Potential Rail Strike Update: What’s Up, How Railroads Are Planning

WSJ report OPEC Considering 500,000 barrel-a-day production boost jolts crude oil market
 

Members of a key union representing train conductors rejected a new wage deal, moving closer to a labor strike that could disrupt some supply chains as soon as early December. Details in Market section.

Saudi Arabia and other OPEC oil producers are discussing increasing crude output by up to 500,000 barrels a day, the WSJ reported Monday. But Saudi Arabia on Monday said that OPEC+ was sticking with oil output cuts and could take further measures to balance the market amid falling prices, denying the WSJ report it was considering boosting output, according to state news agency SPA. Saudi Arabia’s energy minister said a production cut was possible instead. Markets were volatile during the initial WSJ reporting and Saudi Arabia statement. WTI crude oil is trading comfortably above $80/barrel this morning, fueling a rally in energy companies which is buoying index futures and aiding soyoil prices.

U.S. officials are pressing Russia’s major trading partners to enforce sanctions and trade controls, as exports to the country pick up.

Investor buying of homes fell 30% in the third quarter. Details in Market section.

Chinese consumer spending is buckling as the property market slumps and Beijing insists on snuffing out Covid-19.

China turns to back-channel diplomacy to shore up U.S. ties. In an exclusive report, the WSJ reports that with Chinese leader Xi Jinping’s blessing, a Chinese delegation of policy advisers and executives met with a U.S. counterpart group ahead of the Biden-Xi summit

Equities today: A rise in China Covid-19 infections and the reporting of virus-related deaths for the first time in almost six months have caused investors to worry that China’s normalization could instead be further delayed. In global trading today, major Asia stock markets closed mixed, Europe was up at midday. U.S. Dow opened up around 200 points higher. 

     U.S. equities yesterday: U.S. stock indices opened the holiday-shortened week with losses. The Dow was down 45.41 points, 0.13%, at 33,700.28. The Nasdaq dropped 121.55 points, 1.09%, at 11,024.51. The S&P 500 fell 15.40 points, 0.39%, at 3,949.94.

     Disney shares surged as much as 10% on Monday before ultimately settling into a 7% rise as investors proved optimistic on the homecoming of the company’s longtime CEO Bob Iger.

Agriculture markets yesterday:

• Corn: December corn fell 8 1/4 cents to $6.59 1/2, while March corn fell 6 1/2 cents to $6.63 1/2, a one-week low.
• Soy complex: January soybeans rose 8 1/2 cents to $14.36 3/4, after dropping as low as $14.17 3/4 earlier Monday. January soymeal rose $1.90 to $408.00. January soyoil rose 12 points to 70.73 cents.
• Wheat: March SRW wheat fell 3 3/4 cents to $8.18 1/4, the lowest close since Sept. 1. March HRW wheat fell 1 cent to $9.22 3/4. March spring wheat fell 5 cents to $9.53 3/4.
• Cotton: December cotton fell the initial daily limit of 400 points to 81.16 cents, the contract’s lowest closing price since Nov. 2. March cotton fell 400 points to 79.78 cents.  
• Cattle: February live cattle rose 87.5 cents to $156.725, the contract’s highest close since Oct. 27. January feeder cattle rose $1.85 to $182.625, the highest close since Sept. 20.
• Hogs: February lean hogs rose $60 cents to $90.15. The CME lean hog index fell 37 cents to $87.77 (as of Nov. 17), the lowest level since February.
   

Ag markets today: Corn, soybean and wheat futures held in tight trading ranges while swinging to both side of unchanged during the overnight session. As of 7:30 a.m. ET, corn futures were trading around a penny higher, soybeans were 2 cents lower to fractionally higher and wheat futures were 2 cents lower to a penny higher. Front-month crude oil futures were around $1 higher and the U.S. dollar index was more than 350 points lower this morning.

