CBO: U.S. Economy Could Take Most of Decade to Fully Recover from Covid, Shutdowns

Posted on 06/02/2020 8:01 AM

Confusion prevails re: China's buys of and possible halt to some U.S. farm products

 


In Today’s Updates


 

* International and U.S. equities continue to rally
* Cities across the U.S. faced another night of protests
* Massive spike in gun and ammunition sales
* CBO report has a somber outlook for U.S. economy
* U.S. dollar continues to decline, especially vs oil country currencies
* Oil prices rise to highest level since early March
* Relative to Dow, commodities trading at lowest valuation level since mid-1960s
* Upbeat sugarbeet outlook report
* U.S. oil refining company converting one of its plants into renewable diesel

* State-owned Chinese firms bought at least three cargos of U.S. soybeans on Monday
* U.K. official calls on China to ‘step back from the brink’ on Hong Kong
* House Democratic stimulus bill would add $3.5 trillion
* McConnell (R-Ky.) wants to accelerate approval of changes to the PPP
* USDA has awarded $1.2 billion to supply food to feeding programs
* U.S. food supply update
* Would you buy meat from a vending machine?
* Update on reopening America... and around the world
* Unrest across U.S. complicating comeback for restaurants and retailers
* Coronavirus update
* Roughly 1 in 4 coronavirus deaths in U.S. were in nursing homes
* Report signals China held Covid-19 data from WHO

* Seven states and Washington, D.C. head to polls today
* Pompeo’s absence from Kansas Senate race sets up GOP primary fight
* Britain and Canada do not support return of Russia to G7
* Bayer back in court
* More meetings on tap over EPA 2021 biofuel, 2022 biodiesel proposed levels

 


MARKET FOCUS


 

Equities today: International stocks gained ground, extending a recent rally. Germany’s DAX index surged 3.3% following a public holiday. Japan’s Nikkei 225 closed 1.2% higher while Hong Kong’s Hang Seng Index rose 1.1%. U.S. equity futures signal a higher opening.

 

     U.S. equities yesterday: The Dow rose 91.91 points, 0.36%, at 25,475.02. The Nasdaq moved up 62.18 points, 0.66%, at 9,552.05. The S&P 500 gained 11.42 points, 0.38%, at 3,055.73.

 

The WSJ Dollar Index, which measures the U.S. currency against 16 others, was down 0.57% Monday at 92.00. It has fallen for three consecutive trading sessions. The U.S. dollar index is lower early today and hitting another 2.5-month low overnight. The British pound gained over 1% against the dollar, and the euro continued to advance, increasing 0.28%. The rebound in oil prices has also boosted petroleum-exporting nations such as Russia and Mexico, both of whose currencies have risen strongly against the dollar over the past month.

 

     Dollar

 

     oil and currencies

 

Oil rose to the highest level since early March this morning, with a barrel of West Texas Intermediate trading over $36 a barrel and Brent crude just shy of $40. OPEC+ producers are considering extending their production cut of 9.7 million barrels a day into July or August, at an online meeting likely on June 4.

 

     oil futures

 

Market perspectives:

 

     • Relative to the Dow Jones Index, commodities are currently trading at the lowest valuation level since the mid-1960s.

     • Silver has experienced a major rebound from the March lows.
     • Percentage of S&P 500 members trading above the 50-day moving average is the highest in nearly three decades.
     • Greed is back, according to the CNN Fear & Greed Index.

     Greed

 

U.S. economy could take the better part of a decade to fully recover from the pandemic and related shutdowns, a U.S. budget agency said on Monday. Output isn’t expected to catch up to a previously forecast level until the fourth quarter of 2029, the nonpartisan Congressional Budget Office (CBO) said. The sharp contraction triggered by the coronavirus caused it to mark down its 2020-30 forecast for U.S. economic output by a cumulative $7.9 trillion, or 3% of gross domestic product, relative to its January projections. The roughly $3.3 trillion in stimulus programs enacted by Congress since March will only “partially mitigate the deterioration in economic conditions,” the CBO said. The CBO now expects U.S. GDP to be 5.6% smaller in the fourth quarter of 2020 than a year earlier, a sizable markdown from its 2020 projection of 2.2% growth made at the end of 2019 before the pandemic.

