Looking Past the Coronavirus Peak, Equities Again Rise

Posted on 04/07/2020 7:35 AM

Ag industry complains about SBA loan kinks | Big changes ahead for U.S./China

 


In Today’s Updates


 

* Federal Reserve appears to be rescuing SBA's rescue plans
* $349 billion programs from SBA having startup kinks including ag industry complaints
* Ag industry wants to avoid hefty fees at congested ports
* USDA is mulling disbursing the $23.5 bil. in ag aid to help deal with Covid-19
* Several suggestions into USDA on how it can aid ailing U.S. dairy industry
* Perdue again tells Stabenow MFP payouts were equitable
* An early virus warning for the White House from Navarro
* U.K. Prime Minister Boris Johnson spent the night in intensive care
* Coronavirus model cited by White House now projects fewer deaths by August
* Four benchmarks for a return to normal
* Yellen: big GDP hit coming for second quarter
* Farm Bureau economist: big gap in China's promised purchases of U.S. ag products
* Big U.S. review of China is coming
* Coronavirus pandemic is hitting U.S. meat operations
* Four workers at ADM corn processing plant in Iowa tested positive for Covid-19
* How China’s army of food delivery drivers helped keep country going
* Wisconsin will hold its presidential primary today

 


MARKET FOCUS


 

Equities: Stock futures tied to the Dow rallied 3.3%, a day after the blue-chips index jumped almost 8% amid continued signs that the coronavirus outbreak may be peaking in several hard-hit places. The pan-continental Stoxx Europe 600 advanced 2.4%, and major Asian stock benchmarks closed higher — Japan’s Nikkei 225 and China’s Shanghai Composite both rose 2% today.

 

Other markets: The yield on the 10-year U.S. Treasury note rose to 0.747%, from 0.675% Monday. Oil prices fell, paring some of their recent rebound after a virtual summit for producers to discuss supply cuts was postponed to later in the week. A growing scarcity of oil-storage space is driving some of the world’s biggest crude producers to negotiate a truce in a Saudi-Russian fight for market share.

     Oil prices

 

Yellen: An initial big hit is coming on GDP... gross domestic product. Former Federal Reserve Chair Janet Yellen told CNBC that the nation’s GDP has likely shrunk by 30% in the second quarter and unemployment could be as high as 13%... although economic reports aren’t yet reflecting these devastating numbers. “This is a huge, unprecedented, devastating hit,” she said, “and my hope is that we will get back to business as quickly as possible.”

 

     Any peak in viruses would mean it’s possible to see a reopening of the economy on the horizon and the market will then have to absorb changes in the economy. If so, a bounce back of varying degrees could begin in the third quarter. Yellen expressed some doubt as to whether the U.S. recovery will signal a quick recovery shaped like a “V.” More negative prognosticators see a “hockey stick” or L-type pattern back for the U.S. economy... others see a long U pattern.

 

     Bottom line: We will be going from unknowns about the duration of the virus spread, then differences over the duration of the shutdown, and soon we will be talking about how long it will take for the economy to get back to normal. As usual, news media will focus on the extremes. The double barrel of monetary stimulus and fiscal stimulus is helping the market and is expected to support the economy as it moves past the massive shutdown of the economy. Going from intense mitigation to back to work is ahead.

 

Japan declared a state of emergency and plans $1 trillion stimulus to combat the coronavirus downturn. The package, equal to 20% of national GDP, is meant to help families and businesses suffering from the pandemic.

 

Cat nipped. After a tiger at the Bronx Zoo tested positive for the virus, scientists assured pet owners that there is no evidence that domestic cats can spread the virus to people. Link to NYT article.

 

An essential Easter bunny... Prime Minister Jacinda Ardern offered reassurances to the children of New Zealand, announcing that the Easter bunny and the tooth fairy had been designated essential workers. She cautioned that, because of distancing rules, “the Easter bunny might not make it everywhere this year.”

