Evening Report | July 14, 2022
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Drought area mildly shrinks... As of July 12, 69% of the U.S. was experiencing abnormal dryness/drought, according to the U.S. Drought Monitor, down one percentage point from the previous week, though still 12 points higher than this year’s low in mid-June. This week’s Drought Monitor commentary notes, “An active weather pattern over much of the Midwest and Southeast brought with it ample rain over many areas, with some places recording more than 5 inches for the week. Dry conditions were noted in the Northeast, West, and southern Plains where flash drought conditions were impacting vast portions of Texas, Oklahoma, Arkansas and into the lower Mississippi River valley. Monsoonal moisture continued to be spotty over much of Arizona and New Mexico, reaching into portions of west Texas as well as southern Colorado and Utah. Temperatures were near normal to slightly above over most of the U.S., with cooler-than-normal temperatures over portions of the West, Northeast, and Mid-Atlantic and above-normal temperatures over most of Texas, Oklahoma, Arkansas, and southern Missouri.”
Across the Corn Belt, dryness/drought covers 53% of Illinois (down 15 points), 79% of Indiana (down 15 points), 45% of Iowa (down 5 points), 60% of Kansas (up 4 points), 40% of Michigan (unchanged), 11% of Minnesota (down 6 points), 63% of Missouri (down 1 point), 87% of Nebraska (unchanged), 0% of North Dakota (unchanged), 20% of Ohio (down 16 points), 54% of South Dakota (up 2 points) and 35% of Wisconsin (down 8 points).
USDA estimates the drought footprint at 30% for corn (up 1 point from last week), 25% for soybeans (up 3 points), 17% for spring wheat (down 2 points) and 71% for cotton (up 3 points).
Click here to view related map.
CARB mulling some changes that could impact the soy sector... Traders and analysts earlier this week were discussing whether the California Air Resources Board (CARB) was thinking of cutting back on the use of food oils (soy, canola) for use in generating Low Carbon Fuel Standard (LCFS) credits.
The following are comments on the topic from a soy complex analyst:
“The impact will depend on what CARB does. It sounds like they might be considering a limit on biofuel produced from crops like Europe does. That would limit the amount of soyoil-based biomass-based diesel in the California market. Still, since the RFS governs total biofuel production and there is a limit on fat and grease supplies, it would shift the volume of Soybean Oil Methyl Ester (SME) shipped to California, so I think the impact on soybean oil demand would be relatively minor. They are also considering a change in their carbon intensity targets. That seems like a longer-term (post-2030) change. Still, if they do not adopt the volume cap, they may revise the carbon intensity (CI) score for soybean oil, which would have a more limited impact on soybean oil demand and might even raise demand, given that it would likely raise LCFS credit prices. It also looks like they are considering revising the land use portion of CI scoring, which would likely increase the CI score for soybean oil. Again, I think it would have a relatively minor change in demand for soybean oil and might raise it if the low carbon fuel standard (LCFS) credit prices rise enough to offset the difference in the CI score. There is some minuscule probability they will increase the CI score of soybean oil sufficiently to make it unprofitable to ship SME to California. I do not think they will do that because it would make it difficult to reach their targets. However, even in that case, it would only redirect SME shipments from the California market to other markets.”
No Brazilian corn exports to China until 2023... Brazilian corn may only be shipped to China next year because of demands made by Beijing regarding trade protocols being put in place, an agriculture ministry official was quoted as saying in Valor Economico newspaper on Thursday. Jose Guilherme Leal, ag defense secretary at the ministry, said Beijing requested the monitoring of some weeds and fungi in corn crops, calling it a common request in negotiations of sanitary agreements and protocols.
“The protocol provides for the need for monitoring and information on production,” Leal was quoted as saying. “As we did not monitor the current second corn crop, I reaffirm that exports will only be possible from the 2022-23 summer crop onwards,” he said.
Brazil’s ag ministry confirmed Leal’s remarks in an emailed message to Reuters.
Leal said Brazilian corn growers who want to export to China will have to conform and report the conditions of the crop and the products used to fight pests and diseases. Then the ministry will be able to certify shipments.
U.S. producer inflation jumps more than expected in June... The producer price index (PPI) climbed 1.1% last month after rising 0.9% in May, the Labor Department reported. The PPI increased 11.3% annually, up from a 10.9% advance in May. A 2.4% monthly rise in goods prices accounted for three quarters of the increase in the PPI, with nearly 90% attributed to a 10.0% jump in energy prices. Wholesale food prices edged up 0.1% from May. Excluding volatile food, energy and trade services components, producer prices rose 0.3% in June. The so-called core PPI rose 6.4% after a 6.7% gain in May.
The surge in producer prices came on the heels of stronger-than-expected consumer inflation data on Wednesday. Persistent and climbing inflation is building expectations the Fed will raise interest rates by 100 basis points at the conclusion of its July 26-27 monetary policy meeting.
Yellen: Inflation ‘unacceptably high,’ White House’s top priority... U.S. Treasury Secretary Janet Yellen has warned that inflation in the U.S. is “unacceptably high” and said bringing down rising prices will be Washington’s “top priority.” She said at a news conference in Bali ahead of the Group of 20 finance ministers’ meeting, “We’re first and foremost supportive of the Fed’s efforts; what they deem to be necessary to get inflation under control. Beyond that, we are taking our own steps which we believe will be supportive in the short term to get inflation down — particularly what we’re doing on energy prices and the Strategic Petroleum Reserve. And also the work that we’re doing to institute the price cap on Russian oil and to avoid potential future spikes in oil prices.”
