Evening Report | July 28, 2022

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Drought footprint largely unchanged but conditions intensified in key areas... As of July 26, 68% of the U.S. was experiencing abnormal dryness/drought, according to the U.S. Drought Monitor, down one percentage point from the previous week. But the Drought Monitory summary noted: “Drought persisted across much of the West this week, while flash drought over parts of the Great Plains, Ozarks, and Mississippi Valley continued to intensify and cause agricultural problems... Conditions locally improved in parts of the Southwest due to an influx of rainfall from the North American Monsoon. Farther east into the lower Great Plains and Midwest, localized heavy rainfall led to improvements, including severe flooding in the St. Louis Metro area, which previously had been experiencing abnormally dry conditions.”

Across the Corn Belt, dryness/drought covers 29% of Illinois (down 7 points from last week), 50% of Indiana (down 19 points), 56% of Iowa (up 9 points), 81% of Kansas (down 1 point), 46% of Michigan (up 5 points), 30% of Minnesota (up 2 points), 66% of Missouri (down 8 points), 89% of Nebraska (up 2 points), 1% of North Dakota (unchanged), 9% of Ohio (down 7 points), 59% of South Dakota (unchanged) and 46% of Wisconsin (up 11 points).

USDA estimates the drought footprint at 29% for corn (unchanged from last week), 26% for soybeans (unchanged), 16% for spring wheat (unchanged) and 70% for cotton (up 4 points).

Click here for the related map and additional details.

Ukrainian grain exports could restart in ‘hours or days’ but ‘crucial’ details still be worked out... The joint grain export coordination center in Istanbul is making efforts to start grain exports from Ukrainian ports as soon as possible, Turkish Defense Minister head Hulusi Akar said today. “The center is actively working. Representatives from Turkey, the Russian Federation, Ukraine and the United Nations are making efforts to start loading grain on ships in Ukrainian ports in the coming hours or days and putting them to sea,” according to ITAR-TASS news.

A UN official said he was hopeful that the first shipment of grain from a Ukrainian Black Sea port could take place as early as Friday, but “crucial” details for the safe passage of vessels were still being worked out. “Without those standard operating procedures, we cannot manage a safe passage of vessels. It’s not just a matter of whether there is a ship, or two, or three available in the ports ready to move out. They need to move safely and that means that we have to be clear where exactly the channel is,” the UN official said.

Meanwhile, Turkish Foreign Minister Mevlut Cavusoglu said on Thursday that following last week’s grain exports deal agreed with Ukraine and Russia, there is a need to focus on a ceasefire between the two countries. Cavusoglu said successful implementation of the grain deal would build up trust between the two countries and could hopefully pave way for a diplomatic solution of the conflict.

HRS Tour: North Dakota spring wheat yield highest since 2015... The average spring wheat yield in North Dakota was estimated at 49.1 bu. per acre by the annual Wheat Quality Council tour. This year’s estimate topped the five-year average of 39.4 bu. per acre and was second only to the 2015 tour estimate of 49.9 bu. per acre. USDA’s first survey-based estimate earlier this month pegged the North Dakota other spring wheat yield at 51.0 bu. per acre.

“There is a lot of potential there, certainly,” Neal Fisher, executive director of the North Dakota Wheat Commission, said of the crop. However, he noted, much of the state’s wheat is developing later than normal. “With six weeks to go until harvest on some of this crop, a lot can still happen,” Fisher said.

Xi warns Biden against ‘playing with fire’ over Taiwan... Chinese President Xi Jinping warned the U.S. against “playing with fire” over Taiwan in today’s phone call with President Joe Biden, as concerns mounted over a possible visit to Chinese-claimed island by U.S. House Speaker Nancy Pelosi. Chinese state media said Xi told Biden that the United States should abide by the “one-China principle” and stressed that China firmly opposed Taiwanese independence and interference of external forces. “Those who play with fire will only get burnt,” Chinese state media quote Xi as telling Biden. “(We) hope the U.S. side can see this clearly.”

The Biden administration has been debating whether to lift some tariffs on Chinese goods as a way to ease soaring inflation, but U.S. officials said a decision on that front has not been made and neither side reported discussions of such in today’s phone conversation.

