Evening Report | October 6, 2023

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Your Pro Farmer newsletter is now available... Congress passed an 11th-hour stopgap measure to keep the government funded through Nov. 17, but chaos ensued as Kevin McCarthy (R-Calif.) was ousted from his House leadership role, marking the only time in history a speaker has been removed by colleagues. The process of electing a new speaker will take time, lowering odds of getting a new farm bill done this year – and even making an extension uncertain. Aside from the chaos in Washington, there is an increased focus on trade. The U.S. recorded another record ag trade deficit in August. On a broader scale, the World Trade Organization slashed its global trade growth forecast for this year. Our News page 4 feature looks at commodity market risks from trade fragmentation. On the economic front, bond yields are surging as investors now believe the Fed will stick with a “higher for longer” stance with interest rates. That pushed the U.S. dollar index to its highest level since November of last year, which creates headwinds for U.S. ag exports. We cover all of these items and much more in this week’s newsletter, which you can access here.

U.S. meat exports rise in August... The U.S. exported 526.7 million lbs. of pork during August, up 22.0 million lbs. (4.4%) from July and 13.3 million lbs. (2.6%) more than last year. Through the first eight months of this year, pork exports totaled 4.482 billion lbs., up 335.1 million lbs. (8.1%) from the same period last year. Shipments to each of the top five destinations for U.S. pork (Mexico, Japan, South Korea, China and Canda) all increased from year-ago.

U.S. beef exports totaled 259.5 million lbs. during August, up 19.4 million lbs. (8.1%) from July but down 66.0 million lbs. (20.3%) from August 2022, which was the all-time high for any month. Through the first eight months of this year, beef exports totaled 2.083 billion lbs., down 335.9 million lbs. (13.9%) from the same period last year, as shipments to five of the top six markets declined; only shipments to Mexico were higher.

Jobs growth accelerates in September... The U.S. economy added 336,000 non-farm payrolls last month, far exceeding market expectations, marking the strongest job gain in eight months. This figure significantly surpassed market forecasts of 170,000 and came on the heels of an upwardly revised 227,000 jobs added in August. The strong jobs data fueled higher probabilities of additional Fed rate hikes.

Big jump in Russian wheat export tax... Russia’s wheat export tax for Oct. 11-17 will be 5,224.0 rubles ($52.07) per metric ton based on an indicative price of $248.80. That’s up from a rate of 4,564.6 rubles per metric ton the previous week and the highest since the week of May 12-16.

Congressional stalemate: Key areas in jeopardy due to lack of House speaker... Work in Congress has come to a standstill as the search for a new House speaker among Republicans delays critical legislative matters, affecting Ukraine aid and crucial business legislation. Here are the key areas impacted per Bloomberg:

• Ukraine Aid: The White House’s request for funding to support Ukraine’s defense against Russia’s invasion faces uncertainty due to hardline Republican opposition. The next House speaker’s stance on this issue remains unclear, further complicating matters, but a growing number of House Republicans are waiting on detailed answers to where funding already given Ukraine has gone.
• Government Funding: Kevin McCarthy’s ouster, following his support for short-term funding to keep the government open, creates uncertainty regarding future funding efforts for fiscal year (FY) 2024. Analysts warn of an increased risk of a government shutdown when current funding expires on Nov. 17. 
• Defense Legislation: The National Defense Authorization Act, a critical defense policy bill, may be delayed due to House gridlock. This bill is essential as it authorizes pay increases and compensation for troops. Delays in the House could impact this important legislation.
• Chip Plant Construction: Legislation within the defense bill aims to expedite planning and construction of new semiconductor plants in the U.S. Delaying this measure could hinder vital projects, including those by companies like Taiwan Semiconductor Manufacturing Co. and Intel Corp.
• Marijuana Banking: Legislation offering federal protections to banks serving cannabis businesses could face challenges. The bill’s fate may depend on the stance of the next House speaker, as it has significant implications for the financial services industry.
• Business Tax Breaks: Extending tax breaks, such as allowing companies to deduct research and development costs in one year, is a priority for business lobbying groups. However, negotiations could be impacted by the leadership vacuum and political priorities.
• Farm Bill: A new farm bill is at risk of delays due to political clashes. While Congress typically extends the existing subsidy system in such cases, it could affect farmers and food assistance programs.

Battle over need for higher reference prices continues... Today’s FarmDoc daily article says this: “We examine how, with the effective reference price calculation enacted in the 2018 Farm Bill, over 90% of all base acres in the United States will experience an increase in the PLC price trigger in the coming years without Congress needing to do anything more than extend those provisions. So, what justifies the demand for higher reference prices if 90% of all base acres will see an increase and the reason the rest won’t is because the SRP (statutory reference price) is so high already?”

The escalation provision in the 2018 Farm Bill allows for reference prices, which determine subsidy payments, to increase by up to 15% if there is an extended period of high market prices.

Key points in the article:

• This escalation could lead to significant increases in reference prices, which could add billions of dollars to the cost of crop support.
• The effective reference price for corn could reach a maximum of $4.26 per bushel in three of the next five marketing years, while soybeans could hit a maximum of $9.66 per bushel in marketing years 2025, 2026, and 2027. Wheat's effective reference price could peak at $6.01 per bushel in marketing year 2027.
• These increases would be substantial compared to the statutory reference prices, which currently stand at $3.70 per bushel for corn, $8.40 per bushel for soybeans, and $5.50 per bushel for wheat.
• Cotton, rice, and peanuts would not benefit from this reference price escalator, but other crops like oats would see increases.
• The article notes the decision on how to fund these increases is crucial, especially as it could impact USDA land stewardship programs.

Comments: Nearly all farm groups are asking for increased reference prices. FarmDoc’s opposition seems out of place. FarmDoc points to an expected increase already expected due to an escalator clause in the 2018 Farm Bill that they didn’t like at the time. Congress passed it anyway. The increase FarmDoc mentions is due to higher crop prices of the crops subject to the increase. But the trouble with this is that what goes up must come down and the escalator cannot prevent that. Moreover, not all crops enjoyed the higher prices, so the escalator won’t help them. This is the reason farm groups are asking for an increase.