Yellen said she believed it was appropriate the top priority should be to bring down inflation, despite negative impacts sharply tightening monetary policy could have on economic growth.
The surging U.S. dollar will make other currencies comparatively weaker, but could also make their exports cheaper and more attractive. “On the one hand, it can strengthen their ability to export, which is good for their growth. On the other hand, to the extent that countries have dollar-denominated debt, it can make those debt problems — which already are very severe — more difficult,” she said.
IMF warns of negative impact from Ukraine war... The war in Ukraine is clouding the world’s economic prospects for this year and next, the International Monetary Fund (IMF) warned, as the conflict settles into a costly stalemate despite intense fighting on the ground. IMF said it would downgrade its forecast for global economic growth in 2022 and 2023 later this month, in part because of the worsening fallout from the war, which has stoked inflation around the world and worsened existing supply-chain woes. The bank said a possible interruption in Russian natural gas supplies to Europe as the economic war between Moscow and the West intensifies could tip many economies into recession and trigger a global energy crisis.
California trucker protests the latest supply-chain concern, but no impact yet... Truckers servicing some of the busiest U.S. ports are staging protests as state-level labor rules that change their employment status begin to go into effect, creating another choke point in stressed U.S. supply chains. Freight operators across California are bracing for rough roads ahead over the state’s new trucking-employment law. Trucking companies and truck owner-operators say they are trying to figure out how to operate under the measure known as AB5. Transport workers are demonstrating at the California port gateways of Los Angeles, Long Beach and Oakland, the Harbor Trucking Association said in a statement. The protests so far have had no impact on operations at the Los Angeles complex, Executive Director Gene Seroka said.
Thune, Klobuchar Call on USDA to improve disaster assistance (ERP) for producers... Sens. John Thune (R-S.D.) and Amy Klobuchar (D-Minn.), members of the Senate Ag Committee, led several of their colleagues in requesting that USDA Secretary Tom Vilsack address implementation issues with the Emergency Relief Program (ERP), which helps producers offset the impacts of natural disasters that occurred in 2020 and 2021. “USDA’s work in implementing the ERP to help farmers and ranchers who suffered disaster-related losses in 2020 and 2021 has been meaningful to producers around the country,” said the senators. “We appreciate your efforts to streamline the process by allowing the Farm Service Agency to use data already on record with the Risk Management Agency, which has been helpful in expediting the process. We write to bring to your attention issues that have come up with ERP implementation and to request that USDA address these issues expeditiously.”
The letter was also signed by Sens. Kevin Cramer (R-N.D.), Steve Daines (R-Mont.), John Hoeven (R-N.D.), Tina Smith (D-Minn.), and Jon Tester (D-Mont.).
The first issue concerns many producers who, because their cause of loss was attributed to a 2019 event, have Prevented Plant indemnities that were not captured under ERP to receive the top up payments even though farmers suffering losses from the same cause of loss were made eligible because the loss was attributed to a 2020 event.
The second issue concerns how certain producers’ adjusted gross income is calculated in order to be eligible for the higher payment limitation under the program.
The senators also noted they have “heard producers who purchased supplemental crop insurance coverage, such as Supplemental Coverage Option, must wait to receive ERP assistance until the fall, while many producers who did not purchase supplemental coverage may have already received their ERP assistance.”
Comments: It is strange that ERP is there to help producers suffering losses but if the losses are so deep that they have a negative AGI they lose ERP benefits under a technicality. That turns logic on its head. Clearly farm machinery or equipment sales should be counted as farm income but instead farmers must prove 66.66% of income came from farming outside of machinery or equipment sales before such sales can count as farm income. Again, strange ruling. Tax experts have been alerting USDA this is a big problem, and it works an inequity on farmers. Hopefully USDA fixes these and other issues raised by the lawmakers.
Perhaps a slimmed down, slimmed down reconciliation measure sans energy language... That’s the latest possibility that signals a Democrat-only measure could be limited to negotiating Medicare prescription drug costs and extensions for expiring Affordable Care Act/ObamaCare provisions. According to the Congressional Budget Office (CBO), implementing the Medicare prescription drug plan proposed by Senate Democrats would save the federal government nearly $288 billion over a decade while having little impact on the number of new drugs introduced. Some of those savings could be used to shore up Medicare, support ObamaCare premium subsidies or reduce the deficit.
In terms of a timeline, centrist Sen. Joe Manchin (D-W.Va.) this week said Democrats have until Sept. 30 to hold a vote. That’s the day that a budget resolution allowing them to pass legislation with just 50 votes expires.
Another scaled-back measure: USICA/China bill... A plan to pass $52 billion in funding for semiconductor manufacturers instead of a broad U.S./China competition (USICA) package is being pushed by some key Democrats. This legislation could be drafted and passed in the coming weeks. The $52 billion for U.S. semiconductor chip makers could in turn spur tens of billions more in private investment. Senate Minority Leader Mitch McConnell (R-Ky.) said earlier this week he was open to this chips-funding-only approach, as did Commerce Secretary Gina Raimondo on Wednesday. Raimondo today led a classified briefing for House members on the issue.