 

Speaking of eggs... Wholesale egg prices have more than tripled as consumers’ coronavirus-driven buying clears supermarket shelves. Meanwhile, wholesale costs for whole chickens, butter, cheese and ham have fallen, despite consumers rushing to stock up, partly because of plunging demand from restaurants. Rapidly changing prices for food commodities are compounding grocers’ budgeting and planning challenges as the pandemic forces Americans to shift from restaurant dining to eating at home, notes the Wall Street Journal (link).

 

    Egg prices

 


POLICY FOCUS


 

The huge $349 billion programs from SBA are having startup kinks, as expected. And the ag sector, always quick with noting problems, is listing them for this rollout as well. Other small businesses have their gripes from. For example, some small businesses are complaining about Treasury’s terms of loan forgiveness — namely that 75% of the loan must cover their payroll costs. Employers in some places lspend more each month on rent, mortgages and utilities than labor, so this could preclude them from obtaining loan forgiveness.

 

     On the ag side, issues over H-2A workers excluded from wage calculations and loan amounts, despite some accounting for them, is just one topic of discussion. Several issues have surfaced regarding Farm Credit being able to make a loan guaranteed by the SBA. For now, the loans are only available through banks that already participate in other Small Business Administration lending programs — a group that includes most of the biggest U.S. banks. The Treasury Department has said it plans to allow other lenders to participate but hasn’t detailed a timeline.

 

     Some businesses worry that the pot of money will run out before they are able to dip into it. Larry Kudlow, chief White House economic adviser, said Monday that President Donald Trump would ask Congress for more money for the program if it’s needed. Some lawmakers think the SBA's popular Payment Protection Program (PPP) will run out of money by late May.

 

     House Speaker Nancy Pelosi (D-Calif.) said another $1 trillion is needed, beyond the just-passed $2.3 trillion effort. Pelosi wants another round of direct payments to Americans and more money for companies to keep making payroll. Senate Majority Leader Mitch McConnell (R-Ky.) has said in recent days that health care should top the list, signaling his intent to get to work on a new bill.

 

     Meanwhile, the Federal Reserve said it would create a new program to finance loans that banks and other lenders make through the small-business lending program. The move will free up financial firms to make more loans guaranteed by the Small Business Administration’s PPP. In essence, the Fed promised to take steps to get the money flowing more quickly. The move may involve the Fed’s either lending directly to banks participating in the program, or buying the loans once originated so that lenders don’t have to carry the debt on their books. Looks like the small-business rescue plan is getting rescued.

     Fed and PPP

 

President Trump needs to look at a tweet from Farm Bureau Chief Economist John Newton. Why? The president several times on Monday mentioned the huge amount of farm products China pledged to buy from the U.S. ag sector. Newton, in a tweet, wrote: “Fiscal year to date #agricultural exports to #China total $7.2B...BELOW the pace needed to meet USDA's projection of $14.5B & current pace = $10.5B.” He then included this graphic:

 

     China trade gap

 

A big U.S. review of China is coming. Based on interviews with Trump administration officials, some lawmakers and industry personnel, the following points are likely:

 

     • China is going to come in for a major U.S. review at all levels, from the White House (executive branch), Congress and the private sector relative to supply chains.

 

     • It is becoming clearer that China's government withheld key Covid-19 virus information early on and that led to delays in how other parts of the world treated Covid-19 initially.

 

     • China will no longer be the major supplier of key U.S. health items... vaccines, pharmaceuticals and Personal Protective Equipment (PPE).

 

     • Coming battles with China could impact U.S. ag trade with Beijing, and this could lead to more worries for some U.S. crop and meat sectors that see the country as a big customer now or in the future.

