Evening Report | May 4, 2022

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Fed raises interest rates, more 50-basis point hikes likely... The Federal Reserve raised its key interest rate by 50 basis points following the two-day Federal Open Market Committee (FOMC) meeting, as expected. The Fed funds rate range is now 0.75% to 1.0%. The rate hike is the first 50-basis point increase in 22 years and comes amid the highest U.S. inflation levels in 40 years.

The FOMC statement said the Fed will continue to raise interest rates as appropriate. Fed Chair Jerome Powell said additional 50-basis-point increases are likely, but downplayed the potential for even larger rate hikes, saying a 75-basis-point hike is “not something the committee is actively considering.” The statement said the Fed's balance sheet would be allowed to decline by $47.5 billion per month in June, July and August and the reduction would increase to as much as $95 billion per month in September.

Powell said inflation levels are “much too high” and spreading but are likely to stabilize soon. However, he does see inflation declining for a while. On the positive side, Powell said the U.S. economy is strong and well positioned to handle more interest rate increases to combat inflation, noting nothing suggests the economy is close to recession. He feels there is a “good chance” for a soft landing for the economy and “plausible path to avoid” a recession.

Powell noted the Fed thinks supply and demand will come back into balance. But a Barron’s headline this morning read: “The Fed’s big hikes won’t fight inflation from soaring oil prices.” The article argues central banks can only control the demand side of the economic equation by raising interest rates – not the supply side.

U.S. trade deficit widens to a record in March... The U.S. trade deficit widened more than expected to a record $109.8 billion in March, up $20 billion from February. Imports jumped 10.3% from year-ago to $351.5 billion in March, while exports increased 5.6% to $241.7 billion – both were record-highs. The data confirmed trade weighed on the economy in the first quarter. The government reported last week a record trade deficit sliced 3.2 percentage points from gross domestic product in the first quarter, resulting in GDP contracting at a 1.4% annualized rate. Trade has subtracted from GDP for seven straight quarters.

The U.S. trade deficit with China widened $3.3 billion in March to $34.0 billion.

U.S. ag trade deficit in March... U.S. ag exports totaled 17.7 billion in March against imports of $17.8 billion for a trade deficit of $118 million. That was down from a surplus of nearly $1.2 billion in February. Through the first six months of fiscal year 2022, ag imports stood at $101.8 billion against imports of $93.1 billion for a surplus of $8.7 billion. USDA forecasts ag exports at $183.5 billion and imports at $172.5 billion, which would imply a surplus of $11 billion.

India cuts wheat crop estimate; uncertainty on export plans... India cut its 2021-22 wheat production forecast to 105 MMT from an earlier projection of 111.3 MMT as hot temps in mid-March reduced yields. Despite the cut to production, India’s food secretary told Reuters, “there is no move to curb wheat exports, as the country has sufficient stocks of wheat.”

But Bloomberg reported the country is considering restricting wheat exports to ensure domestic supplies, citing a source with knowledge of the matter. Top officials are discussing the move and will recommend it to Prime Minister Narendra Modi, who will then make the decision, said the person, who asked not to be identified as the information is private.

Addressing the Indian diaspora in Germany, Modi said Indian farmers are coming forward to sell wheat on the world market as many countries struggle to meet supplies. “Big nations are worried about food security, and at this time India’s farmers are coming forward to feed the world,” Modi said.

Ukraine group: Wheat crop could be ‘close’ to last year... Ukraine’s 2022 wheat crop is likely to be “close” to last year’s 32 MMT output, APK-Inform ag consultancy quoted the National Academy of Agrarian Sciences of Ukraine as saying. “Considering that in April, which is decisive in terms of the yield of winter crops, precipitation exceeded the average long-term norm, farmers will probably be able to get a significant harvest of winter wheat, which will be close to the previous, but not exceed it,” the state-run academy said.

Group sees rising food insecurity risks with Russian invasion potentially making it worse... The annual report from the Global Network Against Food Crises contains forecasts for levels of global food insecurity, but the report cautions the outlooks did not reflect Russia’s invasion of Ukraine. The group noted global wheat output was poised to rise a fourth straight year before the invasion, but that has now created “major uncertainties regarding the production and export capacities of agricultural products from Ukraine due to widespread infrastructure damage and destruction, and from the Russian Federation due to the economic impact of the war.” The report detailed that in 2020, “38 countries/territories affected by food crises received 34% of the total Ukrainian exports of wheat and maize (corn) products. Food-crisis countries also accounted for 73% of Russian exports of wheat.” Some 27 of those received 13.4 MMT of wheat and corn from Russia and Ukraine, with the report noting the largest of those importers were Yemen, Sudan, Nigeria and Ethiopia, “which are consistently among the world’s ten largest food-crisis countries.”

Click here to view the 2022 report briefing and here for the full report.

USDA report highlights hurdles to higher ethanol blends... Biofuel and farm groups see E15 and other higher blends of corn ethanol into gasoline as the strategy to increased sales, but the current structure of the Renewable Fuel Standard “does not serve to incentivize ethanol blends higher than E10,” according to a report from USDA’s Office of the Chief Economist. The report “evaluates market conditions and provides an analysis of barriers for higher ethanol blends, including technical, regulatory, consumer acceptance, and economic challenges.”

The report concludes, “Looking forward, there are concerns about possible ethanol demand reductions given the projected reduction in gasoline demand in the coming decade. Given the decline in FFVs (flex fuel vehicles) and lack of growth in E85 sales, mid-level ethanol blends, in particular E15, are options to expand future ethanol markets. Furthermore, transitioning to ethanol blends between E11 to E25 will be easier and less costly than blends above E25. The current structure of the RFS, combined with the commercialization stage of cellulosic fuels, does not serve to incentivize ethanol blends higher than E10. Federal and State policies are providing incentives for the conversion of refueling infrastructure. Finally, resolution and clarity relative to the permissibility of E15 to be sold year[1]round will have implications for the marketability and expansion of E15. Gas stations are less likely to invest in infrastructure for a fuel that can only be sold for a portion of the year.”

Click here to view the full report.

White House to hold conference on hunger, nutrition and health... The White House will hold the first White House Conference on Food, Nutrition, and Health since 1969, with the event to take place in September. No specific date has been set. The goal of the conference is to rally “public and private sectors around a coordinated strategy to accelerate progress and drive transformative change in the U.S. to end hunger, improve nutrition and physical activity, and close the disparities surrounding them.” There will be public listening sessions leading up to the conference the White House said will allow input from all regions of the United States.