U.S. economy contracts again in Q2... Gross domestic product fell at a 0.9% annualized rate in the second quarter, according to the initial estimate from the Commerce Department. That followed a 1.6% contraction in the first quarter.

Commerce noted: “The decrease in real GDP reflected decreases in private inventory investment, residential fixed investment, federal government spending, state and local government spending, and nonresidential fixed investment that were partly offset by increases in exports and personal consumption expenditures (PCE). Imports, which are a subtraction in the calculation of GDP, increased.”

The second straight quarterly decline in GDP meets the standard definition of a recession, though the White House and some economists don’t believe the economy is currently in recession given continued strength in the labor market. the National Bureau of Economic Research, the official arbiter of recessions in the United States defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income and other indicators.”

Fed Chair Jerome Powell also said on Wednesday following the latest interest rate increase he didn’t believe the U.S. economy was in recession. The Fed, though, is probably not a reliable recession messenger. The central bank has said it can bring down inflation without sending the economy backward. Many question that. “A big part of leadership is to project confidence,” Michael Arone, a strategist at State Street Global Advisors, told the New York Times’ DealBook. “I have always taken Fed-speak with a bit of salt, but when it comes to a recession, as I told my team this morning, a ton of salt.”

Yellen comments on economy after disappointing GDP data... U.S. Treasury Secretary Janet Yellen said on Thursday the economic contraction in the second quarter was a sign of an inevitable slowdown but there was still broad strength in the economy, especially in the labor market. Yellen did not rule out a possible recession as the Federal Reserve strives to bring down inflation from 40-year highs but refused to concede one was underway after two quarters of GDP contraction. “Most Americans have a similar definition of recession - substantial job losses and mass layoffs, businesses shutting down, private sector activities slowing considerably, family budgets under immense strain ... a broad-based weakening of our economy.” Yellen said. “That is not what we're seeing right now.”

CBO released its July 2022 Long-Term Budget Outlook... Although the Congressional Budget Office’s (CBO’s) extended baseline is based on outdated economic assumptions, it nonetheless shows the federal budget is on an unsustainable long-term trajectory. According to the Committee for a Responsible Federal Budget, CBO’s report shows:

• Deficits and debt are on an unsustainable path. Under current law, CBO projects federal debt held by the public will rise from 98% of Gross Domestic Product (GDP) at the end of Fiscal Year (FY) 2022 to a record 107% by 2031 and 185% by 2052. Deficits will grow from 3.9% of GDP in 2022 to 11.1% in 2052.
• Spending will outpace revenue, and interest costs will explode. CBO projects spending will grow from 23.5% of GDP in FY 2022 to 30.2% in 2052, while revenue will reach only 19.1% of GDP. Interest costs are projected to more than quadruple as a share of the economy, from 1.6% of GDP in 2022 to 7.2% in 2052.
• Major trust funds are headed toward insolvency. CBO projects Highway Trust Fund (HTF) insolvency in FY 2027, Medicare Hospital Insurance (HI) insolvency in FY 2030, Social Security Old-Age and Survivors Insurance (OASI) trust fund insolvency in calendar year 2033, and Social Security Disability Insurance (SSDI) trust fund insolvency in calendar year 2048. On a theoretical combined basis, the Social Security trust fund will exhaust its reserves in 2033.
• The long-term outlook is better than last year’s but still troubling. CBO projects debt will reach 180% of GDP by FY 2051, somewhat lower than the 202% it projected last year. This improvement is due to a combination of higher expected revenue and lower health costs over the next three decades along with lower expected interest rates in the second two decades.
• Debt could grow much faster than projected. Should policymakers extend various expiring provisions and appropriate at higher levels, debt would grow much higher. CBO generates three alternative scenarios that assume higher discretionary spending and lower revenue than in its baseline. Under these scenarios, debt would grow to between 218% and 262% of GDP. Against current law, CBO also finds that higher interest rates or slower growth could boost debt to as high as 235% of GDP.

Bottom line from CBO: “Ultimately, high debt levels will slow income and wage growth, increase interest payments on the national debt, place upward pressure on interest rates, reduce the fiscal space available to respond to an economic recession or other emergency, put an undue burden on future generations, and heighten the risk of a fiscal crisis. Policymakers should work today to get our long-term fiscal house in order.”