Evening Report | December 1, 2023

Evening Report
Evening Report
(Pro Farmer)

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Your Pro Farmer newsletter is now available... Brazil’s weather has improved enough to temporarily stabilize crops, though additional rains will be needed across dry central and northeastern areas of the country to support crop development. Given ongoing soybean planting delays due to the dry conditions, more Brazilian farmers are likely to switch acres to cotton instead of risking growing soybeans followed by safrinha corn. USDA won’t update its corn and soybean crop estimates in its Dec. 8 reports; only a revised cotton production forecast this month. Any changes to domestic use in the 2023-24 balance sheets will likely be limited. The bigger focus in the December crop reports will be global production forecasts, especially for South America. The drought footprint in winter wheat country is shrinking but still covered 38% of U.S. acres as of Nov. 28. The final crop condition ratings of the fall equated to an average HRW crop and above-average SRW crop on our weighted Crop Condition Index. On the economic front, U.S. inflation continues to cool, which suggests the Fed’s monetary tightening cycle has likely concluded, which is weighing on the dollar. From a global perspective, economic growth is likely to decline in 2024 before rebounding in 2025. We cover all of these items and much more in this week’s newsletter, which you can access here.

 

Soybean crush surges to all-time high... U.S. processors crushed 201.4 million bu. of soybeans during October, according to USDA, an all-time high for any month. The crush pace jumped 26.7 million bu. (15.3%) from September and 4.8 million bu. (2.4%) from last year.

Despite the record crush, soyoil stocks fell to 1.507 billion lbs., down 95 million lbs. (5.9%) from September and 587 million lbs. (28.0%) below October 2022.

 

Corn-for-ethanol use stronger than expected... Corn-for-ethanol use totaled 461.5 million bu. during October, up 31.3 million bu. (7.3%) from September and 12.9 million bu. (2.9%) above year-ago. Traders expected corn ethanol use to total 452.7 million bushels.

Dried distillers grains with soluble (DDGS) production totaled 1.796 billion short tons, up 95.5 million bu. from September and 50.9 million bu. more than last year.

 

Steady growth in farm debt amid robust loan performance... In the third quarter, farm debt balances at commercial banks showed steady growth, while loan performance remained robust, according to the Federal Reserve Bank of Kansas City. Despite some signs of reduced lending activity and varying loan demand, the total debt at commercial banks increased at a rate like the previous year. This growth in farm debt coexisted with low delinquency rates on agricultural loans, marking the third consecutive year of decline.

The steady loan growth coincided with a slowdown in deposit growth, resulting in stronger liquidity positions for agricultural banks. Rising interest rates led to heightened competition for deposits, increased funding costs, and a slight compression of net interest margins in recent months. However, agricultural banks continued to perform well, benefiting from higher interest income.

Farm debt increased by approximately 5% compared to the same period last year, driven by growing demand for production loans. While non-real estate debt maintained a steady growth rate, the growth in farm real estate debt was softer.

Loan performance remained strong, with delinquency rates on both real estate and non-real estate farm loans declining for the third consecutive year at agricultural and non-agricultural banks. Agricultural banks also maintained sound financial performance, despite some margin compression and persistently elevated unrealized losses on investment portfolios.

However, the tightening liquidity situation became evident, with steady loan growth and stagnant deposit levels. The share of agricultural banks with loan-to-deposit ratios above 80% increased, indicating a shift from the previous abundance of liquidity.

 

Airlines race toward powering jets with ethanol... Airlines want to replace jet fuel with ethanol to fight global warming, and that would require hefty amounts of corn and water. The New York Times says “Their ambitious goals would likely require nearly doubling ethanol production, which airlines say would slash their greenhouse gas emissions. If they succeed it could transform America’s Corn Belt yet again, boosting farmers and ethanol producers alike, but also potentially further damaging one of the nation’s most important resources: groundwater.”

