Evening Report | December 4, 2023

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Wheat producers: Increase 2023-crop marketings, make initial 2024-crop sales... Wheat futures have rebounded sharply after posting contract lows last week. While bearish momentum has stalled, bulls still have a lot of work to do to swing the trend in their favor. We advise wheat hedgers and cash-only marketers to sell another 10% of 2023-crop to get to 60% priced in the cash market. We also advise selling an initial 10% of expected 2024-crop production for harvest delivery next year.

Canadian wheat production bigger than expected... Canada’s wheat crop is estimated at 32.0 MMT by Statistics Canada, up from the 29.8 MMT forecast in September and higher than the 31.1 MMT traders expected. StatsCan raised its Canadian canola crop estimate to 18.3 MMT, which was right in line with pre-report expectations. While the estimates are higher than previously forecast, Canadian production declined 6.9% from year-ago for wheat and 2.0% for canola.

Mike Jubinville with MarketsFarm told us, “Canadian production estimates were increased across most crops in this report. The only crops not seeing a big change were those grown in the heart of the Prairie drought regions during this past summer... that being central-south areas of western Saskatchewan and southern Alberta. That’s also typically the drier area of the Prairies and is outside the primary canola growing region. In terms of ‘real’ market influence... not sure I see anything game-changing coming from this report. While demand for high-quality/high-protein spring wheat from Canada has been strong this year so far (exports are running about 8% ahead of last year to date), the price trend remains weak.”

Australia modestly raises wheat crop estimate... The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) slightly raised its forecast for the country’s 2023-24 wheat production to 25.5 MMT from 25.4 MMT projected in September. Production is forecast to plunge 15 MMT (37%) from the 2022-23 record and be 4% under the 10-year average.

ABARES raised its 2023-24 production forecast for barley by 300,000 MT to 10.8 MMT, which would still be down 24% from last year. It raise the canola crop forecast by 300,000 MT to 5.5 MMT, which would still be down 33% from last year.

Drier conditions this year, linked to the onset of an El Niño weather pattern, have affected yield potential for Australia’s main winter grain crops.

Politico: GAO recommends crop insurance subsidy reforms for cost savings... The Government Accountability Office (GAO) is recommending that lawmakers consider reducing or recalibrating crop insurance subsidies for both private insurers and the largest farms as a cost-saving measure for taxpayers, according to Politico, who says the new report was shared exclusively with them. This recommendation comes amid a long-standing policy debate that is expected to become a contentious issue during the next farm bill discussions.

Crop insurance is a widely popular program designed to provide financial protection to farmers in the event of natural disasters or market disruptions. However, critics argue the subsidy system disproportionately benefits large farms and a handful of private insurance companies. They charge the current subsidy system encourages insurers to focus on larger and more expensive policies, making it challenging for smaller farmers to access the program's safety net.

Key findings from the GAO report, according to Politico:

• GAO found that reducing premium subsidy rates for high-income policyholders by 15 percentage points in 2022 could have saved the federal government approximately $15 million.
• In 2022, only 1% of policyholders accounted for 22% of the federal crop insurance program’s premium subsidy dollars, with an average subsidy of $464,900 per policyholder.
• The federal crop insurance program cost taxpayers $17.3 billion in 2022, with $3.7 billion going to private insurance companies. A significant portion of these subsidies went to insurers writing policies for larger farms with bigger policies.
• Larger policies made up about 2% of total policies but accounted for 36% of the total $2.1 billion in administrative and operating cost subsidies for private insurers.
• Setting the rate of return for insurance companies closer to the current market rate could potentially save billions over the next decade, according to GAO.

The report was requested by Sens. Cory Booker (D-N.J.) and Kirsten Gillibrand (D-N.Y.).

Comments: One farm policy expert, asked to comment, emailed: “GAO has a long record of issuing reports that are hostile toward agriculture policy. This is just one more. Cory Booker is the senator who believes the U.S. food and agriculture system should be totally destroyed and rebuilt. He was featured in The NY Times series hit piece on U.S. agriculture that was widely repudiated even by USDA, which has been sympathetic to many of these goals. The findings are a bit bizarre. Charging farm families who produce the bulk of the nation’s food, feed, fiber and fuel 15 percentage points more for their insurance would save $15 million (with an ‘m’)? To most Americans $15 million is still a bit of money. But the injury to these farmers would be enormous while the money saved isn’t even a rounding error in federal budgeting. The 1% of farmers receiving 22% of total premium support is the same old EWG talking point rebranded for crop insurance. I wonder if GAO thought to ask the question, What percentage of total premium of premiums paid by farmers did these 1% pay? Dollars to donuts it is disproportionately higher.”

CFTC proposing federal guidelines for voluntary carbon credit derivatives... The Commodity Futures Trading Commission (CFTC) is seeking to bring order to a volatile market. The guidelines will call on exchanges to verify the quality of these derivatives, which are linked to financial instruments used by companies to offset emissions. The value of the global carbon trading market could grow to $100 billion by 2030, up from $2 billion in 2022, according to Morgan Stanley. Environmentalists have criticized voluntary credits for doing little to combat global warming.

The comment period for the proposed guidance will be open for 75 days, ending on Feb. 16, 2024. Comments may be submitted electronically through the CFTC Comments online process.

Mortgage market’s significance grows amid housing demand, FOMC’s dilemma... Dr. Vince Malanga, president of LaSalle Economics, notes the labor market has always been a crucial indicator for the Federal Open Market Committee (FOMC), but recently, the mortgage market’s significance has been growing due to its role as a leading indicator for the housing market. With the decline in mortgage rates, there was an expectation of pent-up demand being released. Over the past four weeks, mortgage purchase applications have risen by nearly 15%, indicating an increase in housing demand. Despite lower mortgage rates, housing remains unaffordable by various measures, and labor demand is showing signs of easing. As a result, Malanga says it is anticipated the mortgage market will cool down soon. This cooling would likely be welcomed by FOMC, he says, and could provide them with the flexibility to support market expectations of approximately fifty basis points of rate cuts in the coming months, albeit not immediately. Nevertheless, if housing demand remains strong, there is a risk that fixed income markets may be misjudging the situation, similar to what happened last year. In such a scenario, FOMC may resist efforts to further ease financial conditions. The upcoming year is marked by a presidential election and the government’s potential allocation of infrastructure and “IRA” funds to stimulate the economy, regardless of deficits. Malanga concludes FOMC typically prefers a passive approach, and it remains to be seen if it can afford to maintain this stance in the current economic environment.