Technical viewpoints from Jim Wyckoff:

On tap today:

     • Cleveland Fed President Loretta Mester speaks. (11 a.m. ET)
     • St. Louis and Kansas City Fed presidents James Bullard and Esther George speak. (2:45 p.m. ET)

A Fed rethink? Federal Reserve officials, after an aggressive path of rate increases this year, are starting to take a closer look at how the economy is reacting to more restrictive monetary policy. The Fed has raised rates by 0.75 percentage point at each of the last four meetings in an attempt to cool inflation. On Monday, San Francisco Fed President Mary Daly pointed to the risks that officials raise interest rates too high, which could cause unnecessary damage to the economy. So far, higher rates have shown up in financial markets in the form of higher mortgage rates and tighter financial conditions but they have yet to fully percolate down to the real economy, she said. “The real economy takes longer to adjust,” she said. “Overlooking this lag can make us think we have further to go when, in reality, we just have to wait for earlier actions to work their way through the economy.” As the Wall Street Journal notes: “That doesn’t mean Fed officials are ready to stop raising rates. Several Fed officials in recent weeks have said they see rates going up further but perhaps at a slower pace. It does suggest, however, that the Fed is in a new phase in its effort to tighten policy, one where it is starting to look out for signs it risks overshooting.”

     Investors looking for signs that central banks are starting to ease off aggressive rate increases should look to emerging market central banks rather than the Fed, particularly those in South America, the WSJ reports (link). Countries such as Brazil, Chile, Colombia and Hungary started raising rates months before the Fed and are now in a position to lower them, which would give their economies a boost.

    
     Countries

OECD to EU: Take rates higher. The Organization for Economic Cooperation and Development (OECD) said the European Central Bank needs to raise its key interest rate much further if it wants to bring down inflation. Higher rates will be necessary to support the euro against the dollar and to keep food prices from rising too far.

     The OECD also said it expects the global economy will avoid a recession next year.\

Investor buying of homes fell 30% in the third quarter as higher mortgage rates and home prices start to affect these buyers just as they've held back traditional buyers. Companies bought around 66,000 homes in 40 markets tracked by Redfin during the third quarter, down from 94,000 in the same quarter a year ago.

Market perspectives:

     • Outside markets: The U.S. dollar index was weaker with strength in the euro and British pound versus the greenback. The yield on the 10-year U.S. Treasury note was nearly unchanged around 3.81%. Crude is higher, with U.S. crude around $81.25 per barrel and Brent around $87.90 per barrel. Gold and silver futures are higher, with gold around $1,748 per troy ounce and silver around $21.28 per troy ounce.

   • Saudi Arabia and other OPEC oil producers are discussing boosting oil output, a move that could lower prices and help heal a rift with the Biden administration amid new attempts to blunt Russia’s oil industry, the WSJ reports (link). Delegates are considering raising output by up to 500,000 barrels a day. The move could come the day before the European Union is set to impose an embargo on Russian oil. The article jolted the crude oil markets at around 9 am ET. U.S. benchmark crude oil prices fell more than 5% in response, to about $75 a barrel. (Chart: Axios)

     • Rail strike looms. One of the two largest railroad unions said Monday it had rejected a new labor deal brokered by the White House, inching closer to a strike that could disrupt supply chains in December. The other union voted to ratify it. Unions and railroads are back at the negotiating table. By law, Congress can intervene to impose an agreement if the two sides remain deadlocked. A rail shutdown could further upend supply chains. The SMART Transportation Division said it would head back to the negotiating table with railroads with a goal of reaching a deal by Dec. 8. If no agreement is reached, the union could strike Dec. 9. However, the Brotherhood of Railroad Signalmen (BRS) is on a schedule where their cooling-off period ends Dec. 4, opening the way for a strike Dec. 5. Eight of the industry’s unions have ratified the contract. But if one group strikes, others say they won’t cross picket lines. The BRS has not yet said that they will extend their cooling-off period to match the Dec. 8 timeline for the SMART TD union. If the BRS does not move back their potential strike date, railroads would start making plans for the strike right after Thanksgiving.

        “A strike would cause enormous disruption to the flow of goods nationwide, the effects of which would ripple through the supply chain and the U.S. economy at large,” the Retail Industry Leaders Association said in a statement.

