Evening Report | March 27, 2024

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U.S. hog herd expected to be virtually unchanged... Analysts expect Thursday afternoon’s Hogs & Pigs Report to show the U.S. hog herd was virtually the same size as year-ago at 74.136 million head as of March 1. The breeding herd is expected to be down 3.5%, while the market hog inventory is anticipated to be up 0.3% from last year. The winter pig crop is expected to be up 1.4% amid a 3.4% jump in pigs per litter. Spring and summer farrowing intentions are anticipated to be down 2.3% and 2.2%, respectively.

Assessing the Port of Baltimore closure... Following the cargo ship wreck, the Port of Baltimore suspended shipping traffic until further notice, but trucks were still being processed at marine terminals. There is no indication of how long shipping traffic will be halted. Some shipping officials have said it might take several months, but most don’t anticipate long-term impacts. Keys:

• The Port of Baltimore is the fifth largest port on the East Coast by total tons of cargo handled and the 17th largest overall in the United States.
• The port was first in terms of the volume of automobiles and light trucks (including 847,158 cars and light trucks). Baltimore is one of the nation’s leading gateways for farm equipment and construction machines like combines, tractors, hay balers, excavators and backhoes. The port is also a critical hub for items like steel and aluminum.
• The port accounts for about 3% of U.S. ag imports, totaling around 1.794 MMT in 2023. Baltimore was outside the top 12 ports for U.S. ag exports. The top five ag products handled (imports and exports) at the port are: sugar, soybeans, grain (corn and wheat), coffee and grocery items.
• The disruption will lead to challenges in redistributing cargo shipments to other East Coast ports. While some ports may absorb part of the diverted cargo, they may not have the capacity to accommodate the entirety of what would have gone through Baltimore. This situation mirrors the congestion experienced by ports during the pandemic, highlighting the potential for traffic jams in port operations.
• Experts suggest that considering the ongoing Red Sea crisis and the loss of Baltimore’s port, shipping activities may increasingly shift towards the West Coast. However, this shift could lead to congestion issues at West Coast ports, exacerbating shipping logistical challenges.
• Economists labeled this as a “supply shock,” likely resulting in temporary shortages. Rerouting of shipping and congestion at other ports may cause delays in the delivery of goods, impacting even those not originally destined for Baltimore. Additionally, there’s a “demand shock” element. Efforts to clear the channel and rebuild the bridge will divert resources such as manpower, materials and time from other projects, potentially leading to delays or postponements.
• Some say this could alter the Fed’s expected cuts to interest rates this year if inflation flares up. Although markets are still pricing in the first rate cut in June, some expect the timeline could change as impacts of this incident become apparent.

EU envoys agree deal on Ukraine agricultural imports... Ambassadors from European Union countries reached an agreement regarding Ukrainian grain, extending tariff-free trade until June 2025. However, this extension comes with stricter conditions compared to previous agreements, reflecting a more hardened stance by EU member states. Certain agricultural products, including poultry, eggs, sugar, oats, corn, oat groats and honey, will now face tariffs if their exports surpass average volumes from the past three years. Additionally, measures were introduced to address market disruptions, potentially allowing individual member states to implement bans if needed.

The newly reached compromise extends the reference period to the second half of 2021 and excludes wheat from the list of sensitive products, potentially deepening economic losses for Ukrainian producers. Despite this agreement, further negotiations with the European Parliament and ratification are still required. If approved, this extension will be the final one, as EU leaders have tasked the European Commission with finding a long-term solution within the framework of the EU/Ukraine Association Agreement.

The curbs are due to start on June 6, when tariff-free access for Ukrainian imports is renewed for a further year.

Firm raises Brazil soybean crop forecast... Agroconsult raised its Brazilian soybean crop estimate by 4.3 MMT to 156.5 MMT due to higher planted acreage after surveying fields across the country. The Brazil-based consulting firm now forecasts soybean acreage at 46.4 million hectares, 1.2 million hectares more than Conab’s estimate earlier this month.

Tax credits and carbon capture: How ethanol plants offset costs... Ethanol plants are exploring carbon capture technologies to reduce their carbon intensity (CI) scores and qualify for tax credits. Paul Neiffer, via his Farm CPA Report, says the two main methods are point source capture and carbon capture and storage (CCS). The Inflation Reduction Act (IRA) has increased tax credits for carbon capture under Section 45Q and reduced eligibility requirements. Ethanol plants utilizing point source capture can qualify for tax credits of up to $85 per metric ton, while those using CCS may indirectly benefit through reduced CI scores. Lower thresholds for carbon capture eligibility present new opportunities for ethanol plants, he notes. However, Neiffer says the Section 45Z credit, which provides benefits to ethanol plants, is only scheduled until 2027 and may need extension for continued benefits. Ethanol plants may also benefit from Department of Energy funding. Overall, he says plants with carbon capture technology may have an economic advantage over those without it.

USTR reviewing China's WTO consultation on EV subsidies... U.S. Trade Representative Katherine Tai is currently reviewing China’s request for consultations at the World Trade Organization (WTO) regarding U.S. subsidies for electric vehicles (EVs). China claims these subsidies, provided under the Inflation Reduction Act (Climate Bill), are discriminatory and have distorted the global EV supply chain market. Tai stated the U.S. is carefully assessing China’s consultation request. She also criticized Beijing’s own policies, accusing them of employing unfair practices to promote Chinese manufacturers globally. If the consultations fail to resolve the issue, China can request the establishment of a dispute settlement panel at the WTO.

American companies face slowdown in China expansion amid rising tensions... An in-depth article in the Wall Street Journal highlights a significant slowdown in the decades-long expansion of American companies into China. Several factors contribute to this stalling trend, including escalating geopolitical tensions, trade disputes leading to retaliatory measures and China’s pursuit of self-sufficiency.

Recently, the attractiveness of the Chinese market has diminished. China’s economic growth has decelerated to its slowest pace in decades, resulting in decreased consumer spending, particularly on foreign brands. Additionally, China’s once dominant export sector is facing challenges.

Consequently, many multinational corporations are reducing their involvement with China. They are exporting fewer products to China and witnessing declines in their revenue from the country. This situation has prompted some companies to scale back their investments in China.

Previously, American and other multinational firms constituted over half of China’s exports, but now they represent less than one-third. China is increasingly favoring products from other countries and domestic manufacturers over those from the U.S., impacting sectors such as automobiles, aircraft and semiconductors.

The revenue generated by multinational companies from China has declined, with the share of total company revenue earned in China by U.S. firms dropping from 16% in 2006 to 10% in 2020, based on McKinsey Global Institute data. While Apple experienced a boost in iPhone sales in China following U.S. sanctions on Huawei, the Chinese tech giant has retaliated, gaining traction in high-end smartphone sales with its Mate 60 Pro.

American automakers like Ford and GM are losing market share in China, although Tesla’s sales have increased. Nevertheless, Tesla faces stiff competition from Chinese rivals and its market share has remained stagnant.

Bottom line: Given the challenging environment, American companies are increasingly opting to reduce their exposure to China, a strategy referred to as “de-risking.” Foreign direct investment, which surged after China’s accession to the World Trade Organization in 2001, is now being curtailed by U.S. firms, while Washington is imposing restrictions on certain investments.