Evening Report | July 22, 2022

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Wheat hedgers: Reestablish 2022-crop hedges… When we claimed profits on the 2022-crop hedges earlier this week we said we would reestablish them if support at the recent lows was violated. That has happened, which opens sharp downside price risk. As a result, we advise wheat hedgers to hedge 15% of 2022-crop in short December SRW futures. This pushes coverage back to 100% on 2022-crop. Our fill was $7.83.

Your Pro Farmer newsletter is now available... Forecasts signal some areas of the U.S. will get relief from recent extreme heat, though it could be temporary. The extended forecast from the National Weather Service calls for above-normal temps to continue through the end of the growing season, while much of the western and central Corn Belt is expected to also see below-normal rainfall. The U.S. corn and soybean crops are rated highly as of mid-July, but timing of August and September rains will be critical in how both crops finish. While markets are focused on weather and crop conditions, prospects for resumption of Ukrainian grain exports and the macroeconomic situation are also influencing price movement. Our News page 4 feature takes a look at the Fed’s fight against inflation and how that could impact economic growth. We cover all of these items and much more in this week’s newsletter, which you can access here. 

Ukraine grain export deal signed; implementation critical to success... Under the deal signed today, safe passage into and out of ports would be guaranteed in what one official called a “de facto ceasefire” for the ships and facilities covered, although the word “ceasefire” was not in the agreement text. Ukrainian operators will guide ships along safe channels in its territorial waters. Monitored by a Joint Coordination Center based in Istanbul, the ships would then transit the Black Sea to Turkey’s Bosphorus strait and proceed to world markets, UN officials said. A parallel agreement will facilitate Russian grain and fertilizer exports. The agreements are in force for 120 days and are renewable.

Key remaining issues:

• Even with the signed deal, logistical and geopolitical hurdles remain. Implementation will be critical. A signed deal and actual exports are two very different things.
• How much of the roughly 20 million metric tons of grain stuck at Ukraine’s ports has already been sold by Russia?
• Russia pledged to not target vessels carrying Ukrainian grain, but will it attack export facilities?
• In the past, Russian President Vladimir Putin has said Ukraine will sell grain to buy weapons. We doubt his stance has changed and therefore, it’s doubtful Russia will allow heavy exports of Ukrainian grain.
• Difficulty in getting this grain export deal means overall peace is nearly impossible.

Interest among insurers in covering Ukraine grains cargoes... A number of insurance underwriters are interested in providing cover for grain shipments from Ukraine after an agreement was reached to re-open Black Sea ports although details need to be worked out, a senior London marine insurance market official said. “There are a number of underwriters who have expressed an interest in writing this risk and one or two brokers also. It may well be a consortium that is formed,” Neil Roberts, head of marine and aviation with the Lloyd’s Market Association, told Reuters. But he also noted ships that could transport Ukrainian grain are expected to be weeks away.

“A number of things are still to be resolved and underwriters will need to assess voyages individually,” said Roberts, whose association represents the interests of all underwriting businesses in the Lloyd’s of London insurance market.

Cattle Inventory Report: U.S. cattle herd continues to contract... USDA estimated the July 1 U.S. cattle herd at 98.8 million head, down 2 million head (2.0%) from year-ago, though that was 117,000 head more than the average pre-report estimate implied. The beef cow herd dropped 750,000 head (2.4%), while the milk cow inventory fell 50,000 head (0.5%). USDA estimated the 2022 calf crop at 34.6 million head, down 485,000 head (1.4%) from year-ago.

The smaller beef cow inventory and a 150,000-head (3.5%) decline in the number of heifers held back for breeding signals the contraction phase will continue. Previous cattle liquidation phases where we’ve seen the July herd drop 2.0 million head or more, the January population declined about another 1.5 million. That suggests a January 2023 population would total around 90.4 million head.

USDA revised its estimates of July 2021 other heifers (up 100,000 head), steers (up 100,000 head) and calves (up 300,000 head), which suggests the feeder cattle supply isn’t as tight as some believe.

Cattle on Feed Report: Mostly neutral... USDA estimates the July 1 feedlot inventory at 11.340 million head, up 45,000 head (0.4%) from last year, only 39,000 head more than the average pre-report estimate implied. June placements declined 2.4% versus year-ago, though that was 2.6 percentage points higher than anticipated. Markets rose 2.0% versus June 2021.

Feedlots increased placements of lightweight (under 600 lbs.) and 6-weights by 4.3% and 3.8%, respectively. But placements of all other weight categories declined versus year-ago, with 7-weights down 1.3%, 8-weights down 8.7%, 9-weights down 10.3% and heavyweights down 5.6%. Kansas (down 50,000 head) and Nebraska (down 10,000 head) reduced placements, while Colorado and Texas each placed 10,000 head more cattle into feedlots last month.

Compared to last year, the number of steers in feedlots declined 80,000 head (1.1%), while heifers increased 125,000 head (2.9%).

Cold Storage Report: Record June beef stocks, pork inventory drops less than average... USDA’s Cold Storage Report showed a record amount of beef in storage at the end of June and contra-seasonal increase in stocks. While that could imply sluggish demand, it may also be related to facilities building inventories due to strong exports. Pork stocks declined less than average during June.

Beef stocks totaled a June record of 516.2 million lbs., up 9.9 million lbs. (1.9%) from May. Over the past five years, beef stocks have declined an average of 3 million lbs. during June. Beef inventories topped year-ago by 114.7 million lbs. (28.6%) and the five-year average by 96.1 million lbs. (22.9%).

Pork stocks totaled 541.0 million lbs., down 5.1 million lbs. (0.9%) from May, though the five-year average has been a 25.8-million-lb. decline during the month. Pork stocks topped year-ago levels by 99.1 million lbs. (22.4%) and the five-year average by 12.5 million lbs. (2.3%).

Poultry stocks totaled 1.189 billion lbs., up 59.5 million lbs. (5.3%) from May and 42.4 million lbs. (3.7%) more than last year.

Impasse at the Port of Oakland is deepening, shippers feeling impacts... California Gov. Gavin Newsom says the state is proceeding with the transition toward a new law aimed at “gig economy” work, the Wall Street Journal reports. His administration is effectively digging in against truckers who have said they will keep blocking gates at the port without some action to minimize the impact of the law known as AB5. For now, the protesters are preventing trucks from reaching the West Coast’s third-busiest container port. They are also stopping dockworkers from reaching their posts loading and unloading ships. One state agriculture exporter says two of her shipments for overseas buyers have been tied up in the congestion and that her ability to sell her produce is being undercut by the blockade.

Freight rail service is deteriorating as the sector’s labor tensions simmer... Containers are piling up around the country and trains are waiting for longer stretches at depots, the Wall Street Journal reports, frustrating industrial shippers and exacerbating delays across U.S. supply chains. Railroad executives are citing the tight labor market while existing employees say they are overworked and that wage increases are long overdue. Shippers say they started to suffer substandard service levels last fall and complained to federal regulators about delays disrupting the production and delivery of everything from ethanol to grain and livestock feed. The railroads are reporting higher profits (see below) under the leaner operations known as precision scheduled railroading. But some shippers say their service is getting worse and their costs are increasing, as bunching goods into one shipment rather than multiple loads to meet the rail requirements complicates their operations.

• Union Pacific’s second-quarter operating revenue rose 14% despite a 1% decline in carload volume.
• Second-quarter revenue at CSX rose 28% on pricing and fuel surcharge gains along with the addition of trucker Quality Carriers.
• Maersk Line is warning customers that rail congestion is delaying shipments from Canada’s West Coast to inland destinations.