 

     CBO

 

Solid rebound expected for U.S. sugarbeet industry. Increased acreage, higher prices and strong demand point to improved outlook for sugarbeet growers and processors. Sugarbeet growers and cooperatives in the U.S. are expected to have a stronger financial year ahead, with improved production and high prices for the 2020-2021 crop ushering in a recovery from the stressful growing season last year. Many growers and processors suffered through significant financial strains due to extreme weather, market uncertainty and severe crop production losses that plagued the 2019-2020 marketing year. A new report (link) from CoBank’s Knowledge Exchange Division details the market forces and production dynamics that suggest the industry is well-positioned for a financial rebound, as consumer demand for sugar remains high.

 

     sugar prices

 

Cities across the U.S. faced another night of protests sparked by the death of George Floyd in Minneapolis last week. President Trump called for a tougher government response to the violent unrest, and said he is ordering thousands of armed soldiers and law enforcement officers to the nation’s capital. Two separate autopsy reports concluded that George Floyd’s death in police custody in Minneapolis was a homicide — the Minneapolis medical examiner ruled that Floyd’s death was a homicide and an independent autopsy arranged by Floyd’s family determined the 46-year-old died of asphyxiation. The Associated Press describes at least nine people confirmed killed as a result of violence across the country since protests began eight days ago.

 

     Mayhem

 

     Unrest

 

Massive spike in gun and ammunition sales as FBI background checks break May record. Shares of American Outdoor and Sturm Ruger jumped nearly 10% on Monday as gun background checks rose 75% in May — on an adjusted basis — to follow on strong months in March (+80%) and April (+62%).

 


POLICY FOCUS


 

Refinery part of RFS exemption case to shift to biodiesel. HollyFrontier announced they will convert their refinery in Cheyenne, Wyoming, to produce renewable biodiesel, one of the plants at the center of the 10th Circuit Court case in which the court ruled a small refinery exemptions (SRE) granted for the 2016 compliance year was invalid. The company said it would spend between $125 million and $175 million to convert the facility to produce around 90 million gallons of renewable diesel per year. Completion is targeted for the first quarter of 2022. The company said it would halt petroleum refining at the site and would reduce its workforce. “This decision was primarily based on the expectation that future free cash flow generation in Cheyenne would be challenged due to lower gross margins resulting from the economic impact of the Covid-19 pandemic and compressed crude differentials resulting from dislocations in the crude oil market, coupled with forecasted uncompetitive operating and maintenance costs and the anticipated loss of the Environmental Protection Agency’s small refinery exemption,” the company stated.

 

Update on China:

  • State-owned Chinese firms bought at least three cargos of U.S. soybeans on Monday despite reports suggesting Beijing had ordered a freeze on American farm good purchases due to an escalation with the U.S. over Hong Kong. Chinese importers still have not covered a large share of October and November soybean needs. Some wire service reports also said that state purchases of U.S. pork, corn and cotton were put on hold. Chinese foreign ministry spokesman Zhao Lijian told reporters during a daily briefing today that he was unaware of the situation. Link to Reuters item.

    USDA this morning reported export sales of 132,000 metric tons of soybeans for delivery to China during the 2020-2021 marketing year.

    Bloomberg reported that there are some exceptions to the order that state-run buyers Cofco and Sinograin halt American soy purchases. One exception is when state-buyers import on behalf of private firms, who are not affected by the halt. Another is when the state-buyers need the beans to cover their derivative positions, and a third exception is if there are already ongoing transactions, according to Bloomberg.

    Reuters reported that private Chinese importers have not received a government order to suspend all buying, although commercial buyers are very cautious. “A certain scale of trade will be halted" but it is not a full stop, the wire service quoted a source familiar with the government plan.

    JCI reported that “China’s monthly soybean imports may reach 11 million MT on average during May-Jun 2020 and above 10 million MT in Jul. Imports during May-Jul 2020 may increase nearly 10 million MT from a year earlier. Soybean crush has increased to about 2.1 million MT a week. Main crushers’ soymeal inventories had increased for 6 consecutive weeks.”

     
  • U.K. official calls on China to ‘step back from the brink’ on Hong Kong. The national security law approved by China’s legislature relative to Hong Kong is a breach in China’s commitment to the “one country, two systems” principle that applies to the former U.K. colony, British Foreign Secretary Dominic Raab told parliament. “To be very clear and specific about this, the imposition of national security legislation on Hong Kong by the government in Beijing rather than through Hong Kong's own institutions lies in direct conflict with Article 23 of China's own basic law,” Raab said. “And it lies in direct conflict with China's international obligations freely assumed under the Joint Declaration." He called on China to “step back from the brink” and respect the autonomy of Hong Kong. "If China continues down this current path, if it enacts this national security law, we will consider what further response we make, working with those international partners and others," he said.
     
