Impacts Mount from Red Sea Shipping End-Arounds

Biden extends suspension of Trump-era tariffs on European steel and aluminum | Mexican and U.S. officials announce border collaboration

MARKET FOCUS

• Grain and livestock markets observe normal trading hours today
• Investors worried about China’s economy shunned Hong Kong’s stock market
• Median year-end 2024 forecast for the S&P 500: 5,068
• Presidential elections and the S&P 500
• Average rate on a 30-year fixed mortgage drops to 6.61%
• Complexities from Red Sea shipping end-arounds
• Panama Canal Authority continues to limit vessel transits, affecting U.S. grain exports
• Hapag-Lloyd continues diverting ships from Suez Canal, citing security concerns
• Ag markets today
• Ag trade update
• 2024 predicted to be hottest year on record
• NWS weather outlook
• Pro Farmer First Thing Today items

ISRAEL/HAMAS CONFLICT 

• Israel warns it will remove Hezbollah from Lebanese border should attacks continue
   

CHINA

• China appoints Adm. Dong Jun as defense minister
• Soybeans, cotton major export sales to China in most recent week
• China's new thirst for coffee spurs cut-throat cafe competition
   

TRADE POLICY

• Biden extends suspension of Trump-era tariffs on European steel and aluminum
• Mexico imposes nearly 80% tariff on some steel imports, targeting Chinese steel
   

ENERGY & CLIMATE CHANGE

• Brazil's carbon market raises concerns over agriculture exemption
   

LIVESTOCK, NUTRITION & FOOD INDUSTRY

• HPAI confirmed in Ohio poultry flock; Russia considers poultry import restrictions
• USDA to resume milk market order hearing in January
   

HEALTH UPDATE

• Medicare drug price negotiations face challenges in 2024
   

POLITICS & ELECTIONS

• Federal judge approved Georgia’s congressional districts, drawn to favor the GOP
• Maine second state to bar Donald Trump
• 2024 Presidential, Senate and House election forecasts
   

OTHER ITEMS OF NOTE

• Argentina's president faces first general strike amid protests against economic reforms
• Cotton AWP moves higher
• Mexican, U.S. officials to enhance collaboration in addressing surge in migration
   

— Grain and livestock markets will observe normal trading hours today. All markets and government offices are closed on Monday, Jan. 1 for New Year’s Day. Grain and livestock markets resume trading at 9:30 a.m. ET on Tuesday, Jan. 2.

— Equities today: U.S. Dow opened slightly lower then went slightly higher. Asian and European stocks. In Asia, Japan -0.5%. Hong Kong -0.2%. China +0.7%. India -0.2%. In Europe, at midday, London +0.2%. Paris +0.3%. Frankfurt +0.3 Investors worried about China’s economy shunned Hong Kong’s stock market.

     U.S. equities yesterday: Another record finish for the Dow while the S&P 500 just missed a new high close — it is within 0.28% of the all-time closing high. The Dow was up 53.58 points, 0.14%, at 37,710.10. The Nasdaq eased 4.04 points, 0.03%, at 15,095.14. The S&P 500 was up 1.77 points, 0.04%, at 4,783.35. All three indexes are on pace for a ninth consecutive weekly gain.

    Year-to-date gains impressive.  With one trading session remaining in 2023, the S&P 500 is up 25%. The Nasdaq is on pace to advance more than 44% on the year. The Dow 30 is up nearly 14%.

— Agriculture markets yesterday:

• Corn: March corn futures dropped 2 1/4 cents to $4.74 1/4, settling on session lows.
• Soy complex: March soybeans closed 8 1/2 cents lower at $13.12, ending the session below the 10- and 200-day moving averages, while March soymeal fell $3.10 to $390.70. March soyoil closed 68 points lower at 47.98 cents.   
• Wheat: March SRW futures rallied 8 1/2 cents to $6.31 1/2 but closed off session highs. March HRW futures rallied 8 3/4 cents to $6.43 3/4. March spring wheat futures rose 3 3/4 cents to $7.35 1/4.
• Cotton: March cotton rose 42 points to 80.95 cents, the highest close since Dec. 13.  
• Cattle: February live cattle fell 35 cents to $168.925, ending below the 10-day moving average, while March feeders plunged $2.2750 to $223.125 and closed near the session low.
• Hogs: February lean hog futures fell $1.425 to $68.45, settling nearer session lows.
   