        Said the National Retail Federation: “American businesses and families are already facing increased prices due to persistent inflation, and a rail strike will create greater inflationary pressures and will threaten business resiliency. Congress must intervene immediately to avoid a rail strike and a catastrophic shutdown of the freight rail system.”

        “I’m hoping the railroads will get reasonable, this is the 21st Century and to have skilled workers being denied sick leave, even unpaid sick leave, is unconscionable,” Rep. Peter DeFazio (D-Ore.), chair of the House Transportation and Infrastructure Committee, said in an emailed statement Monday. “Freight rail companies are watching their record profits, ‘Oh my God, if we give people paid sick leave our stock might drop by a dollar.’ Give me a break.”

        Bottom line: If the parties can’t come to an agreement, Congress will likely be forced to step in. If so, some union officials are hoping lawmakers will impose the terms of tentative agreements that the unions reached separately with employers, rather than the set of recommendations put out by the president’s emergency board in September. Shippers are beginning to make plans to work around a potential work stoppage. As was the case before a potential strike in September, railroads could start restricting shipments right after Thanksgiving to ensure that volatile materials aren’t sitting unsupervised on idled rail cars for long periods in case of a shutdown. A railroad strike could cost the U.S. economy more than $2 billion a day, according to the Association of American Railroads.

     • Port of Mobile, Ala., dockworkers plan to strike at breakbulk operations starting today. Link for details.

     • The U.S. is stocking up on Brazilian orange juice after Hurricane Ian and disease devastated citrus groves in Florida, the top producing state for the popular breakfast beverage. Link for details via Bloomberg.

     • Ag trade: Taiwan purchased 43,400 MT of U.S. milling wheat.

     • NWS weather: Rain/snow spreads from Pacific Northwest to Northern/Central Plains... ...Temperatures remain below average across Southern Plains; Northern/Central Plains, Midwest and West Coast warm up... ...Heavy rain potential for Southern Plains and Lower Mississippi Valley on Thanksgiving.

Items in Pro Farmer's First Thing Today include:

     • Light two-sided trade overnight
     • China increases shutdowns as Covid cases rise (details in China section)
     • Analysts: China’s Covid resurgence delays oil demand recovery to after Q2 2023
     • HRW CCI rating declines, SRW rating inches up
     • Cold Storage report out this afternoon
     • Cash hog/pork fundamentals weaken
     • Cash cattle price inches higher

— Summary: The World Health Organization warned that Ukraine faces a “devastating energy crisis” this winter. That will severely test the country’s health service, which lacks fuel, water and electricity. Some 10 million people, a quarter of the population, do not have access to power as Russian strikes have halved the country’s generating capacity. The country’s president, Volodymyr Zelenskyy, asked Ukrainians to conserve energy, with power cuts expected until March. As winter temperatures in Ukraine fall below -20°C (-4°F), local authorities told citizens in Kherson, a recently liberated Ukrainian city with severely damaged infrastructure, that they may be evacuated to other regions.

• The U.S. has launched a quiet push to get Russia’s major trading partners to enforce sanctions and trade controls as exports to the country pick up, the WSJ reports (link). So-called sanctions leakage, in which weak enforcement enables banned finance and trade to continue flowing, is weakening the West’s campaign to squeeze the Russian economy because of the war in Ukraine.
• Russian companies reduced their foreign currency loans by $7.4 billion last month and have also cut forex holdings on the accounts by $11.1 billion, the central bank said on Monday. Link for details via Reuters.
• Russia threatens to reduce gas exports to Europe further. Possible cut puts in doubt one of the last remaining Russian gas-supply routes to Europe. On Tuesday, Gazprom said that Ukraine was withholding Russian gas destined for neighboring Moldova. The Kremlin-controlled exporter said it would curb some of the flows to Ukraine from Monday if the issue wasn’t resolved.
• The intensity of Russia’s war in Ukraine has raised questions about how long it can continue. Both sides have suffered heavy losses of men and materiel since the invasion began in February, but Moscow is more dependent on its own shrinking economy to replenish supplies than Kyiv is. Western and Ukrainian officials and military analysts say there have been indications that Russian stocks of certain critical weapons systems, including precision missiles, are running low. The WSJ reports that one wild card is the significance of Russian imports of weaponry from Iran. Ukraine’s military said it launched an operation to push Russian forces from the Kinburn Spit, a peninsula on the country’s Black Sea coast that lies at a maritime choke point.
  
