Evening Report | November 22, 2023

Evening Report
Evening Report
(Pro Farmer)

Check our advice monitor on ProFarmer.com for updates to our marketing plan.

 

 

Happy Thanksgiving from Pro Farmer... Markets and government offices are closed on Thursday for Thanksgiving. As a result, there will be no Pro Farmer market updates tomorrow. On Friday, markets are open for an abbreviated trading session from 8:30 a.m. to 12:05 p.m. CT. Due to the shortened schedule, we will only send out two reports – “First Thing Today” Friday morning around 8:00 CT and “After the Bell” briefly highlighting the day’s price action after the closes. Happy Thanksgiving from your Pro Farmer staff.

 

 

Federal Open Market Committee (FOMC) minutes released Tuesday reveal several key points:

No Recession Predicted: The Fed's staff did not predict a recession in the near future.

Monitoring Treasury Yields: Both staff and Fed officials are closely monitoring the rise in Treasury yields, with a focus on term premiums and increased uncertainty regarding the duration of high policy rates.

Inflation Concerns Persist: Despite acknowledging some moderation, officials still view current inflation as unacceptably high and above the 2% target. They require further evidence that inflation is on a clear path toward their objective.

Impact of High Interest Rates: Rising interest rates are affecting businesses, leading to delays in investment plans and tighter lending conditions. Small businesses and the agricultural sector are particularly affected.

Rising Bond Yields: The rise in longer-term bond yields may be driven by expectations of a higher federal funds rate or increased economic resilience, and officials agree that persistent changes in financial conditions should be closely monitored.

Monetary Policy Remains Restrictive: Officials believe that monetary policy should remain restrictive until inflation clearly moves down sustainably toward the 2% target. The balance sheet runoff should proceed as planned, and there may be a need to continue it even after rate cuts.

Inflation as a Key Concern: Inflation remains the primary focus for Fed officials, and they want to ensure that it is moving toward their target without any "head fake" on prices becoming lower. Consumer perceptions of high prices are also noted.

Bottom line: The minutes provide insight into the Fed's cautious approach to monetary policy, with continued attention on inflation and potential impacts on various sectors of the economy due to rising interest rates and bond yields.

 

 

Agricultural Bankers in Midwest report lower incomes and cautious outlook…Agricultural bankers in the U.S. Midwest have reported lower incomes for farmers heading into this year's fall harvest due to falling output prices and high production costs, according to a third-quarter survey by the Federal Reserve Bank of Minneapolis (link). The survey, conducted in October, found that commodity prices were trending down, and interest rates were high. Despite this, farm finances remained in good condition overall, with the rate of loan repayment holding steady. However, the outlook for the fourth quarter is modestly pessimistic, with most lenders expecting farm incomes to decrease.

Farm Incomes and Spending. The decline in farm incomes was not uniform, with 46% of respondents indicating that incomes decreased in the third quarter from a year earlier. More than a third of respondents reported increased spending by farm households, while capital spending on equipment and buildings dropped.

Loan Repayments and Renewals. Loan repayments and renewals remained stable, with 83% of respondents reporting that repayment rates were unchanged from a year earlier. Collateral requirements on loans were also mostly unchanged, although some lenders reported increases. Interest rates continued to rise, climbing at least 20 basis points for all loan categories.

Demand for Loans and Collateral. Demand for loans showed little change from previous years, with 52% of lenders reporting no change in loan demand relative to a year ago. Collateral requirements on loans were mostly unchanged, with 85% of lenders reporting no increase.

Land Values and Rents. Land values and cash rents continued to increase, with nonirrigated cropland values up 7.2% on average from the third quarter of the previous year. Cash rents for nonirrigated land increased by 4.2%, while irrigated land rents grew by 8%.

Outlook: Bankers' outlooks for agriculture in the remainder of 2023 are generally pessimistic, with 60% expecting farm incomes to decrease in the fourth quarter. However, more than a third of lenders anticipate an increase in loan demand despite higher interest rates.

Bottom line: The survey paints a cautious picture for the agricultural sector in the Midwest, with farmers facing challenges from falling prices, high costs, and a mixed outlook for the future.

 

 

Gas prices have seen a nine-week consecutive declinedue to a decrease in crude oil prices and the typical seasonal drop in demand. The national average for a gallon of regular gas is currently at $3.28, as reported by AAA. These lower prices are contributing to a resurgence in travel, both on highways and in the air. Over 55.4 million Americans are expected to travel at least 50 miles from home between the day before Thanksgiving and the Sunday after the holiday. The Transportation Security Administration (TSA) is also anticipating the busiest holiday travel season on record, with expectations to screen 30 million passengers during the Thanksgiving travel period, which spans from November 17th to November 27th. This marks a 9% increase compared to the previous year and an additional 1.7 million passengers over pre-Covid record levels.

 

 

 USDA confirms more cases of HPAI in South Dakota and California…USDA's Animal and Plant Health Inspection Service (APHIS) confirmed three additional cases of highly pathogenic avian influenza (HPAI) in commercial poultry operations in Edmunds County, South Dakota. The affected flocks include 30,100 commercial turkey breeder replacements, 19,200 commercial turkey breeder hens, and 33,400 commercial meat birds. This brings the total number of affected commercial flocks in South Dakota to 13, with a combined total of 451,500 birds.

