Evening Report | September 6, 2023

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Dry August worsens Australia’s rain shortfall... The Australian Bureau of Meteorology said areas of severe rainfall deficiency had expanded and soil moisture was below average across large parts of the country. Australia’s rainfall last month was 49.5% below the 1961–1990 average, the tenth-driest August on record back to 1900. More dry weather is expected due to a strengthening El Niño weather event.

“Since May 2023, areas of severe rainfall deficiency (totals in the lowest 5% of periods since 1900) have persisted in south-west, Western Australia and expanded along eastern Australia,” the bureau said. “Serious deficiencies (totals in the lowest 10% of periods since 1900) have expanded inland across north-eastern New South Wales into Queensland. August soil moisture was below average (in the lowest 30% of all years since 1911) across a wide band from south-west Western Australia into southern South Australia, south-central and eastern Victoria, eastern Tasmania and New South Wales and southern Queensland, except in the west,” the bureau said.

Earlier this week, Australia reduced its wheat production forecast due to the strengthening El Niño.

Russia: Deal 'in principle' to move grain to Africa... Moscow said Turkey had agreed “in principle” to handle 1 MMT of grain that Russia plans to send to Africa at a discounted price with financial support from Qatar. “All agreements in principle have been reached. We expect that in the near future we will enter into working contacts with all parties to work out all the technical aspects of the scheme for such deliveries,” Deputy Foreign Minister Alexander Grushko said, according to Interfax news.

Turkey would handle onward export of the Russian grain but details of its full role were not clear.

EWG report: Higher reference prices would favor southern growers... U.S. farm groups and farm state lawmakers want higher reference prices in the upcoming farm bill. However, an environmental activist group, the Environmental Working Group (EWG), has raised concerns this would predominantly benefit a relatively small number of large cotton, rice and peanut growers, primarily located in the South.

EWG’s analysis suggests higher reference prices would primarily assist fewer than 6,000 growers, with a focus on those in the South. The organization released its analysis alongside an online summit on farm subsidies. During the summit, speakers called for stricter regulations on farm subsidies and taxpayer-subsidized crop insurance programs.

Cotton, rice, and peanut growers are more likely to enroll in the Price Loss Coverage (PLC) program, where payments are triggered when commodity prices fall below reference prices. On the other hand, corn and soybean farmers tend to favor the Agriculture Risk Coverage (ARC) program, which calculates payments based on annual crop revenue compared to the five-year average.

Of note: There are internal farm bill discussions about potentially reducing the premium subsidy for crop insurance, with some suggesting it should be lowered from 61 cents per dollar to 40 cents.

Schumer lists farm bill as item on to-do Senate list... The Senate agenda includes “advancing a farm bill,” but the first item on the list is preventing a government shutdown on Oct. 1, said Majority Leader Chuck Schumer (D-N.Y.). The Senate resumed work on that front after the August recess.

Meanwhile, Senate Ag Committee Chair Debbie Stabenow (D-Mich.) told Politico she does not believe a Democrat-only farm bill will be needed “at this point.” Her comments come in the wake of a suggestion last week by panel member Amy Klobuchar (D-Minn.) that a Democrat-only farm bill could be needed to thwart the demands of some conservative Republicans for additional cuts in food and nutrition programs. Stabenow said she was still hoping to move a bill yet this year, a stance which will mean an extension of some duration will be needed to finish the bill.

Reuters: Biden administration to delay SAF subsidy guidance until December... President Joe Biden’s administration likely will delay until December a decision on whether to make it easier for sustainable aviation fuel (SAF) made from corn-based ethanol to qualify for subsidies under the climate law, two sources familiar with the discussions told Reuters. At issue is a requirement in last year’s Inflation Reduction Act that SAF producers seeking tax credits must demonstrate with an approved scientific model their fuel generates 50% less greenhouse gas emissions over its lifecycle than petroleum fuel. Ethanol producers have asked the administration to adopt a model that would enable ethanol-based SAF to qualify while environmentalists want standards that would favor inputs like used cooking oil and animal fat. A decision was expected sometime this month, though the administration has been divided.

U.S. trade gap below forecasts... In July, the U.S. had a trade deficit of $65 billion, which was slightly narrower than anticipated, especially when compared to the revised June figure of $63.7 billion (originally estimated higher). Market expectations had projected a larger gap of $68 billion. Here’s a breakdown of key points from the trade report:      

• Exports increased 1.6% to a four-month high of $251.7 billion. Leading the rise in exports were categories such as passenger cars, trucks, buses, and special purpose vehicles. Other significant contributors to export growth included nonmonetary gold, crude oil, pharmaceutical preparations, travel services, and transport-related goods.
• Imports rose 1.7% to $316.7 billion in July. Key drivers of import growth included items like cell phones, other household goods, pharmaceutical preparations, semiconductors, computers, crude oil, and travel-related products.
• The trade deficit with China expanded $1.2 billion, reaching $24.0 billion. In contrast, the surplus with Hong Kong decreased $1.0 billion to $1.5 billion. The trade balance with the United Kingdom shifted from a deficit of $800 million in June to a surplus of $500 million in July. 