  Bottom line: Russia still controls about 17% of Ukrainian territory, mainly in the east and south, and both sides are gearing up to keep fighting well into next year.
  
   

— ERP payments up slightly. Payments under the Emergency Relief Program (ERP) totaled $7.16 billion as of Nov. 20, up from $7.1.5 billion the prior week. Payments for non-specialty crops now total $6.13 billion ($6.12 billion prior) with specialty crop payments at $1.03 billion ($1.02 billion prior).

— Cargill Chief Operating Officer Brian Sikes will take over as CEO of the agriculture commodities giant at the start of 2023. Cargill’s current CEO, David MacLennan, will take over the role of executive chair of Cargill’s board on Jan. 1 and ahead of the company’s customary retirement age of 65; MacLennan is 63. Sikes, 54 years old and a 31-year company veteran, will become the 10th CEO in Cargill’s 157-year history. Before being elevated to COO in 2021, Sikes led Cargill’s protein and salt businesses. He began his career with Cargill in 1991, worked across its meat and food service businesses, and joined the company’s executive team in 2019. He also previously led Cargill’s global talent management.

— China increases shutdowns as Covid cases rise. Beijing shut parks, malls and museums on Tuesday while more Chinese cities resumed mass testing for Covid-19. Some analysts are saying 20% of China’s economy is being negatively impacted by the Covid lockdowns. China reported 28,127 new domestically transmitted cases for Monday, nearing its daily peak from April, with infections in the southern city of Guangzhou and the southwestern municipality of Chongqing accounting for about half the total. The wave of infections is testing recent adjustments China has made to its zero-Covid policy, aimed at making authorities more targeted in clampdown measures and steering them away from blanket lockdowns and testing that have strangled the economy and frustrated residents.

— Analysts: China’s Covid resurgence delays oil demand recovery to after Q2 2023. Analysts are cutting forecasts for China’s year-end oil demand after Covid-19 cases surged to near record levels, forcing authorities to reinstate mobility curbs, and delaying recovery at the world's top crude importer. “We cautiously lower our expectations for China demand by 1.2 million barrels per day (bpd) in 4Q ’22,” Goldman Sachs analysts said in a note. “Confidence remains high in a 2Q 23 China reopening.” Sun Jianan, an analyst with consultancy Energy Aspects, also revised down China’s oil demand forecasts, by 200,000 bpd for November and December, and 190,000 bpd for the fourth quarter to 14.45 million bpd.

— China turns to an old friend in corporate America to bolster communications with the U.S. The Wall Street Journal reports (link) that a few days before Chinese leader Xi Jinping’s summit last week with President Biden, Beijing dispatched a delegation of senior policy advisers and business executives to New York to meet with a U.S. counterpart group set up by insurance executive Maurice “Hank” Greenberg. Such a high-level group hasn’t come to the U.S. since the Covid-19 pandemic started, and in that time, U.S.-China relations plunged. Distrust between the two countries is still high, but Xi’s approval of the delegation’s visit signals his intention to prevent the relations from going off the rails and to find a way to communicate.

— Chinese officials begin meeting with counterparts from U.S. Defense Secretary Lloyd Austin met his Chinese counterpart, Wei Fenghe, for the first time in months.

     Meanwhile, Germany is considering requiring companies with large exposure to China to disclose their reliance on the country.’

