Farm Income Shocker from USDA Could Have New Farm Bill Implications

Mexico surpasses China as top source of goods imported by U.S. for first time in over two decades

Modified format today as I am en route to Fargo.

— Equities today: Asian and European stock markets were mixed in overnight trading. U.S. stock index futures are set to open modestly lower. In Asia, Japan +2.1%. Hong Kong -1.3%. China +1.3%. India -1%. In Europe, at midday, London -0.1%. Paris +0.5%. Frankfurt +0.2%.

     Equities yesterday: The Dow rose 156.00 points, 0.40%, at 38,677.36. The Nasdaq gained 147.65 points, 0.95%, at 15,756.64. The S&P 500 was up 40.83 points, 0.82%, at 4,995.06. A stronger-than-expected earnings season is driving U.S. stocks to new highs.

— Ag markets today: Wheat traded lower overnight, while soybeans firmed and corn chopped around unchanged in quiet price action ahead of USDA’s February crop reports later this morning. As of 7:30 a.m. ET, corn futures were trading steady to fractionally higher, soybeans were 2 to 4 cents higher, winter wheat markets were 7 to 10 cents lower and spring wheat was 4 to 5 cents lower. Front-month crude oil futures were about 80 cents higher, and the U.S. dollar index was up more than 200 points this morning.

     Wholesale beef prices rebounding. After falling to $293.08 on Feb. 2, Choice boxed beef prices have rebounded $1.90 the past three days, including a 91-cent gain on Wednesday. Select beef has pushed back above $285.00. Despite the strength, packer cutting margins remain deep in the red, which has limited their willingness to actively establish cash cattle bids so far this week. 

     Pork cutout fading. After recently trading in the upper-$80.00 range, wholesale pork prices have faced heavy pressure this week, falling another $2.24 on Wednesday to $83.99, as packers discount prices to move product after recent big slaughters. While the cash hog advance continues, it has slowed, rising 16 cents to $74.02 as of Feb. 6.

— Ag trade: Japan purchased 136,321 MT of milling wheat it in weekly tender, including 54,036 MT U.S., 25,750 MT Canadian and 56,535 MT Australian.

— Ag markets yesterday:

• Corn: March corn fell 4 1/2 cents to $4.34 1/4, closing nearer the session low.
• Soy complex: March soybeans fell 10 1/2 cents to $11.89, near mid-range and hit an eight-month low. March soybean meal dropped $7.60 to $351.20 and nearer the session low. March bean oil closed up 82 points at 46.76 cents.  
• Wheat: March SRW rose 7 cents to $6.02, closing above the 10- and 20-day moving averages, while HRW fell 1/4 cent to $6.18 1/4. March spring wheat rose 3 cents to $6.96 1/4.
• Cotton: March cotton rose 93 points to 88.47 cents, nearer the session high and hit a four-month high.  
• Cattle: Cattle futures set back Wednesday in the wake of Tuesday’s big surge. Expiring February live cattle slid 77.5 cents to $182.225, while most-active April fell $1.275 to $184.80. March feeder futures dropped $1.125 to $245.55.
• Hogs: April lean hog futures slipped 15 cents before settling at $81.10, settling near session lows.
   

— Modest changes expected in February USDA crop reports. Traders anticipate slightly smaller U.S. ending stocks for corn and wheat and a rise in carryover for soybeans in USDA’s Supply & Demand Report at noon ET. The average pre-report estimates peg ending stocks at 2.146 billion bu. for corn (2.162 billion bu. in January), 284 million bu. for soybeans (268 million bu.) and 647 million bu. for wheat (648 million bu.). A greater focus will be placed on USDA’s South American production forecasts, especially for Brazil. While USDA is expected to trim its Brazilian soybean and corn crop forecasts, they will likely remain above those from private crop watchers.

— Brazil cuts soybean, corn crop and export forecasts. Brazilian crop estimating agency Conab cut Brazil’s soybean crop forecast 5.9 MMT from last month to 149.4 MMT. Conab lowered its corn crop forecast 3.9 MMT to 113.7 MMT, with 3.1 MMT of the decline due to a smaller outlook for safrinha production. February is the first month Conab incorporates field observations into its safrinha corn crop forecast. Conab now expects year-over-year declines of 3.4% for soybeans and 13.8% for corn from last year’s record production for both crops. Given the smaller production estimates, Conab reduced its 2023-24 export projections by 4.3 MMT for soybeans to 94.2 MMT and by 3 MMT for corn to 32 MMT.

— Russia, UN may discuss grain, fertilizer exports. Officials from Russia and the United Nations may meet this month to discuss facilitating Russian agricultural and fertilizer exports, RIA news agency reported, citing Russian UN envoy Gennady Gatilov. Moscow has insisted sanctions be lifted from companies and banks involved in Russian agricultural and fertilizer exports.