— Ag markets today: Corn and soybeans favored the downside overnight while wheat traded modestly higher. All three markets saw light volume overnight. As of 7:30 a.m. ET, corn futures were around a penny lower, soybeans were fractionally lower and SRW wheat was mostly a penny higher, while HRW and HRS futures were around 3 cents higher. Front-month crude oil futures were trading near unchanged following two consecutive sessions of steep losses, while the U.S. dollar index was modestly lower.

     Still no cash cattle trade. The holiday shortened week and lessened slaughter counts has apparently discouraged packers and feedlots from negotiations. That likely does not bode well for cash cattle prices, as packers have fresh contracted supplies available starting next week and steer weights are likely nearing their seasonal peak.

     Uncertainty in CME lean hog index. After falling to a fresh seasonal low early this week, the CME lean hog index posted another small uptick, as the index rose 14 cents to $65.57 today (as of Dec. 27). It will take more than a couple days of gains to convince traders a seasonal low is in place, especially considering a low is rarely forged in the week between Christmas and New Year’s.

— Quotes of note:

• The median year-end 2024 forecast for the S&P 500 is 5,068, according to FactSet. Such a level would imply an annualized gain of roughly 6% for 2024.
  
  
   
• Presidential elections and the S&P 500. Presidential elections are not rally killers, according to market analysis by LPL Financial that looks at the past 71 years. In that period, the S&P has risen, on average, by 7% during U.S. presidential election years. (The market tends to do even better in a re-election year, the financial advice firm notes.)
   

— Average rate on a 30-year fixed mortgage dropped to 6.61%, down more than a percentage point from a 23-year high of 7.79% in late October, according to data released by mortgage giant Freddie Mac on Thursday. The rate has declined for nine consecutive weeks.

     Of note: The supply of homes for sale is still very low, keeping a lid on market activity.

Market perspectives:

— Outside markets: The U.S. dollar index was weaker, with the euro and yen registering small gains against the U.S. currency. The yield on the 10-year U.S. Treasury note was firmer, trading around 3.88%, with a higher tone in global government bond yields. Crude oil futures saw early gains. U.S. crude was around $72.30 per barrel and Brent around $77.75 per barrel. Gold and silver futures were under pressure ahead of the final 2023 trading session, with gold around $2,072 per troy ounce and silver around $23.92 per troy ounce.

— Panama Canal Authority (ACP) continues to limit vessel transits, affecting U.S. grain exports. The Panama Canal Authority (ACP) reduced the daily limit of vessels passing through the canal to 22 ships in December, down from the usual 36 vessels, and plans to raise daily transits to 24 in January due to improved rainfall and water levels but remains below normal volume. This reduction has delayed U.S. exports of grains such as corn and soybeans during the peak shipping season. Grain carriers struggle to secure transit slots due to irregular schedules and fleet fluctuations compared to cruise and container ships.

     The ACP auctions extra transit slots, with winning bids ranging from $1.4 million to $2 million. Such high costs, if absorbed, would significantly increase grain transportation expenses. Consequently, many grain carriers are choosing alternative routes, such as the Suez Canal or the Cape of Good Hope.

     From Oct. 15 to 28, only five grain carriers bound for East Asia transited the Panama Canal, compared to 34 in the previous year. Meanwhile, grain carriers transiting the Suez Canal increased nearly fivefold to 33 from seven in the same period.

     Charter rates for bulk carriers have risen, with spot rates for Panamax carriers reaching $21,966 per day in December. Extended journeys via alternative routes, especially during the peak shipping season for U.S. grain, are causing a ship capacity shortage.

     The situation is compounded by tensions in the Middle East, affecting the Suez Canal route due to route cancellations amid attacks by Houthi rebels in Yemen.

     Of note: The Panama Canal is expected to enter a dry season from January to April, making it difficult to foresee improvements in water levels and transit restrictions.

— Complexities from Red Sea shipping end-arounds (Source: Foreign Policy/Link):

• Houthi attacks in the Red Sea have led to over 350 container ships and various other vessels diverting to alternative routes since late November.
• This shift poses logistical challenges, including the need for new navigation charts, extra fuel, and rerouting of crews and cargo.
• The U.S. military's Operation Sea Guardian has been unable to provide immediate solutions, and it remains uncertain which ships can expect escort, given the complex nature of vessel ownership and operation.
• Many shipping lines have chosen to reroute their ships via the longer Cape of Good Hope route on South Africa's southwestern coast. Traveling this route adds 10 to 12 days of sailing, requiring adjustments in crew rotations and seafarer changes, potentially in places like Mombasa, Kenya, Durban, South Africa, Dar es Salaam, Tanzania, or Gran Canaria, Spain's Canary Islands.
• The Red Sea route comes with war risk premiums, while the Cape of Good Hope route incurs additional fuel costs and surcharges imposed by shipping lines.
• These disruptions in shipping may signal the beginning of a broader geopolitical impact on global trade and the global economy.
• Nearby countries, including Sudan and Eritrea, face challenges attracting ships to their ports due to reduced Red Sea traffic, while Egypt's Suez Canal experiences decreased activity.
• Shipping to Mediterranean countries such as Greece, Italy, and Turkey becomes more cumbersome with fewer vessels transiting the canal.

