China’s Covid Cases Soar; Central Bank Lowers Reserve Requirement Ratio

Mega change: First vessel carrying Brazilian corn to China set to sail

An abbreviated report today following an excellent Thanksgiving dinner at my longtime friends Paul and Diane Meyers and their daughters and families.

Grain and livestock markets were closed overnight and will reopen at 9:30 a.m. ET. Front-month crude oil futures are trading around $1 higher, and the U.S. dollar index is up nearly 500 points this morning. Grain and livestock markets close at 1:05 p.m. ET. The day after the Thanksgiving holiday is typically one of the slowest U.S. trading days of the year.

Sharply higher cash cattle trade. Cash cattle trade wrapped up on Wednesday as packers raised bids to $154 to $155 in the Southern Plains and around $157 in the northern market – up around $3 from the previous week. December live cattle futures should find support from the strong cash gains as the lead contract finished last Wednesday at $153.35.

Cash hog index continues to weaken. The CME lean hog index continues to face seasonal pressure as slaughter tallies rise. But slaughter is running under year-ago levels and we anticipate a seasonal low in the index and nearby futures will be posted soon. Last year, the seasonal low came at the end of November. 

Holiday ag demand news. Egypt purchased 175,000 MT of wheat in private deals, mostly Russian and Ukrainian supplies. Algeria purchased at least 300,000 MT of durum from unspecified origins. South Korea tendered to buy 70,000 MT of food-grade non-GMO soybeans that can be sourced from optional origins. Pakistan pushed back the end date on its tendered to buy 500,000 MT of optional origin milling wheat until Nov. 30.

Equities: Global stock markets were mixed overnight, with European shares mostly firmer and Asian shares mostly weaker. U.S. stock indexes are headed for mixed openings. Stock futures tied to the blue-chip Dow and S&P 500 were up 0.2% on Friday, and those linked to the Nasdaq 100 dropped roughly 0.1% as investors reassessed the outlook for monetary policy while looking for clues on consumer health as Black Friday shopping kicks off. In Asia, Japan -0.4%. Hong Kong -0.5%. China +0.4%. India flat. In Europe, at midday, London +0.3%. Paris +0.2%. Frankfurt +0.1%. There are no economic reports today and no Fed officials are scheduled to speak.

Key outside markets see the U.S. dollar index slightly higher. Nymex crude oil prices are higher, trading around $79.75 a barrel. Yield on the benchmark U.S. 10-year Treasury note is 3.722%. Sevens Report says this about the U.S. dollar: “The Dollar Index is still over a full point above key support just above the 105 mark and has some room to continue lower. If the 105 level is broken, it will add technical conviction that the peak in the dollar may finally be in, which would be a positive for risk assets.”

WTI crude futures rose almost 2% to $79.5 per barrel in thin trading on Friday but were still set to end the week lower due largely to concerns about Chinese demand and reports of a high price cap by G7 nations on Russian oil that eased supply worries. The US oil benchmark is down for the third consecutive week. Markets evaluated the impact of the G7’s proposed price cap on Russian oil in the range of $65-70 per barrel which is higher than current prices for Urals, allaying fears that Russia would retaliate by cutting supply. Still, investors remain cautious ahead of the European Union ban on Russian crude on Dec. 5, as well as an OPEC+ meeting on Dec. 4.

Brazil freight rates soar amid protests. Protests over Brazil’s election result that blocked roads in Mato Grosso state earlier this week lifted truck freight prices, affecting the operations and margins of global grain traders. Truck freight rose 20% or 50 reais ($9.40) per tonne in Mato Grosso, industry group Abiove said. Some companies reported loading less corn than scheduled for export on Monday, Tuesday and Wednesday, while others said the situation was having no material effect on export volumes.

Major item from FOMC minutes released Wednesday: "A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate," according to records from the Nov. 1-2 gathering. "A slower pace in these circumstances would better allow the Committee to assess progress toward its goals of maximum employment and price stability."