— Farm income shocker could press stalled farm-state lawmakers to act on new farm bill. USDA forecast a significant $40 billion plunge in 2024 farm income versus 2023, which was down $26 billion from 2022. It is the lowest net farm income and net cash farm income forecast since 2020. Gov’t payments would be the smallest in the last 10 years. Expenses continue to rise as receipts for crops (corn and soybeans notably) are seen falling.

     Of note: Some traders wonder if USDA’s forecasts signal the dour commodity price forecasts that could be part of its Ag Outlook Conference projections coming soon.

— Another hit to working capital. After having risen to a record $129.05 billion in 2022, working capital is forecast by USDA to fall to $101.67 billion in 2024, down 16.7% from $121.96 billion in 2023 and a fall of 22.3% from 2022. That is the lowest level of working capital since 2020 when it was $84.76 billion.

— Impact of USDA’s farm income forecasts: They quickly entered the farm bill debate, with Sen. John Boozman (R-Ark.), ranking on the Senate Ag Committee, saying: ““Our current farm safety net is not equipped to handle the challenges our farmers are facing. The gravity of the situation drives home the need for Congress to make meaningful investments in the farm bill’s safety net programs.”

     The USDA update shows a decline in gov’t payments, with minimal payouts under PLC and ARC, and that particularly hurts with higher expenses and falling prices for many crops.

     Anyone selling to farmers should note this: The level of working capital has fallen again, a sign that farmers are burning through capital to compensate for falling receipts and higher expenses.

     One positive perspective: Despite the fall in income, rising expenses, and falling working capital levels, the financial ratios only ticked slightly higher and remain well below historical levels.

     USDA Secretary Tom Vilsack tried to put a positive spin on the forecasts, saying in a news release that “after the three highest consecutive years on record in 2021-2023,” farm incomes had returned to “slightly below historic levels for farm income.” During a speech to the National Association of State Departments of Agriculture, Vilsack said the recent good years had left American farmers in a good situation financially and that most would be able to survive the downturn.

— The National Agricultural Law Center (NALC) provided updates to members of the National Association of State Departments of Agriculture (NASDA) regarding significant legal and regulatory issues affecting the agricultural sector in 2024 and beyond.

• Foreign Farmland Ownership: States have been proposing laws to restrict foreign ownership of US farmland, particularly targeting countries like China, Iran, North Korea, and Russia. Legal challenges have arisen, with litigation in progress and rulings pending in federal district courts. The Eleventh Circuit Court of Appeals recently granted an injunction blocking implementation of Florida's restrictions, citing potential conflicts with federal law and constitutional grounds.
   
• Proposition 12 and Corporate Transparency: The future of California's Proposition 12, concerning animal welfare, faces potential challenges through legislative avenues like the Ending Agricultural Trade Suppression (EATS) Act. Additionally, the implementation of the Corporate Transparency Act (CTA) requires increased transparency in corporate ownership, impacting agriculture businesses and necessitating specific reporting.

• Glyphosate Litigation and Pesticide Rules: Legal battles surrounding glyphosate continue, with recent rulings suggesting ongoing challenges for pesticide companies. Lawsuits also target EPA's 2020 registration updates for dicamba herbicide, potentially affecting its availability for the upcoming growing season. Issues regarding chlorpyrifos pesticide tolerances have seen conflicting rulings, impacting its availability for agricultural use.

• Waters of the U.S. (WOTUS): The Supreme Court's ruling in Sackett v EPA has implications for the Biden administration's WOTUS rule, with ongoing legal challenges and uncertainty surrounding its interpretation. Some states are operating under an injunction, applying an older WOTUS definition, while others adhere to EPA's revised rule aimed at complying with the Supreme Court decision. Questions remain regarding the scope and interpretation of WOTUS regulations.
   

     Bottom line: These legal and regulatory issues present significant uncertainties and potential impacts on the agricultural sector, requiring careful monitoring and legal counsel for affected stakeholders.

— A federal court earlier this week ruled that the EPA unlawfully approved dicamba for use over soybeans and cotton crops. The decision vacates 2020 registrations for Monsanto (now Bayer) XtendiMax, BASF Engenia, and Syngenta Tavium, preventing farmers from using dicamba for weed control this season. BASF expressed concern about the impact on farmers and acreage. The court cited dicamba's broader toxicity and volatility, siding with four organizations challenging the EPA's decision. Bayer disagreed with the ruling and awaits EPA guidance. The Agricultural Retailers Association criticized the decision's timing and called for science-based regulation. They urge an appeal and flexibility to minimize disruptions.