— Hapag-Lloyd continues diverting ships from Suez Canal, citing security concerns. Hapag-Lloyd, a German shipping company, told Reuters it has decided to keep diverting its vessels away from the Suez Canal and Red Sea due to security concerns. They plan to reassess the situation on Jan. 2. This choice is significant because about one-third of global container ships typically use the Suez Canal for transit. Avoiding the canal by redirecting ships around the southern tip of Africa results in additional expenses, including up to $1 million in extra fuel costs for each round trip between Asia and Northern Europe. It also prolongs transport times by several days or even weeks.

     Meanwhile, the U.S. military is trying to reassure shipping companies that a global force is making it safe to sail through the Red Sea and Suez Canal even though attacks from Yemen-based Houthi rebels show no sign of stopping. The Pentagon is “engaged with industry on a near-daily basis to gauge needs and provide reassurance” to the industry, a Defense Department spokesperson said.

— Ag trade update: Egypt cancelled an international tender with no purchases made.

— 2024 predicted to be hottest year on record. Climate scientists are warning that 2024 could potentially become the hottest year in recorded history. A climate scientist from Texas A&M University suggests that 2024 will likely be "a bit" hotter than 2023. Additionally, it's noted that the first year of a strong El Niño weather pattern is expected in 2024, which could result in temperature peaks. These rising temperatures have significant implications, particularly for global food supplies, as recent extreme weather events have negatively impacted crop yields and agriculture. Link for more via Axios.

— NWS weather outlook: Pacific storm system brings locally heavy rain to California Friday; moderate to heavy snow forecast for the Sierras Saturday... ...Wintry mix expected for the Interior Northeast/New England, with some accumulating ice and snow in Maine... ...Above average temperatures forecast for most of the country Friday and Saturday; cooler temperatures and chilly morning lows for the Southeast.

Items in Pro Farmer's First Thing Today include:

     • Grains mixed overnight
     • Russia raises wheat export tax

— Israel warned that it will act to remove Hezbollah from the Lebanese border should the group’s attacks continue. Israeli Minister without portfolio Benny Gantz said “[t]he situation on Israel’s northern border demands change,” and that “the stopwatch for a diplomatic solution is running out… If the world and the Lebanese government don’t act in order to prevent the firing on Israel’s northern residents, and to distance Hezbollah from the border, the IDF [Israeli Defense Forces] will do it,” Gantz said. Cross-border attacks have been ongoing, and escalating, since Oct. 8, the day after Hamas’s attack on Israel.

— Soybeans, cotton major export sales to China in most recent week. USDA Export Sales for the week ended Dec. 21 was relatively quiet for several commodities but there was activity for soybeans and cotton for the current marketing year. Activity for 2023-24 included net sales of 73,481 metric tons of corn, 69,751 metric tons of sorghum, 576,765 metric tons of soybeans, and 271,208 running bales of upland cotton. Net reductions of 62,401 metric tons of sorghum were reported for 2024-25. For pork and beef, net reductions of 419 metric tons of beef and 110 metric tons of pork were reported for 2023, but net sales of 2,603 metric tons of beef and 2,152 metric tons of pork were reported.

— China appoints new defense minister to fill an unexpected vacancy. The appointment of Adm. Dong Jun comes two months after Beijing abruptly removed the previous appointee without explanation. Link to details via the WSJ.

— China's new thirst for coffee spurs cut-throat cafe competition. The number of branded coffee shops in China grew a staggering 58% in the last 12 months to 49,691 outlets, according to Alegra Group, a company that tracks growth of coffee chains. Link to more via Reuters.

— Biden extends suspension of Trump-era tariffs on European steel and aluminum. The Biden administration as expected extended the suspension of Trump-era tariffs on European steel and aluminum for two more years. This move comes as efforts to find a permanent solution to eliminate these tariffs have not yielded results even after more than two years of negotiations. As part of this extension, the administration will maintain a temporary import quota system that replaced the original tariffs imposed during the Trump administration.

     The European Union (EU) has expressed dissatisfaction with this temporary measure, and its future depends on the outcome of the next presidential election, as a new administration could undo it.