 

Another ag industry complaint comes from those wanting to avoid hefty fees at congested ports. Ships are getting hit with steep fees as the coronavirus slows trade and forces shipments to idle at docks. Eighty groups representing ag and food shippers want the White House to intervene. “These fundamentally unfair fees are frequently exorbitant in nature, even exceeding the negotiated freight rates in some cases, and render U.S. agriculture exports less competitive in the global markets,” the National Grain and Feed Association, National Chicken Council, U.S. Apple Association and other groups said in a letter to National Economic Council Director Larry Kudlow and USDA Secretary Sonny Perdue.

 

USDA is mulling disbursing the $23.5 bil. in ag aid to help deal with Covid-19. This includes the $14 bil. included in the CARES Act to help replenish the Commodity Credit Corporation (CCC) (it was at $7 bil. to $9 bil.) and the additional $9.5 bil. for aid to livestock, specialty crops and other producers.

Initial focus will be on cattle, dairy & produce producers, we’re told, with perhaps USDA tapping the Commodity Credit Corporation funding to aid the ethanol/biofuel industry.

 

     Help for row crops will come later in the summer for several reasons, one being USDA Sec. Sonny Perdue does not want to impact plantings.

 

     Ensure imports of chemicals & other farm inputs continue to flow so U.S. farmers do not lose these critical components of ag production, the ag sector is telling Perdue.

 

     Additional ag aid funding will be needed and that is coming via Phase 4 legislation.

 

     Meanwhile, Perdue on Monday offered a lengthy rebuttal of Democrats’ complaints that the department’s trade bailout has disproportionately boosted Southern states and wealthy farmers, while pledging to distribute the new stimulus payments in a “fair and equitable manner.” In a letter (link) to Senate Agriculture ranking member Debbie Stabenow (D-Mich.), a major critic (along with many of her staff) of the fairness of the trade mitigation program, Perdue wrote, “USDA’s principle based objective process and the data do not support a program that favored one region over another.” He pointed to the department’s underlying calculations of tariff damage to specific commodity prices and exports, and the fact that the bulk of the money flowed to Midwestern states like Illinois and Iowa.

 

USDA is being urged to consider possible aid measures for dairy producers:


     • Direct payments to dairy farmers... A direct payment to farmers “at least equivalent” to the financial support they would have received had they enrolled in the Dairy Margin Coverage (DMC) program. Farm Bureau noted its earlier support for reopening enrollment in DMC, but suggested the payments are another option.

 

     • Dairy purchases... To offset declines in dairy demand from food service and school meals, Farm Bureau says “USDA should immediately make purchases of dairy products including but not limited to fluid milk, butter, cheeses and dry milk powders. Additional support could be provided through export assistance programs.” The department should consider offering vouchers “to facilitate the distribution of donated milk through grocery stores and other venues,” and continue to utilize Section 32 food program purchases “to the greatest extent possible.”

 

     • Milk loss program... USDA should consider offering a milk loss program similar to the 2019 Wildfires and Hurricanes Indemnity and Milk Loss (WHIP-ML) Program to indemnify eligible dairy operations for milk dumped or removed without compensation from the commercial milk market due to Covid-19.

 

     • Temporary milk solids content changes... USDA being told to temporarily increase the minimum milk solids content in fluid milk to above 8.25 solids-non-fat and for whole milk above 3.25% butterfat.

 

     • Dumped milk... Any milk that is dumped or otherwise disposed of should be allowed to count “towards a Dairy Revenue Protection policy holder’s total milk marketings.”

 

     • Some dairy groups reportedly have a proposal into USDA... including a voluntary program to reduce milk production from a March base by 10% from April through September. Farmers would then be paid $3 per cwt on the remaining 90% of production as long as the Class III/IV average stays below $15.
 

Coronavirus update:

  • Summary: The COVID-19 case total stands at 1,359,398 with deaths at 75,945, according to Center for Systems Science and Engineering (CSSE) at Johns Hopkins University (JHU). The U.S. case total is at 368,449, with deaths at 10,993.

    The Covid-19 death toll in Spain fell for the fourth day running, to 637, the lowest since March 24. It has extended its restrictions through April 25. Meanwhile, Italy reported 636 deaths on Monday, a bounce of 111 from 525 on Sunday, its fewest since March 19. The daily death toll in France continued to rise, reaching 833.