  • Police in Hong Kong banned a vigil to commemorate the anniversary of the Tiananmen Square massacre this Thursday. Authorities cited health concerns over covid-19, but pro-democracy groups cried foul, accusing the government of trying to stifle opposition after China’s decision to impose a controversial national-security law on the territory. Hong Kongers have held annual Tiananmen memorials for three decades.

Update on next aid package — Phase 4/CARES 2:

  • House Democratic stimulus bill would add $3.5 trillion. The latest House-passed stimulus measure would add about $3.5 trillion to the deficit over the next 10 years, according to a report by the Congressional Budget Office (CBO). The section of the Heroes Act that would provide another round of $1,200 checks would cost $557 billion, the study said. Extending boosted unemployment insurance through January 2021 would cost $437 billion, and the higher education provisions would cost $169 billion, according to CBO.
     
  • Senate Majority Leader Mitch McConnell (R-Ky.) wants to accelerate approval of changes to the Paycheck Protection Program (PPP). The legislation would give small businesses more flexibility in using PPP funds. The bill (HR 7010) would extend the eight-week period when proceeds must be spent for loans to be forgiven to 24 weeks or until the end of the year, whichever comes first. Businesses would also have as long as five years, instead of two years, to repay any money owed on a loan and could use a greater percentage of proceeds on rent and other approved non-payroll expenses. “I hope and anticipate the Senate will soon take up and pass legislation that just passed the House by an overwhelming vote of 417-1 to further strengthen the Paycheck Protection Program so it continues working for small businesses that need our help,” McConnell said on the Senate floor yesterday.

    Businesses in agriculture, forestry, hunting and fishing have received nearly $7.6 billion so far in PPP loans, according to the Small Business Administration. That is 1.5% of the $510 billion approved by the agency as of May 30.

Update on implementation of CARES 1, including CFAP:

  • USDA has awarded $1.2 billion to nearly 200 companies to supply boxes of dairy, meat, fruits and vegetables to feeding programs across the country. Companies that were left out could potentially qualify for a second round of contracts. In a letter today (link) to USDA Secretary Sonny Perdue, Wisconsin's congressional members said Wisconsin-based businesses received less than 1% of the funding to source dairy products and fluid milk. “Considering the impact Covid-19 has had on the dairy industry, we expected that our well-established dairy producers, processors and distributors in Wisconsin — America’s Dairyland — would be particularly well funded by USDA to fill the need,” they wrote.

U.S. food supply/industry update:

  • A meat-supply crunch is beginning to ease but grocers and suppliers expect strains across U.S. food sectors to persist for several months. The U.S. food industry heads into the summer months with beef and pork production last week about 7% lower than the same time last year, the Wall Street Journal reports (link), while items like rice, flour and pasta remain scarce following heavy consumer stockpiling. “That panic-buying has tailed off but disconnects in supply chains are lingering as suppliers and distributors cope with rapid shifts in production and demand,” the article notes. Restaurants that had scaled down to pickup and delivery operations have resumed food purchasing as they begin to reopen, for instance, keeping supplies of meat products and other items tight. Meat processors have reopened plants but “many sites are running well below their usual capacity, with some workers out sick and others adjusting to new safety rules.”
     
  • Would you buy meat from a vending machine? A butcher in New York is betting on it. Link to USA Today article.

Update on reopening America... and around the world:

  • Starbucks is reducing workers' hours as coronavirus limits opening times and services.
     
  • Play ball? The question of how to divide billions of dollars sits at the heart of a bitter labor dispute between Major League Baseball and its players’ union.
     
  • Unrest across the U.S. is complicating the comeback for restaurants and retailers still reeling from the coronavirus. Macy’s, which postponed the reopening of some coronavirus-closed stores, had its flagship Manhattan store looted Monday night. Apple, whose stores have been broken into in several cities, closed several locations Sunday and Monday. Burger King and Popeyes Louisiana Kitchen locations closed early in some areas to protect workers and customers, and McDonald’s plans a company town hall to allow employees to tell executives how to foster more racial inclusion and corporate outreach. Link to WSJ article.
     
  • Shoppers can expect big clearance sales this summer. A glut of pent-up inventory is waiting to be dumped on consumers as stores reopen, and shoppers for everything from shoes to sofas should be able to find major bargains.