— China’s consumer prices drop the most in over 14 years. In January 2024, China experienced a decline in consumer prices, with a year-on-year decrease of 0.8%, marking the fourth consecutive month of decline, the longest streak since October 2009. This decline was more severe than market forecasts, which predicted a 0.5% fall, indicating the steepest decrease in over 14 years. The drop was primarily driven by a significant decrease in food prices, which fell by a record pace of -5.9%, compared to -3.7% in December, affecting all food components. On the other hand, non-food inflation slightly decreased (0.4% vs 0.5%), with transport prices declining more rapidly (-2.4% vs -2.2%), while prices continued to rise for clothing, housing, health, and education.

     Excluding food and energy prices, core consumer prices increased by 0.4% year-on-year in January, the smallest rise since last June, following a 0.6% gain in the preceding three months. On a monthly basis, the Consumer Price Index (CPI) rose by 0.3%, marking the second consecutive month of increase and reaching its highest level since last August. In 2023, consumer prices in China increased by 0.2%.

     What the Chinese stats mean: Nigel Green, the CEO of deVere Group, says “Prolonged deflation in China poses a threat to its manufacturing and export sectors, key drivers of that nation’s economic growth and sectors often favored by international investors. The deflationary trend in China could also weigh heavily on commodities and industries dependent on natural resources.” Green said the cumulative effect of three years of economic downturn, “erasing a staggering $7 trillion of value, demands a departure from the smaller measures. It’s time for Beijing to adopt steps to reignite growth and restore confidence.”

— December sees sharp decline in U.S. consumer credit use. In December, there was a significant decrease in consumer credit usage according to data from the Federal Reserve. Consumer credit rose by only $1.56 billion, a stark contrast to the $23.5 billion increase observed in November. Expectations had been for a rise of around $16 billion. Both revolving credit (such as credit cards) and nonrevolving credit experienced declines during the month. Nonrevolving credit increased by approximately $500 million, whereas revolving credit plummeted to just $1 billion after a substantial surge of $15.4 billion in November.

     The decline in revolving credit isn't entirely unexpected, given that the Fed reported a record-high average interest rate on credit cards at commercial banks, reaching 21.47% in the fourth quarter. This trend raises concerns about the future trajectory of the U.S. economy, suggesting that consumers are feeling the impact of higher interest rates. If this pattern persists, it could signify broader economic challenges ahead.

— Logistics operators are observing signs of a freight rebound after nearly two years of decline, the Wall Street Journal reports (link). Ocean imports to the U.S. are increasing, intermodal rail volumes are on the rise, and truckers are receiving signals indicating a strengthening demand at the beginning of the year. This turnaround signals a shift for freight companies that have struggled since retailers reduced restocking efforts, causing shipping markets to plummet. Now, with destocking efforts concluded, supply chains are replenishing. The Logistics Managers' Index experienced a surge last month, and reports indicate transportation prices are climbing. While the Lunar New Year may contribute to demand, indications of a strengthening American economy suggest increased goods movement within logistics pipelines.

— U.S. agricultural trade shows December decline. In December, U.S. agricultural exports and imports experienced declines. Agricultural exports totaled $15.50 billion, down 4.7% ($690 million) from November, while imports decreased to $15.66 billion, down 2.1% ($330 million), resulting in a trade deficit of $160.6 million. In the first quarter of fiscal year (FY) 2024, exports reached $48.23 billion, compared to imports of $48.56 billion, resulting in a deficit of $330 million. November marked a rare surplus of $99 million after eight consecutive months of deficits.

     In calendar year 2023, agriculture registered surpluses in only two months.

     USDA forecasts agricultural exports at $169.5 billion and imports at $200.0 billion for FY 2024, projecting a deficit of $30.5 billion. To meet this forecast, agricultural exports need to average $13.47 billion monthly, with imports at $17.16 billion, indicating a monthly trade deficit of $3.69 billion. However, recent export and import totals suggest that meeting these projections may be challenging, especially considering that the first quarter of the fiscal year typically sees strong agricultural exports.

     Bottom line: This marks a disappointing start to the fiscal year for U.S. agricultural trade.

— In 2023, Mexico surpassed China as the top source of goods imported by the U.S. for the first time in over two decades. Imports from Mexico rose by $20.8 billion year-on-year to $475.6 billion, while Chinese imports declined by $109.1 billion to $427.2 billion, as reported by the U.S. Census Bureau. Economists attribute this shift to escalating trade tensions between Washington and Beijing, noting it as a clear indication of decoupling affecting trade flows. "We're decoupling, and that's weighing heavily on trade flows," said Mark Zandi, chief economist at Moody's Analytics.

— The U.S. trade deficit with China reached its lowest point in over a decade last year, yet this doesn't signify a departure from importing Chinese goods, according to a WSJ assessment (link). Chinese and Western manufacturers have devised methods to circumvent tariffs, altering trade patterns. If tariffs increase further, they are likely to intensify these efforts. While the overall U.S. goods trade deficit decreased last year, mainly due to a reduced gap with China, factors such as overordering by U.S. importers in 2022 and subsequent inventory buildup contributed. Importantly, the declining trade deficit doesn't accurately reflect a reduction in U.S. consumption of Chinese-made products. Imports from countries like Vietnam and Mexico have surged, but many of these goods contain components initially sourced from China.