     "Various" Fed officials still said the persistence of inflation meant that the federal funds rate may have to go higher than they previously expected to achieve the central bank's goal of bringing down price pressures. The word "inflation" was mentioned 95 times in the minutes, remaining the primary focus on the gathering. The Consumer Price Index rose less than expected in October (headline inflation +7.7% Y/Y and core at +6.3% Y/Y).

Russian strikes have knocked out water and power in Ukraine. About two-thirds of Kyiv, Ukraine’s capital, is without heat and about 50% of homes don’t have electricity, as of early today. Fifteen regions are having water supply problems. Temperatures are dipping below freezing in parts of the country, and millions are expected to leave their homes in search of warmth and safety. Meanwhile, Ukrainian President Volodymyr Zelenskyy gave European governments a pep talk Friday, urging them to stick together as Russia’s war in his country drags on. “There is no split, there is no schism among Europeans, and we have to preserve this. This is our mission number one this year,” Zelenskyy said in a video address to a conference in Lithuania.

Slow Ukrainian grain exports after new deal. Ukraine’s grain exports have gotten off to a slower start after the Black Sea grain initiative was extended last week. Since the agreement was extended beyond Nov. 19, no more than five ships a day have departed Ukraine, United Nations data showed, down from previous weeks and months when up to 10 vessels departed per day. Meanwhile, Russian Defense Minister Sergei Shoigu discussed the situation in Syria and the Black Sea grain deal in a phone call with his Turkish counterpart, Russian news agency TASS reported.

China is facing one of its biggest Covid-19 outbreaks. A record 31,656 infections were reported Thursday. Major cities including Beijing and Guangzhou have ordered residents in some areas to stay home. China’s strict “zero covid” strategy means most of its 1.4 billion people have never been exposed to the virus, leaving them with no natural immunity.

     Oil market impact: According to ANZ, the surge in new infections has already affected fuel demand in the country, with implied oil demand seen lower by 1 million barrels daily than average, at 13 million bpd. "This remains a headwind for oil demand that, combined with weakness in the U.S. dollar, is creating a negative backdrop for oil prices," ANZ commodity analysts said in a note quoted by Reuters.

     Upshot: There are fears that any major outbreaks could overwhelm China's healthcare system (especially given the population's low natural immunity), mobilizing public anger and undermining confidence in the government. Earlier this month, officials said they would be more specific and targeted in implementing pandemic controls, but there would be no fundamental change to the overall zero-Covid stance.

China’s central bank lowered its reserve requirement ratio by 25 basis points Friday in a bid to support the world’s second-largest economy. The People’s Bank of China (PBOC) said cut of the reserve requirement ratio (RRR) to 7.8% will take place on Dec. 5 and inject around 500 billion yuan ($70 billion) in long-term liquidity. The decision was within expectations, but comes at a time when the world’s second-largest economy is facing a new round of coronavirus disruptions. The PBOC last cut the RRR in April when the central bank announced a 0.25 percentage point reduction following 0.5 percentage points cuts in both July and December last year. Friday’s announcement followed a State Council meeting on Tuesday chaired by Premier Li Keqiang, who said that it was a “critical time” to consolidate the economic recovery for the fourth quarter. The central bank also added that it will step up implementation of prudent monetary policy and will keep liquidity reasonably ample.

The first vessel carrying Brazilian corn to China was set to sail after a deal earlier this year between the two nations. The Star Iris is moored in Santos port, loaded with about 68,000 metric tons of grain for Chinese trader Cofco Corp., according to the shipping agency Alphamar. In October, China approved over 130 facilities for export. The U.S. accounted for about 70% of Chinese purchases in the 2020-2021 season. According to Alphamar, three more vessels are scheduled to leave in November, which could put the total shipments for this month close to 200,000 tons. There’s also another ship expected to sail in the first days of December. Bottom line: This is a mega change for the corn industry as China is clearly diversifying its purchases outside the U.S. market.