     Without this extension, steel would face a 25% import duty, and aluminum would be subject to a 10% import duty, which could trigger retaliatory tariffs from the EU on American products such as Bourbon whiskey and Harley-Davidson motorcycles.

— Mexico imposes nearly 80% tariff on some steel imports, targeting Chinese steel. Mexico announced a significant tariff of nearly 80% on certain steel imports in response to complaints from local steel producers about the impact of Chinese steel on their industry. The tariff primarily applies to Vietnamese exports of cold-rolled steel sheets. However, there is an exemption for the tariff if importers can prove that the steel originates from a country other than China. Hoa Phat, Vietnam's largest steelmaker, will face a nearly 12% tariff, while Posco Vietnam will encounter a 26% tariff, with the country-of-origin exemption also applicable to them. This move comes after concerns about Chinese steel producers selling surplus steel at below-market rates, a practice known as dumping.

     Mexico previously increased tariffs to 25% on some steel imports in August, targeting countries with which it lacks a free-trade agreement. This recent tariff announcement marks the conclusion of a government anti-dumping investigation initiated at the request of local steelmaker Ternium's unit nearly two years ago.

     The U.S. has also expressed concerns about the transparency of steel and aluminum imports from Mexico regarding their country of origin. Steel production in Latin America has been declining as imports have risen, with China being the region's top steel supplier, accounting for almost a third of steel imports into Latin America.

     Brazilian steelmakers have also requested a 25% tariff on Chinese steel imports, but limited action has been taken, given China's significance as a trading partner.

— Brazil's carbon market raises concerns over agriculture exemption. Brazil is in the process of establishing a regulated carbon market with a "cap-and-trade" system aimed at supporting projects that reduce or remove carbon dioxide from the atmosphere, as reported by the Financial Times (link/paywall). These efforts may include initiatives like tree planting, allowing participants to sell tradeable permits to offset their emissions. However, critics are concerned about the proposed exemption for livestock and primary agriculture (unprocessed farm goods), arguing that this omission leaves out a significant source of carbon emissions.

     Brazil accounts for about 3% of global carbon dioxide emissions, with around half of that stemming from deforestation, according to Climate Watch data from 2020. Agriculture and livestock contribute to approximately one-quarter of carbon dioxide emissions, primarily through land clearing, methane emissions from cattle, and the use of nitrogen fertilizers. Supporters of the exemption argue that measuring agricultural emissions is challenging. Nevertheless, food processors and meat packing plants would still be subject to the new rules.

     The legislation for this carbon market has received initial approval in both the house and senate, but it still requires secondary approval from both chambers before it can be signed into law by President Luiz Inácio Lula da Silva's administration.

— HPAI confirmed in Ohio poultry flock; Russia considers poultry import restrictions. USDA's Animal and Plant Health Inspection Service (APHIS) confirmed cases of highly pathogenic avian influenza (HPAI) in several commercial poultry operations. These include a commercial table egg layer flock in Hardin County, Ohio, with 1,363,900 birds, as well as locations in Todd County, Minnesota (78,900 commercial turkey breeding hens), and Muskegon, Michigan (31,000 commercial turkey meat birds). Over the past month, there have been a total of 89 confirmed HPAI cases, affecting 52 commercial flocks and 37 backyard flocks, totaling approximately 13.22 million birds.

     Meanwhile, reports suggest that Russia may be considering blocking imports of U.S. poultry passing through Russia on their way to Kazakhstan due to concerns about bird flu. This potential restriction comes as Kazakhstan's imports of U.S. broilers have declined significantly, from 101.487 million pounds in the January-October period of the previous year to around 49.986 million pounds in the same period this year.

— USDA to resume milk market order hearing in January. USDA's Agricultural Marketing Service (AMS) is scheduled to resume a hearing on proposed changes to federal milk marketing orders (FMMOs) on Jan.15 in Carmel, Indiana. The hearing will take place from 8 am ET to 5 pm ET each day. If the proceedings are not concluded by Jan. 19, the hearing will reconvene again on Jan. 29, with that session potentially recessing on Feb. 2 if necessary. Virtual testimony will not be accepted, and dairy farmers who wish to appear and testify do not need to pre-submit their testimony or exhibits. This hearing is a continuation of a previous session that recessed on Dec. 8, which aimed to consider and gather evidence on proposals to modify pricing formulas in the 11 FMMOs.

