Evening Report | August 30, 2022

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USDA cuts FY 2022 ag trade forecast, expects deficit in FY 2023... USDA raised its forecasts for ag exports and imports in fiscal year (FY) 2022, calling for a record for both. USDA increased its FY 2022 ag export outlook by $5 billion from May to $196.0 billion, which would be up $23.3 billion from last year. The ag import forecast was raised $11.5 billion to $192.0 billion. That would leave an ag trade surplus of $4.0 billion, down $6.5 billion from the implied level in USDA’s May outlook and $5.4 billion below FY 2021.

USDA’s initial forecast for FY 2023 projects ag exports will decline $2.5 billion from this year to $193.5 billion and ag imports will rise another $5 billion to a record $197.0 billion. That would leave an ag trade deficit of $3.5 billion, the first deficit in two years. USDA said the lower export forecast was primarily driven by lower exports of cotton, beef, and sorghum that are partially offset by higher exports of soybeans and horticultural products. The higher ag import outlook for FY 2023 is due to an expected rise in imports of grains and feed products, horticultural products, and sugar and tropical products.

FAPRI updates ag baseline projections... The Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri provided the following commentary with its August baseline update: “The war in Ukraine and weather‐reduced crop supplies have contributed to higher prices for many agricultural commodities, while higher prices for fertilizer, fuel and other inputs have increased farm production expenses. Projected prices for a range of farm commodities and farm inputs are expected to decline in the years ahead but nominal prices remain high by historical standards. This report, based on information available in mid‐August 2022, updates the 2022 FAPRI baseline outlook prepared earlier this year. Crop production in 2022 is assumed to equal the values reported by USDA in its August Crop Production report and macroeconomic assumptions are based on July 2022 forecasts by S&P Global. Current government policies are assumed to continue, and selected provisions of the recently approved Inflation Reduction Act (IRA) are incorporated along with the 2020‐2022 RFS requirements that were finalized in June 2022. The COVID‐19 pandemic is assumed to continue waning and related supply chain disruptions are anticipated to be resolved in the future.”

Key results include:

• The war in Ukraine has reduced exports by a major grain and oilseed trading country, contributing to higher prices. The baseline assumes the conflict continues to limit Ukraine’s production and trade in the year ahead before an eventual return to normalcy.
• Weather is another factor pushing up crop prices. Unfavorable weather reduced the South American soybean crop earlier this year and has reduced crop production in the United States and Europe this summer.
• Tight global supplies result in record prices for wheat and cotton and near‐record prices for corn and soybeans. For the 2022-23 marketing year, wheat prices are projected to exceed $9 per bu., corn tops $6 per bu., soybean prices are more than $14 per bu. and cotton prices average 96 cents per pound.
• Prices for fertilizer, fuel and many other farm inputs are also up very sharply in 2022. For example, variable corn production expenses increase by an estimated $164 per acre in 2022. Projected input costs moderate in the years ahead but remain well above the 2021 level.
• If better growing conditions result in trendline crop yields in 2023 and later years, crop prices could also decline from current levels. In 2023-24, projected average corn prices drop to $5.22 per bu., wheat falls to $7.11 per bu. and soybean prices decline to $12.36 per bushel.
• Sharply higher feed and other input costs help keep projected total U.S. meat production nearly flat in 2022 and 2023. The last time meat production failed to grow in consecutive years was 2003 and 2004. Strong U.S. consumer demand for meat offsets a decline in exports.
• Drought conditions in important cow‐calf areas are causing producers to send animals to slaughter early, lifting beef production in the short term but leading to fewer cows and higher prices in the years to come.
• The all‐milk price is on pace to reach a new annual record high in 2022 as milk production fails to increase for the first time since 2009. Milk production growth resumes in 2023, but solid international demand for U.S. dairy products should moderate price declines.
• Supply of liquid motor fuels, including biofuels, recovers from pandemic lows. Renewable diesel production is projected to overtake methyl‐ester biodiesel as soon as 2023, and tax credit provisions in the IRA lead to a modest expansion of sustainable aviation fuel production.
• However, the long‐run trend is for lower U.S. motor fuel use, so ethanol and biomass‐based diesel domestic use soften after the near‐term recovery. Foreign income growth and policies, as well as rising petroleum prices, lead to strong U.S. ethanol exports.
• The CPI for food is projected to increase 9.0% in 2022. Food‐at‐home prices increase 10.6%, well above the increase in prices of food away‐from‐home for the first time since 2011.
• The increase in the food CPI moderates to 2.3% in 2023, as commodity prices and food marketing costs decline. This still outpaces the 1.7% average annual increase from 2010‐2019.

To view the full report, click here.

Raimondo: Biden still undecided on Chinese tariffs... President Joe Biden remains undecided about easing tariffs on Chinese imports, as he weighs the possible impact on inflation against the impact on American workers, Commerce Secretary Gina Raimondo said. “He is trying to balance the benefit to inflation from cutting the tariffs against potential harm to U.S. labor,” Raimondo said in an interview cited in the Wall Street Journal. “I know he’s looking at it. He takes it incredibly seriously."

“It all depends on exactly how it is done and on which products…but I think there is merit to it,” Raimondo said Monday. “That decision is with the president himself. We have briefed him a number of times.”

U.S. Trade Representative Katherine Tai has said the tariffs provide leverage in confronting China, which failed to meet goals set by a Trump-era bilateral trade agreement aimed at cutting the U.S. trade deficit.

U.S., Europe expected to take bigger bite of global power battery production by 2026... A lot more of the world’s growing supply of electric vehicle (EV) batteries will be produced by U.S. and European companies by 2026. Honda and LG announced they will spend $4.4 billion to build a new EV battery plant in the U.S., with construction beginning as early as 2023 — part of the race to comply with a new EV tax credit requiring all eligible vehicles be assembled in North America. The joint venture is expected to have an annual capacity of roughly 40 gigawatt-hours, Honda said in a new company filing, with mass production expected to start as early as 2025. The location of the EV battery plant has not yet been decided, though Bloomberg noted earlier this summer that Ohio, where Honda already has a plant, could be a front-runner.

Fed’s Williams: Rates will stay high for a while... Federal Reserve Bank of New York President John Williams said Tuesday the U.S. central bank will need to push its short-term interest-rate target to a point where it will restrain the economy and maintain that stance for a while as part of its bid to lower inflation. “Our focus is on getting inflation back down to 2%” and the current level of price pressures is “far too high,” Williams said at a Wall Street Journal event. To get inflation down in an economy with strong labor markets and continued forward momentum, Williams said the central bank will very likely need to take monetary policy into an area where it holds back economic activity. That could bring the central bank’s interest-rate target range above 3.5%, up from its current range of 2.25% to 2.5%. Williams didn’t comment about the size of the rate rise he would like to see at the Fed’s policy meeting next month, but he pushed back on the idea the central bank might soon be able to reverse course and lower rates. “We’re going to need to have restrictive policy for some time; this is not something that we’re going to do for a very short period of time and then change course,” he said. “We’ll continue through next year” with a restrictive policy stance and “it’s going to take some time before I would expect to see adjustments of rates downward.”