President Biden said his administration was involved in negotiations to avert a looming U.S. railroad strike that could shut down supply chains across the country. A rail traffic stoppage could freeze almost 30% of U.S. cargo shipments by weight.

Avian flu has wiped out 50.54 million birds in the United States this year, making it the country's deadliest outbreak in history, USDA data showed. The deaths of chickens, turkeys and other birds represent the worst U.S. animal-health disaster to date.

California’s $3 billion ag drought. The state’s worst drought has left growers facing losses of $3 billion, just as producers brace for more widespread cuts to water supplies. Researchers estimate initial crop revenue losses of $1.3 billion in 2021 and $1.7 billion in 2022, with the Central Valley accounting for the largest proportion of that.

     The state’s driest three-year period on record resulted in the crop revenue losses after growers left a total of 1.3 million acres unplanted over 2021 and 2022 as compared with 2019, according to a study commissioned by the California Department of Food and Agriculture. That’s the most idled acreage in recent memory. California’s Central Valley — which grows about a quarter of all U.S. food, including 40% of fruits and nuts — is bearing the brunt of the losses so far.

      More land idling expected. The state’s southern farming areas reliant on water from a shrinking Colorado River likely to see more fallowing in 2023, said Josue Medellin-Azuara, a University of California Merced professor who led the analysis. “Strategic short term land idling was the most common cropping decision adaptation in this drought,” researchers said in the report. “Some crops such as rice, and other field and grain crops showed extensive idling,” while beef and milk productions were “lower than they would have been.” The estimated 752,000 acres of fallowed fields in 2022 alone represent nearly 10% of California’s irrigated land examined by researchers. Growers also faced extra energy costs due to the need to pump water. The study is based on “water” years that run from October through September.

The U.S. is halting imports from one of the Dominican Republic’s largest sugar producers amid allegations the company uses forced labor. U.S. Customs and Border Protection said in a statement it was issuing a “withhold release order” that will effectively block shipments of sugar and sugar-based products from Central Romana Corp, Ltd. “We disagree vehemently with the decision as we do not believe it reflects the facts about our company and the treatment of our employees,” Central Romana said in a statement. The company also said it plans to engage with U.S. officials to “work collaboratively to resolve this matter.” The Dominican Republic exported $113 million worth of raw sugar in 2020, according to the National Statistics Office, and the U.S. is the largest market for Dominican sugar exports.

Malawi became the first low-income nation to receive financing from the IMF under a new tool intended to help countries cope with global food price shocks. The southeast African country will get $88.3 million to “address urgent balance-of-payments needs and mitigate the impact of the food shock,” according to a statement. Separately, the fund and South Sudan reached a staff-level deal to provide the nation with $112.7 million in emergency financing, which needs to be approved by IMF’s board.

Flooding in eastern Australia is hurting the quality of the wheat harvest in one of the world’s biggest exporters, worsening a global shortage of the high-grade variety used to make bread and ramen noodles. The lack of milling-quality grain across the east coast this year means that demand for more general-purpose wheats with lower-protein content is gaining traction, said James Maxwell, senior manager at Australian Crop Forecasters. Rains have also slowed the harvest in parts of Western Australia, another huge growing region, where the local industry association is predicting a further bumper crop. For the country as whole, wheat exports could still reach 26 million tons this season, almost three times the amount in 2019-20, when supplies were cut by drought, according to USDA.

Backers of an overhaul of farmworker visas want to reach a deal before Republicans take control of the House in 2023. Lawmakers, agriculture groups and farmworker organizations are pushing the bill, which would provide a path to citizenship for about one million farmworkers and create a capped number of new year-round visas.  A version of the bill passed the House in March 2021. House Republicans are unlikely to bring it up in the next Congress, unless they first get border security actions.

Midterm elections: Republican Sen. Lisa Murkowski and Democratic Rep. Mary Peltola won re-election races in Alaska.

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