     
  • Coronavirus model cited by White House now projects fewer deaths by August. The Institute for Health Metrics and Evaluation model cited by the White House Coronavirus Task Force lowered its projections of coronavirus deaths in the United States by August 4 to 81,776, down more than 10% from the 93,765 projected on April 1. The Associated Press says the model “relies on much more robust data from Italy and Spain and from hospitals.”

    Meanwhile, NIAID Director Fauci and White House Coronavirus Task Force response coordinator Deborah Birx expressed guarded optimism about America’s ability to reduce the death toll from the coronavirus pandemic” on Monday. Fauci said, “I don’t accept that we have to have 100,000 to 200,000 deaths. I think we can really bring that down.” Birx also expressed hope at the briefing, saying she “doesn’t accept” that the U.S. is resigned to those numbers and that the nation can save lives by continuing the measures in place.

     
  • U.K. prime minister was moved to intensive care. Boris Johnson, who is fighting a serious coronavirus infection, was admitted to an ICU in London. He deputized his foreign secretary, Dominic Raab, to run the government.
     
  • President Trump said the government would buy nearly 167 million masks from 3M over the next three months, resolving a spat with the industrial conglomerate over efforts to ramp up the supply of gear for frontline workers confronting the pandemic. Trump criticized 3M's mask-making efforts last week and invoked the Defense Production Act against the company.
     
  • An early virus warning from White House adviser Navarro. The New York Times reports (link) a memo by Peter Navarro, President Trump’s trade adviser, warned in late January that failing to contain a coronavirus outbreak could cost the U.S. trillions of dollars and put millions of Americans at risk of illness or death. “The lack of immune protection or an existing cure or vaccine would leave Americans defenseless in the case of a full-blown coronavirus outbreak on U.S. soil,” Navarro’s memo stated. The memo, dated Jan. 29, was the highest-level alert known to have circulated in the West Wing. It came as the administration was taking its first substantive steps to confront the crisis but during a period in which the president was also playing down the risks.
     
  • Four benchmarks for a return to normalcy comes via a New York Times article (link). How do officials know when it’s time to reopen public spaces and start to bring life back to normal? Researchers recently outlined some markers:

       1. Hospitals must be able to safely treat all patients requiring hospitalization, without resorting to crisis standards of care. That means having adequate beds, ventilators and staff.

       2. The authorities must be able to test everyone who has symptoms, and to get reliable results quickly. That would be well more than 750,000 tests a week in the U.S.

       3. Health agencies must be able to monitor confirmed cases, trace contacts of the infected, and have at-risk people go into isolation or quarantine.

       4. There must be a sustained reduction in cases for at least 14 days, because it can take that long for symptoms to appear.

     
  • Some European countries are planning to ease restrictions, with Austria and the Czech Republic allowing some shops to reopen next week, as well as lifting bans on international travel. Denmark plans to soon begin a phased reopening of schools and day care centers.
     
  • New research into the deadly influenza pandemic in the early 20th century found that U.S. cities that committed earlier and longer to banning public gatherings and closing schools didn’t fare worse for disrupting their economies for longer. Minneapolis, for example, acted quickly, and had a considerably lower mortality rate than St. Paul, just across the Mississippi River. It appears that the economy in Minneapolis emerged stronger, too. The new study (link), by researchers at the Federal Reserve and MIT, comes amid a debate over the health benefits and economic costs of distancing.