— Global trade map is tilting toward the trans-Atlantic. Trade and investment between the U.S. and Europe is booming as Russia’s war in Ukraine and fraying ties between the West and China draw the Atlantic allies closer. The WSJ reports the U.S. has imported more goods from Europe than from China this year, with Swiss watches, German machinery, Italian luxury items, money and other products flooding across the Atlantic as never before. The shift is helping Europe’s embattled manufacturers and pushing East Coast ports ahead of their West Coast counterparts in import volumes after years of Asia’s ascendance. Container imports into major East Coast ports were up 3.4% year-over-year in September while the inbound volume dropped 17.8% at West Coast ports, according to the Pacific Merchant Shipping Association, as labor tensions at Pacific ports and the burgeoning trans-Atlantic relationship start to reset supply chains.

— Biden administration grants $1.1 billion in credits to keep California's Diablo Canyon nuclear plant open. The Department of Energy (DOE) awarded credits valued at up to $1.1 billion to help keep California’s only operating nuclear energy facility open, the Diablo Canyon Power Plant. Pacific Gas and Electric Company (PG&E) had planned to shutter and begin decommissioning Diablo Canyon’s two reactors in 2024 and 2025, but this fall California enacted legislation providing the company with a $1.4 billion loan to support the continued operation of the plant for another five to 10 years. The move came after data showed closing the plant prematurely would inhibit the state’s ability to reach new clean energy goals and increase the risk of blackouts during times of high demand.

     Details: The DOE action is under the first round of its $6 billion Civil Nuclear Credit (CNC) Program that is funded under the Bipartisan Infrastructure Law. Final terms of the award are subject to negotiation and finalization by DOE. Diablo Canyon produces about 15% of California’s clean energy and nationwide, nuclear power provides 50% of U.S. carbon free electricity. However, early closures of 13 commercial reactors in the U.S. have taken place since 2013.

— Brazil to keep 10% biodiesel mandate in place through March. Brazil’s mandatory blend of biodiesel in diesel fuel will stay at 10% through March 31, 2023, according to the Brazilian Mines and Energy Ministry, but will increase April 1 to 15%.

     The new Brazilian administration that takes office in January could change the action.

     Another determination: Biodiesel produced via “any technological route of production” would be allowed in the fuel mixture but the oil, gas and biofuel regulatory agency would have to approve the biodiesel used in the blend. With soybean oil accounting for around 70% of biodiesel, some note an increase to 15% would push soybean demand for biofuel to around 30 million tonnes in 2023.

     Biofuel organizations are disgruntled at the determination as it could make R5 diesel (a co-processed fuel with 95% diesel and 5% vegetable oil) produced by Petrobras eligible for the mixture. Biofuel industry officials maintain the Petrobras fuel is not biofuel pointing to the view by ANP, the oil, gas and biofuel regulator, that the fuel is not biofuel.

— Summary:

• Global Covid-19 cases at 638,592,283 with 6,622,280 deaths.
• U.S. case count is at 98,351,547 with 1,077,225 deaths.
• Johns Hopkins University Coronavirus Resource Center says there have been 650,810,290 doses administered, 267,476,279 have received at least one vaccine, or 81.18% of the U.S. population.

— Financial agenda in House next year. Rep. Patrick McHenry (R-N.C.), who is expected to serve as the next chair of the House Financial Services Committee in the next Congress, said in an interview with Punchbowl News that he would likely focus the committee's efforts on financial data privacy, crypto policy, executive oversight and capital formation, the latter of which could receive particular attention via a GOP-led revival of the 2012 JOBS Act that Senate Republicans are calling "Jobs Act 4.0." The committee would also target Consumer Financial Protection Bureau Director Rohit Chopra, whose policymaking regime has drawn the ire of GOP lawmakers and industry groups.
 

— The death toll from the 5.6-magnitude earthquake that shook Indonesia’s main island of Java on Monday rose to at least 268, the country's disaster-management agency said, as workers continued to find bodies under wrecked buildings.

— A federal appeals court will hear arguments today in the Justice Department’s investigation of former President Donald Trump’s handling of classified documents at Mar-a-Lago. The DOJ is arguing for an end to a document-vetting arrangement that prosecutors say has slowed the investigation.

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