Besides the South Dakota cases, USDA also confirmed HPAI at a commercial duck breeder operation in Fresno County, California, involving 23,400 birds.

The continued spread of HPAI in poultry operations is a concern for the poultry industry, as the virus can lead to significant economic losses. Efforts are being made to contain and mitigate the spread of the virus, including depopulation of affected flocks and increased biosecurity measures in poultry operations.

 

 

Panama Canal squeeze takes a toll on U.S. energy exports…If weather conditions persist, the ongoing drought could reduce Panama Canal transit capacity from the current 60% to 45% by early 2024, resulting in heightened shipping costs, extended voyages and diminished tanker availability, according to Energy Intelligence Group (link). The Panama Canal Authority has reduced the number of vessels allowed to traverse the canal due to low water levels at Gatun Lake, resulting in traffic congestion and increased premiums for timely passage. Some ships are taking longer alternative routes, increasing shipping costs and delaying shipments.

This situation is particularly affecting U.S.-sourced liquefied petroleum gases (LPGs) and natural gas liquids (NGLs) headed to the Asia-Pacific region, as the canal is a crucial shipping route for these products. Asia accounts for a significant portion of U.S. gas liquids shipments abroad. With U.S. gas liquids production on the rise and domestic demand remaining relatively flat, the canal's capacity constraints pose challenges for U.S. exports.

While LPGs and NGLs are most impacted by the drought, other products, such as renewable diesel moving from the US Gulf Coast to West Coast markets, are also feeling the effects. Ships can bid for priority passage through the canal, but the associated costs are substantial.

Unfortunately, the drought is expected to persist due to the El Niño effect. Additionally, the shipping fleet is not anticipated to grow significantly in the near term, which could further exacerbate the challenges related to shipping through the Panama Canal.

Of note: An oil tanker carrying fuel to New York is adding thousands of miles to its journey to avoid disruption at the Panama Canal. The High Loyalty, chartered by a Glencore subsidiary, is sailing around South America, according to data (link) compiled by Bloomberg News.

 

 

In 2024, estate and gift tax breaks in the U.S. will see significant increases due to inflation…Key points:

Lifetime Estate and Gift Tax Exemption: The lifetime estate and gift tax exemption for 2024 will rise to $13,610,000. This means that individuals can pass on or gift up to this amount without incurring federal estate or gift taxes.

Future Exemption Levels: After 2025, the exemption is set to revert to $5 million, adjusted for inflation, unless Congress decides to extend the higher exemption amount. The likelihood of an extension will depend on the political party in control of the White House and Congress after the 2024 election.

Special Valuation for Real Estate: In 2024, there will be a special estate tax valuation for real estate. Up to $1,390,000 of farm or business real estate can receive a discount valuation, allowing estates to value the property at its current use rather than its fair market value. Certain conditions must be met to qualify for this benefit.

Installment Payment Tax Break: Estates with more significant estate tax liabilities and a substantial portion (greater than 35%) attributed to closely held businesses can defer up to $740,000 in taxes and pay only 2% interest.

Annual Gift Tax Exclusion: The annual gift tax exclusion will increase to $18,000 per donee in 2024. This means that you can give up to $18,000 to each person without triggering gift tax implications or using your lifetime estate and gift tax exemption. Gifts exceeding this annual exclusion amount will require the filing of a gift tax return in 2024, but no gift tax will be due unless your total lifetime gifts exceed $13,610,000.

Post-2025 Estate Tax Calculation: Most tax-free gifts made between 2018 and 2025 will not result in post-2025 estate tax obligations. Estates can utilize the higher lifetime exemption for gifts when calculating post-2025 estate taxes. This ensures that individuals who made significant gifts during this period will not lose the benefits of the larger exemption amount, even if it reverts to a lower level in 2026.

 

 

WTO's Committee on Agriculture divided on food security stockholding…The World Trade Organization's (WTO) Committee on Agriculture (CoA) remains divided on the issue of public stockholding (PSH) for food security. PSH has been a contentious point in WTO agriculture negotiations leading up to the 13th Ministerial Conference (MC13) in February. The Bali decision in 2015 introduced an interim policy known as the "peace clause" for PSH policies, but talks have stalled since then.

Developing nations, led by India, are seeking a permanent arrangement allowing countries to maintain public food stocks for food security purposes without triggering scrutiny under domestic subsidies rules. Pro-trade liberalizing members, including the Cairns Group, the U.S., and the EU, oppose negotiations around a solution based on the post-2015 status quo and argue that PSH should be addressed alongside related issues like domestic support.

During the recent CoA session, India refused to engage in discussions after Canada and Turkey presented a new submission on behalf of the Cairns Group outlining a negotiating framework for domestic support. India suggested that this was an attempt to derail the PSH discussion and preferred to address the submission separately. Over 80 developing members, including Nigeria, insisted that the PSH mandate is standalone and not subject to negotiations in other areas like domestic support, a view shared by China. They argued that the Cairns proposal would undermine PSH goals, particularly during a food crisis.

Bottom line: With negotiations at a stalemate and MC13 approaching, WTO Director-General Ngozi Okonjo-Iweala has called for a mini-ministerial meeting on Nov28 to build momentum and guidance ahead of MC13. The agenda for this session is still being drafted, but it will be closely watched for any progress on key issues like PSH.

 

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