         Pandemic study

     
  • U.S. meat processors are slowing and temporarily halting production at some plants as sickness and fear keep workers home, the Wall Street Journal reports (link), hitting operations that play a critical role in replenishing supermarkets. The shutdowns at plants operated by companies including Tyson Foods Inc. and JBS USA Holdings Inc. are the latest signs of stresses across the economy as state and local governments try to keep most businesses locked down while essential services like food distribution continue, the article notes. “Hundreds of meat plant employees may work side by side at each plant, and staffers have walked off their jobs over concerns that they could contract the coronavirus. Meat inventories remain plentiful, but the slowdowns are complicating adjustments to coronavirus-forced changes to American eating habits as lockdowns have suppliers redirecting shipments toward supermarkets and away from restaurants,” the article concludes.
     
  • Four workers at an Archer Daniels Midland corn processing plant in Clinton, Iowa tested positive for Covid-19. The company is deep-cleaning the facility and quarantining employees who came in contact with the infected workers, but operations at the plant are ongoing “with some staffing adjustments,” a spokesperson said. Link to Reuters item for more.
     
  • Kroger to limit shoppers entering stores. Kroger, the nation's largest supermarket chain, said stores nationwide will, by today, post limits on the number of shoppers permitted inside stores at a given time to prevent the spread of coronavirus. Under Kroger's new reduced capacity limits, one person per 120 square feet will be allowed in stores. That means a traditional grocery-pharmacy "combo" store of 60,000 to 75,000 square feet would allow 500 to 625 shoppers at a time. The limits will vary by store size. Kroger also announced it will take additional steps to boost shopper and associate safety. These include following local ordinances that mandate employee temperature checks, encouraging associates to wear protective masks and gloves and testing one-way aisles in certain markets. Kroger operates nearly 2,800 stores overall and regional supermarket chains in 35 states, including Fred Meyer, Harris Teeter, Ralphs, Mariano's, Fry's, Smith's, King Soopers, QFC and others.
     
  • Car insurers are giving millions in coronavirus refunds. One of the largest car-insurance companies in the country, Allstate Corp., and a smaller Midwestern auto insurer are refunding hundreds of millions of dollars to their policyholders, citing a dramatic drop in accident claims from Americans hunkered down in their homes. Are you in good hands... just remember distancing....
     
  • Oxford Economics recently ranked states according to their economic vulnerability to pandemic shutdowns. An elderly population and reliance on retail and small business makes a state more vulnerable, which could dampen their economic recoveries in relation to states that have more coronavirus cases. The most vulnerable states, according to this analysis, are Maine, Nevada, Vermont, Florida and Oregon. The least are Nebraska, Maryland, Virginia, North Dakota and Alaska.
     
  • Talk about an opportunist... Martin Shkreli, the disgraced biotech entrepreneur, asked to be given a three-month reprieve from prison to help conduct research into coronavirus treatments.
     
  • Will Covid-19 Remake the World?” is the title of a report (link) from a group called Project Syndicate. The lead graph says, “No one should expect the pandemic to alter — much less reverse — tendencies that were evident before the crisis. Neoliberalism will continue its slow death, populist autocrats will become even more authoritarian, and the left will continue to struggle to devise a program that appeals to a majority of voters.”
     
  • How China’s army of food delivery drivers helped keep country going is an article in today's South China Morning Post (link). It says buying and paying for meals and supplies online was already second nature for many Chinese before the Covid-19 lockdown.

Other items of note:

  • The state of Wisconsin will hold elections today after all, after a partisan tussle that involved the Democratic governor’s order to delay, Republican legislators’ opposition to that order, the state’s Supreme Court siding with the Republicans, and the federal Supreme Court ruling that postal ballots postmarked after April 7th would not be accepted. That means Wisconsin will hold an election even though state residents are under a stay-at-home order. Over two dozen health officials from across Wisconsin are calling for a delay, citing "significant" risk to the public and strain on the election system. More than a dozen other states have already delayed their primaries due to the pandemic.

Markets. The Dow on Monday closed up 1,627.46 points, 7.73%, at 22,679.99. The Nasdaq gained 540.15 points, 7.33%, at 7,913.24. The S&P 500 added 175.03 points, 7.03%, at 2,663.68, its biggest gain since March 24, when it climbed more than 9%.

 


 

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