 

U.S. to limit China’s ability to benefit from EV tax credits... The Biden administration on Friday issued-long awaited guidance that will limit Chinese content in batteries eligible for electric vehicle (EV) tax credits starting next year. The new rules, required under an August 2022 law, are designed to wean the U.S. EV battery chain away from China and are being closely watched by automakers as they make investment decisions on producing batteries for their transition to electric vehicles. The rules are expected to further reduce the number of electric vehicles eligible for EV tax credits. The law immediately made any vehicle ineligible if not assembled in North America. Earlier this year, new battery and mineral sourcing requirements took effect with price and buyer income eligibility caps from Jan. 1. The Treasury Department said to allow compliant vehicles to qualify until the rules are finalized, it will have an expedited compliance method for automakers with clean supply chains.

The Treasury Department will temporarily exempt some trace critical minerals from new strict rules barring materials from China and other countries deemed a “Foreign Entity of Concern (FEOC).” Treasury said the few materials being exempted each account for less than 2% of the value of battery critical minerals. The Energy Department said a company would be deemed a FEOC if owned or controlled by a named foreign government. Companies will also be ineligible if an entity of concern holds 25% of that entity’s board seats, voting rights, or equity. Those countries include North Korea, China, Russia and Iran.

 

Yuan’s role in settling cross-border payments with China is on the rise... There has been a 24% increase in transactions in the first three quarters of this year and the yuan now represents over 50% of China’s global transactions, surpassing the U.S. dollar. However, its dominance is mainly limited to countries aligned with China politically, such as Argentina, Nigeria, Russia and Pakistan. The war in Ukraine and sanctions on Russia have encouraged these countries to reduce their reliance on the dollar. Nevertheless, the yuan faces challenges as China conducts most of its trade with U.S.-aligned countries. The yuan accounts for only 3.7% of global payments by value, compared to the dollar's 46.6% share, and foreign investment in Chinese assets has declined due to geopolitical tensions and economic concerns.

 

NAMI promotes meat industry’s sustainability at COP28... The North American Meat Institute (NAMI) is using the UN Climate Change Conference (COP28) in Dubai to highlight the sustainability efforts of the meat industry through its associated livestock sustainability strategy, Protein PACT for the People, Animals, and Climate of Tomorrow. This move comes in response to increasing attention on greenhouse gas emissions linked to livestock farming and meat and dairy consumption. NAMI is participating in COP28 as an observer, and Protein PACT is the principal sponsor of the Inter-American Institute for Cooperation on Agriculture’s (IICA) Sustainable Agriculture of the Americas Pavilion at the event. They plan to organize six expert panel discussions and host a reception to emphasize the role of meat and dairy in sustainable agriculture.

NAMI’s Chief Strategy Officer, Eric Mittenthal, mentioned their intention to engage in the summit to assess progress in sustaining nutrient-dense foods like meat and dairy for future generations, including sharing their greenhouse gas inventory tool and sector-wide data reporting. Dr. Manuel Otero, the Director General of IICA, highlighted the centrality of livestock production in various sustainability solutions — environmental, economic, and social — and expressed their commitment to advocating for sustainable agriculture, including livestock production, at COP28 and beyond.

 

USTR reallocates unused FY 2024 sugar import quotas... The Office of the U.S. Trade Representative (USTR) announced the reallocation of unused country-specific quota allocations for imported raw cane sugar in fiscal year (FY) 2024. The total in-quota quantity for raw cane sugar for FY 2024 is 1,117,195 metric tons raw value (MTRV), which represents the minimum WTO commitment by the United States. Initially, USTR published the country-specific allocations in July. However, this recent announcement involves reallocating 223,740 MTRV of the original TRQ quantity from countries that have indicated they will not fill their FY 2024 allocated raw cane sugar quantities.

 

Fed’s Powell: ‘Premature’ to rule out further rate rises... Fed Chair Jerome Powell said, “It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten monetary policy further if appropriate.” He said Fed officials still consider uncertainty in the economic outlook to be “exceptionally high” – a factor in their insistence that interest rates may still have to rise.

Powell also noted the Fed will move forward “cautiously as the risks of tightening too little or too much are becoming more balanced.”

 

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