Bottom line: These figures indicate the U.S. trade deficit in July was influenced by both increased exports and imports. The positive growth in exports of various goods was partially offset by rising imports, particularly in sectors like electronics, pharmaceuticals, and energy-related products. Additionally, the trade dynamics with specific countries like China, Hong Kong and the U.K. played a role in shaping the overall trade balance.

USTR extends reinstated Covid-related exclusions from China Section 301 tariffs... There is a further extension of the 352 reinstated exclusions and 77 Covid-related exclusions in the China Section 301 investigation that will go through December 31, 2023. The exclusions were previously scheduled to expire on Sept. 30, 2023.

Beige Book: Modest economic growth... The Fed’s Beige Book highlighting economic conditions in the 12 districts noted economic growth was generally modest in July and August. Agriculture conditions were “somewhat mixed,” but reports of drought and higher input costs were widespread. Districts specifically noting agriculture included:

Atlanta: “Agricultural conditions were little changed since the previous report. Demand for cattle was strong. Egg supply increased, but the supply of hens remained lower than normal. The supply of chickens continued to exceed demand, although there was some improvement in the market. There continued to be excess supply of milk in the market. Many row crops were expected to have a strong harvest. Demand for cotton remained weak, leading some growers to exit the cotton market.”

 Chicago: “District farm income expectations for 2023 remained much lower than 2022 levels. However, reduced costs for some inputs, particularly fertilizers, boosted net income prospects for 2024. Drought concerns lessened overall, although hot weather toward the end of the period impaired development of a wide swath of Midwest crops. Corn, soybean, and wheat prices were down. Still, there were reports of a slowdown in exports as prices offered by other producers were more favorable on world markets. Hog prices moved down after hitting a seasonal peak. Prices for dairy products rose from low levels, and egg prices crept up a bit. Cattle prices increased once again, remaining one of the few agricultural prices above the levels of a year ago. Farmland prices were still higher than a year ago.”

St. Louis: “District agricultural conditions have been mixed since our previous report. Despite record-breaking heat and heat-dome-induced thunderstorms across the District, the percent of cotton and rice rated fair or better stayed stable throughout the reporting period, with cotton returning to 2021 rating levels after a moderate dip in 2022. Corn and soybean ratings both decreased more significantly during the summer months, sustaining their fall below 2020-2021 levels the previous year. District contacts described feeling the effects of extreme weather and increased interest rates in the form of higher input costs. On net, contacts indicated a slight decline in dollar value sales and an increase in inventories.”

Minneapolis: “District agricultural conditions weakened slightly. More than a third of respondents to a survey of agricultural credit conditions reported that farm incomes decreased in the second quarter from a year earlier. Several contacts noted that while commodity prices were still favorable, they were retreating to levels that could be below break-even for some producers given high input costs. Drought conditions improved recently but remained a concern, especially in eastern portions of the region. District oil and gas drilling activity decreased slightly since the previous report; however, contacts reported that oil production increased recently.”

Kansas City: “The farm economy in the Tenth District remained strong, but conditions softened alongside lower agricultural commodity prices and persistent drought. Volatility in markets for major crops was elevated amid heightened uncertainty about supply and demand conditions. Through mid-August, prices for corn and wheat were about 10% lower than the beginning of the month and soybean prices also dropped slightly. In the livestock sector, cattle prices remained strong and continued to support profit opportunities, despite considerable cost pressures. Large areas of the region continued to be heavily impacted by drought that could reduce crop revenues and limit availability of feed for livestock operations. District contacts continued to highlight input costs, interest rates and thinner margins as other key concerns. Lenders indicated that credit conditions remained sound with support from strong farm finances.”

Dallas: “A significant portion of the district entered (or reentered) drought over the past six weeks due to meager rainfall and soaring temperatures. Pasture conditions deteriorated, and the weather had an adverse effect on row crops. A majority of the Texas cotton crop was rated in poor to very poor condition, and abandonment is expected to be high this year. Cattle prices rose further over the reporting period, driven by tight supply and solid demand for beef.”

San Francisco: “Conditions in the agriculture and resource-related sectors remained largely unchanged during the reporting period. Domestic retail and food services demand for agricultural products was stable, with strength noted particularly for fruits and vegetables. A contact from Arizona reported challenges with limited availability of produce for retail outlets. Exports of some products, such as grain and hay, reportedly fell, resulting in increased domestic supply levels and lower domestic prices. Major fish stocks were stable. Though yields for some crops remained low due to the wet winter, contacts reported high volumes of crops carried over from the prior harvest and strong projections for this year's perennial crop yields in California and Washington. Production input costs remained elevated with upward movement for some costs, such as packaging and energy.”