— Medicare drug price negotiations face challenges in 2024. In 2024, Medicare's ability to negotiate lower drug prices will face significant tests, with potential implications for both U.S. patients and drug manufacturers. The U.S. gov’t is set to commence negotiations for the prices of ten prescription drugs in January, aiming to finalize and publish these negotiated prices by the fall, with the intention of implementing them in 2026. This endeavor is expected to be contentious, as major pharmaceutical companies like Merck, Johnson & Johnson, and Bristol Myers Squibb have filed lawsuits opposing these price negotiations.

— “A surprise ruling and a big victory for GA Republicans, who will get to keep a gerrymandered 9R-5D advantage in the House delegation,” says David Wasserman, political analyst at the Cook Political Report with Amy Walter. A federal judge in Georgia approved the state's newly drawn congressional maps, which were created by Republicans and include the addition of a majority-Black district. U.S. District Judge Steve C. Jones issued an order accepting the maps, stating that the Georgia General Assembly had fully complied with his previous order to establish a majority-Black congressional district in the western part of metro Atlanta.

     The new maps have divided Rep. Lucy McBath's (D-Ga.) district, moving it to a more rural area, which is expected to favor Republicans. As noted, the maps are likely to maintain the GOP's 9-5 majority among House members. Additionally, the maps create a new majority-Black district in western Atlanta.

     These maps were developed in response to Judge Jones's October ruling that invalidated Georgia's congressional and state legislative maps, citing violations of the Voting Rights Act. Democrats and voting rights groups had argued that the new maps did not adhere to Jones's order to create a new Black-majority district.

     Of note: The approval of these maps in Georgia is part of a broader national trend in which congressional maps are being challenged and redrawn in various states, with implications for the 2024 elections. Congressional maps have recently been challenged and redrawn in various states, including New York, Wisconsin and Alabama.

— Maine became the second state to bar Donald Trump, the leading contender for the Republican presidential nomination, from participating in the primary ballot. The decision was made by Shenna Bellows, Maine's secretary of state, who is a Democrat. She determined that Trump's involvement in the events of January 6, 2021, amounted to "engaging in insurrection," rendering him ineligible to run for the presidency as per the 14th Amendment of the U.S. Constitution. Different states have reached varying conclusions regarding Trump's eligibility, creating a situation where the Supreme Court may need to intervene to provide a final resolution on the matter.

— 2024 Presidential, Senate and House election forecasts. The WSJ includes the outlook for Democrats and Republicans, based on combined ratings from three nonpartisan political analysts. Link for details.
 

— Argentina's president faces first general strike amid protests against economic reforms. Argentina's President Javier Milei is set to confront his first general strike a little over a month after taking office. The country's leading unions are organizing a nationwide labor strike in opposition to Milei's plans to deregulate the economy, change the voting system, and reduce social safety nets. Workers across Argentina are expected to participate in the strike on Jan. 24, as announced by the CGT, one of Argentina's oldest and most influential union groups. The protesters plan to gather around the Congress building in Buenos Aires to challenge what they consider an "illegal" decree signed by President Milei last week.

— Cotton AWP moves higher. The Adjusted World Price (AWP) for cotton is at 64.16 cents per pound, effective today (Dec. 29), up from 63.80 cents per pound the prior week. Meanwhile, USDA announced that Special Import Quota #11 will be established Jan. 4 for the import of 33,103 bales of upland cotton, applying to supplies purchased not later than April 2 and entered into the U.S. not later than July 1.

— Mexican and U.S. officials agreed to enhance their collaboration in addressing the surge in migration at their shared border. This agreement follows high-level talks and a visit by U.S. Secretary of State Antony Blinken to Mexico. The joint statement outlined several key points:

• Strengthening a sponsorship initiative: The two countries plan to reinforce an initiative aimed at assisting migrants from Venezuela, Cuba, Nicaragua, and Haiti. This effort aims to provide support to these individuals.
• Addressing root causes of migration: Both nations intend to work together to tackle the underlying issues driving migration, with the goal of reducing the number of people making the journey.
• DACA program beneficiaries: Discussions also revolved around regularizing the status of beneficiaries of the U.S. Deferred Action for Childhood Arrivals (DACA) program, known as "Dreamers," who were brought to the United States illegally as children.
• Long-time undocumented Hispanic migrants: The talks included considerations for the situation of long-standing undocumented Hispanic migrants living in the United States.

     Additionally, the U.S. had temporarily closed some border crossings to shift agents toward enforcement, leading to trade disruptions and criticism from Republicans regarding the Biden administration's border policies. Immigration and border issues are expected to be significant topics in the 2024 U.S. elections, where President Joe Biden is seeking a second term. Mexican President Andrés Manuel López Obrador confirmed that the two countries have agreed to reopen border crossings following the temporary closures.

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