Coronavirus update:

  • Summary: Global Covid-19 cases total 6,289,259 with the death toll at 376,077, according to data from the Center for Systems Science and Engineering (CSSE) at Johns Hopkins University (JHU). The U.S. case count is at 1,811,277 with 105,147 deaths.

    Roughly one in four coronavirus deaths in the U.S. were in nursing homes, the Centers for Medicare and Medicaid Services has found.

    Covid U.S.

     
  • Study: Masks can help slow virus. Widespread use of face masks could help economies reopen safely from lockdowns when combined with continued social distancing and other prevention measures, according to a new study. The risk of viral transmission is lower in households and among contacts of infected people when masks are worn, according to the study, published in The Lancet medical journal.

    But... The acting head of the Office of the Comptroller of the Currency, which oversees the nation’s largest banks, warned that face masks worn for coronavirus protection could aid bank robbers.

     
  • Report signals China held Covid-19 data from WHO. There were “significant delays” by China in reporting information to the World Health Organization (WHO) relative to the Covid-19 situation, according to an Associated Press report, a contrast to the public praise the WHO was heaping on China for their actions. The report indicated the positive statements from WHO officials on China’s actions were in part an effort to try and coax additional information from the country. China did not release the genetic mapping (genome) of the virus for more than a week after government labs had fully decoded the information, the report said, adding their exam of records and recordings indicated that the WHO did not collude with China on the situation as the U.S. contends, but was kept in the dark as China only provided the minimal information required by law.
     
  • Lawmakers seek OIG look at OSHA Covid-19 response. Sen. Elizabeth Warren (D-Mass.) and five colleagues are pressuring the Department of Labor’s Office of Inspector General to conduct an audit of the Occupational Safety and Health Administration’s (OSHA) response to the coronavirus pandemic. The lawmakers want an investigation of OHSA’s handling of inspections and citations during the pandemic as well as its refusal to issue an emergency temporary standard (ETS) to enact specific worker safety requirements for COVID-19. The number of OSHA-issued citations has dropped nearly 70% during the pandemic and the inspection rate has plummeted despite thousands of essential workers contracting the disease and hundreds dying from Covid-19, according to the senators.

 


OTHER ITEMS OF NOTE


  • Seven states and Washington, D.C. will head to the polls today as former Vice President Joe Biden could be set to officially become the Democratic presidential nominee and a number of key down-ballot primaries are set to take place. Key races the ag sector is watching: Can Steve King retain his seat in Iowa? And who will face Sen. Joni Ernst of Iowa. Democrats are eyeing Senate seats in Iowa and Montana to overturn the Republican majority, now 53-47. Republicans, who need a net gain of 17 seats to win back the House majority they lost in 2018, are targeting three Democratic-held seats in Iowa and one in New Mexico.
     
  • Secretary of State Mike Pompeo’s absence from the Kansas Senate race sets up a primary fight among other Republicans and raises hopes among Democrats of flipping the seat in November, reports the Wall Street Journal (link). All the Republicans in the GOP field have been outraised by Democrat Barbara Bollier, a state senator and former Republican.
     
  • Britain and Canada each said they would not support the return of Russia to the G7. On Saturday President Donald Trump criticized the current makeup of the club as outdated, and proposed bringing in Australia, India and South Korea, as well as Russia; Russia was expelled from what was then the G8 in 2014 over its annexation of Crimea.
     
  • Bayer back in court. Reports note that Bayer wants to keep its total Roundup liability capped at $10 billion, a problem inherited when it acquired Monsanto in 2018, and to do so it will be crucial to get a 2018 California court verdict overturned. The German firm reportedly will ask the state appeals court today to throw out a jury conclusion that the herbicide product caused grounds keeper Lee Johnson's cancer. While he was awarded $289 million before a judge cut the damages to $78.5 million, Bayer has been reaching settlements in thousands of other cases that range from a few thousand dollars to several million per claim.
     
  • More meetings on tap over EPA 2021 biofuel, 2022 biodiesel proposed levels. There are six meetings scheduled so far at the Office of Management and Budget (OMB) on EPA’s proposed levels for 2021 biofuel and 2022 biodiesel under the Renewable Fuel Standard (RFS). The latest session scheduled is with is representatives from the Society of Independent Gasoline Marketers of America and National Associations of Convenience Stores. Missing so far from the list are the Renewable Fuels Association (RFA) and several other groups that represent biofuel interests. Once those occur, that is when information about EPA's intentions usually surface.

 

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