— The surge in immigration will help bolster the US economy by about $7 trillion over the next decade by swelling the labor force and increasing demand, according to the CBO. The stronger growth will be good for the federal government, lifting revenues by about $1 trillion more than otherwise over the period, according to the agency. Wages, however, will rise more slowly, in part reflecting the increase in the number of lower skilled workers, in the CBO’s estimation. “Increases in the population boost the demand for goods, services, and housing,” the CBO said in its budget and economic outlook for the next 10 years. “They also expand the productive capacity of the economy by increasing the size of the labor force.”

     Of note: In a briefing for reporters, CBO Director Phil Swagel said the agency did not take account of housing and other costs states and localities are confronting because of the surge in migration as those are outside the agency’s purview.

— The U.S. national debt could reach $54 trillion over the next decade. The federal government is set to add nearly $19 trillion to its debt load as it grapples with aging Americans and higher interest expenses, according to the Congressional Budget Office. Efforts to slow down growth in federal spending are helping, the agency found, but the country is likely to rack up more debt to GDP than at any point in its history.

— Ozempic maker Novo is getting calls from food CEOs as they face up to the potential threat from powerful appetite-suppressing drugs, Bloomberg News reports (link).

• CEO Lars Fruergaard Jorgensen said “scared” food bosses want to know how the drugs work and how fast they’ll roll out.
• Companies from Walmart to Chipotle are grappling with how a less hungry, potentially healthier customer will affect business.
• The impact of Wegovy and Ozempic has been moderated by Novo’s struggles to meet demand, but the company is working to overcome shortages.
   

— The Senate last night put off a vote on a measure that would provide assistance to Ukraine, Israel and Taiwan. “We will recess until tomorrow and give our Republican colleagues the night to figure themselves out,” Majority Leader Chuck Schumer (D-N.Y.) said.

     President Biden expressed concern that Ukraine’s allies were stepping back from their support for the country at a critical time in its war to repel Russia’s invasion.

     Of note: Tucker Carlson will release his interview with Russian President Vladimir Putin at 6 p.m. ET on TuckerCarlson.com, he said in an Instagram post.

     The House is out until next week.

— Manchin to urge reversal of Biden’s LNG export approval pause. Sen. Joe Manchin (D-W.Va.) will argue during today’s Senate Energy and Natural Resources Committee hearing that President Biden’s pause on new liquefied natural gas export approvals is unjustified and should be “reversed immediately” if a study of the shipments is only beginning now.

— The U.S.  conducted an airstrike that killed the commander of an Iran-backed militia in Iraq, as the Biden administration pressed ahead with its campaign to target those responsible for the killing of three U.S. soldiers last month.

     Meanwhile, Israeli Prime Minister Benjamin Netanyahu rejected a Hamas ceasefire offer on Wednesday. The offer would have seen the gradual release of hostages held in the enclave in exchange for Palestinian prisoners in Israel and another temporary pause in fighting, among other terms. Netanyahu called the proposal "delusional," in a setback to diplomatic efforts to end the war.

— House Speaker Mike Johnson (R-La.) plans to endorse Rep. Matt Rosendale’s (R) campaign in the Montana race for the U.S. Senate seat, Punchbowl News reports, citing people close to the situation. Rosendale reportedly plans to announce his campaign on Friday.

     Johnson’s endorsement would put him in direct conflict with Senate Minority Leader Mitch McConnell (R-Ky.), the National Republican Senatorial Committee, and the Senate Leadership Fund, all of whom are opposed to Rosendale’s candidacy. The Senate GOP has backed Tim Sheehy to challenge Sen. Jon Tester (D).

— Supreme Court will consider Donald Trump’s eligibility to be president. The court this morning will hear arguments about Colorado banning the former president from its primary ballot because of his role in the Jan. 6, 2021, attack. The case, which hinges on a part of the Constitution barring insurrectionists from office, could determine Trump’s status as a candidate nationwide.

WASDE | Crop Production | USDA weekly reports | Crop Progress | Food prices | Farm income | Export Sales weekly | ERP dashboard | California phase-out of gas-powered vehicles | RFS | IRA: Biofuels | IRA: Ag | Student loan forgiveness | Russia/Ukraine war, lessons learned | Russia/Ukraine war timeline | Election predictions: Split-ticket | Congress to-do list | SCOTUS on WOTUS | SCOTUS on Prop 12 pork | New farm bill primer | China outlook | Omnibus spending package | Gov’t payments to farmers by program | Farmer working capital | USDA ag outlook forum | Debt-limit/budget package |