stated. While the Fed voted to pause, the projections following the meeting showed 16 of 18 officials still expected interest rates would need to rise at least another 25 basis points by the end of the year, with half expecting two rate hikes.

Democratic Reps: Biden’s EV plan threatens rural America... The Biden administration’s plan to increase electric vehicle (EV) adoption and reduce automotive pollution is drawing criticism from certain Democratic lawmakers, Reps. Mary Peltola of Alaska and Marie Gluesenkamp Perez of Washington. The plan would effectively require automakers to ensure that two out of every three cars and light trucks sold in 2032 are electric models.

The lawmakers’ primary concern is the risk this plan may pose to rural America due to insufficient EV charging infrastructure. They feel this rapid transition to EVs, set to kick off with model year 2027, lacks a robust plan for adequate charging infrastructure development. Without such a plan, they argue, the move could limit consumer choice and potentially lead to an unfavorable situation in rural areas, where charging stations may not be as readily available as in urban settings.

This criticism underscores the complex challenges surrounding the shift to EVs, particularly the need to balance environmental goals with practical infrastructure needs and consumer choice.

Stablecoins could help U.S. fend off challenges to the dollar... In a commentary item in Barron’s, Corey Then, former Obama administration member and current Vice President of global policy at Circle, emphasizes the growing threat to the U.S. dollar’s global dominance. The challenge is stemming from countries like Russia and China, who have been increasingly conducting their bilateral trades in yuan instead of dollars. Remarkably, it's the first year where cross-border transactions with China will be settled more in yuan than in dollars.

With a focus on reducing dollar usage, technology is noted as a pivotal factor, with more than 110 countries considering the launch of their own central bank digital currencies (CBDCs). In fact, China launched its digital yuan pilot back in 2019, now held by about 300 million people.

Despite these challenges, the leading status of the dollar isn’t lost yet, Then writes, but he notes there’s need for modernization to maintain this status. The U.S. dollar’s infrastructural backend has been described as “aging rails,” slowing down and increasing the cost of transactions, particularly those of an international nature.

Stablecoins, however, provide a potential solution. Blockchain-backed tokens, which are pegged to the dollar and other financial instruments like U.S. Treasury bills, could make transactions faster, more cost-effective, and even programmable, according to Then.

The implications of stablecoins are multifaceted — they make it possible to transform physical dollars into their digital counterparts with ease, enabling them to operate at the speed and scale offered by the internet. This digital form of currency, because of its negligible cost of use, could increase the usability and competitive standing of the dollar compared to other forms of currency.

These arguments have not fallen on deaf ears within the U.S. government, Then observes. Treasury Secretary Janet Yellen and Federal Reserve Chairman Powell have both acknowledged the potential contributions of well-structured and properly supervised stablecoins to the payments industry. In November 2021, the President’s Working Group on Financial Markets called for legislative groundwork for payment stablecoins.

Legislation designed to protect consumers and regulate stablecoins is currently being written by the U.S. House Financial Services Committee, with a set date for votes on July 19. By doing this, Then says the U.S. hopes to avoid an incoherent regulatory environment that could encourage rogue actors to look for jurisdictions with poor oversight and weak consumer safeguards.

Message emphasized by Then: The U.S. needs to act swiftly to regulate and promote the use of payment stablecoins, or risk other global players defining the financial rules of the future. By advancing such legislation, he concludes, the U.S. stands to protect the dollar's standing as a global reserve currency, and potentially streamline its usage at a global scale through the internet.