Evening Report | May 12, 2022

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Wheat explodes higher after bullish USDA data... USDA’s May crop reports featured the first official 2022-23 balance sheets and its initial 2022 winter wheat crop estimates. It was the winter wheat crop that caught traders by surprise, especially the HRW estimate, which came in 95 million bu. lower than the average pre-report estimate. USDA’s old- and new-crop wheat ending stocks forecasts were also lower than anticipated. The bullish data sparked a surge in the wheat market, including new contract highs in HRW and HRS futures.

The corn and soybean ending stocks data was generally neutral – even a little negative for old-crop corn – but both markets followed wheat higher, though gains weren’t nearly as strong.

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Drought footprint for winter wheat gets a little smaller... Based on U.S. Drought Monitor data as of May 10, 68% of the U.S. winter wheat crop area was experiencing drought. That was down one percentage point from the previous week. USDA classified the drought as 19% “moderate,” 27% “severe,” 19% “extreme” and 3% “exceptional.”

Across HRW areas, dryness/drought covers 89% of Texas (down nearly two points from the previous week), 60% of Oklahoma (down 17 points), 72% of Kansas (down three points), 100% of Colorado (unchanged), 98% of Nebraska (unchanged), 76% of South Dakota (down six points) and 93% of Montana (unchanged).

The Drought Monitor commentary noted: “In the South, drought-related conditions improved in eastern Oklahoma and areas of northeastern Texas. In eastern Oklahoma, very heavy rainfall accumulations (ranging from 3 to 8+ inches) led to improvements on the map. However, this week’s heavy rains largely missed the western part of the state. Likewise, much of the western half of Texas was very dry combined with extreme heat, leading to further expansion of areas of Extreme Drought (D3) and Exceptional Drought (D4).”

In the High Plains region, the commentary stated, “Improvement in drought conditions continued on the map in areas of eastern Kansas, Nebraska and eastern South Dakota where another round of storms helped to alleviate short-term deficits as well as provide a modest boost to soil moisture levels and streamflows. However, the longer-term impacts of the drought in western portions of the region are still causing impacts including areas with poor pasture and rangeland conditions and low stock pond levels.”

For other crops, USDA estimates the drought footprint at 21% for corn (down two points from the previous week), 12% for soybeans (down two points), 35% for spring wheat (unchanged) and 56% for cotton (unchanged).

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Smaller Argentine wheat crop expected in 2022-23... The Buenos Aires Grain Exchange projects Argentina’s wheat crop will fall to 20.5 MMT in 2022-23, down from 22.4 MMT this year. The exchange expects the area sown with wheat will decline by 1.5% to 6.6 million hectares, due to a growth in seedings of other crops with higher profit margins, such as soybeans and sunflowers. It also expects wheat yields to fall due to the use of less inputs amid high prices.

USDA’s initial 2022-23 Argentine wheat crop projection is 20 MMT. The Rosario Grain Exchange projects Argentina’s wheat crop will fall to 19 MMT next year.

EWG report: Crop insurance premiums could skyrocket as climate change intensifies... Taxpayers covered nearly $40 billion in crop insurance premiums in the Mississippi River region between 2001 and 2020, and that number is expected to increase sharply as climate change intensifies, according to an analysis of USDA data by the Environmental Working Group (EWG). “The federal Crop Insurance Program must be reformed to encourage farmers to adapt to a rapidly changing climate before costs spiral even more out of control,” said Anne Schechinger, EWG’s Midwest director and author of the report. The report predicts that if the climate warms by 1-degree Celsius, premium subsidies could increase 22%. With 2 degrees of warming, that increase could be 57%.

“As the USDA evaluates all of its programs for how they could better support climate adaptation and mitigation, the agency should be taking a long hard look at the Crop Insurance Program,” Schechinger said. In the 20-year period analyzed by EWG, Illinois, Iowa, Minnesota, and South Dakota received the most money in premium subsidies — more than $22.9 billion combined, or about 58% of total premium subsidies in the MRCCA — Mississippi River Critical Conservation Area, a USDA-designated “area of focus” encompassing more than 387 million acres in about 1,000 counties across 13 states.

Comments: One policy analyst commented: “EWG has been discredited so many times. Crop insurance consistently operates under budget. The FY [fiscal year] [20]23 budget provides $13 billion total for all commodities, including livestock and dairy. If EWG were serious about saving money from crop losses it would stop trying to block crop protection products that limit crop losses due to drought and pests. Without those products, imagine what crop insurance would cost? If EWG cared about climate, it would stop blocking these crop protection products that allow farmers to plant cover crops and to do no till farming and other things EWG should want to encourage. This cognitive dissonance of EWG is just an example of why nobody takes EWG seriously.”

U.S. producer inflation slows, but still elevated... The Labor Department said the producer price index (PPI), which generally reflects supply conditions in the economy, increased a seasonally adjusted 0.5% in April from the prior month, which was in line with expectations. That marks a deceleration from the upwardly revised 1.6% gain in March. April’s rate of increase was the lowest since September 2021 but was higher than the average monthly gain of 0.2% in the two years before the pandemic. Producer prices rose 11% on a 12-month basis in April, its fifth consecutive double-digit gain, easing from an upwardly revised 11.5% record increase the prior month.

How unhappy are Americans about inflation?... Consider this from the New York Times: “Americans are unhappy about the economy. They report less confidence in it than they did at the start of the Covid pandemic, when the unemployment rate was four times as high as it is now. Their feelings toward the economy are almost as low as they were during the depths of the Great Recession in 2008.”

Unlike unemployment, inflation affects everyone. And people encounter it every day — when they go to the grocery store, fill up at the gas pump or buy almost anything. “Inflation is no longer just contained to the supply chain — these pressures are actually becoming more broad-based,” said Aneta Markowska, chief financial economist at Jefferies LLC, referring to disruptions in goods supplies that initially drove the run-up in prices.

Gov’t budget deficit shrinking... The U.S. federal government’s budget deficit has shrunk by some $1.57 trillion so far this fiscal year, driven by record receipts from a strong economy and a slowdown in spending as pandemic-era programs fade. The deficit dropped to $360 billion over the seven months from October through April 2022, according to Treasury Department data released Wednesday. The Treasury Department said government revenue from taxes and other receipts for the month rose by 97% from a year earlier to $864 billion while federal outlays in April fell by 16% to $555 billion, reflecting a decline in pandemic-related spending. April’s $308 billion surplus was the largest recorded in a single month, though surplus and deficit amounts aren’t adjusted for inflation.