Evening Report | October 19, 2022

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Erdogan reaches agreement with Putin to form natural gas hub in Turkey... Turkish President Tayyip Erdogan said on Wednesday he had agreed with Russian leader Vladimir Putin to form a natural gas hub in Turkey. Erdogan said Putin had said Europe can obtain its gas supply from the hub in Turkey. Putin noted the international gas hub would serve not only as a distribution platform, but could also be used to determine gas prices. This seemingly opens the door for Russia to supply gas via the hub by routing payments and clearance through Turkey, while Ankara would become a major player in the EU gas market, benefiting both countries.

This could also lead to Russia seeking a similar deal with Turkey for Russian grain shipments. If that happens, it’s uncertain what would happen with the Ukraine grain export deal that would expire in about a month if it is not extended.

Meanwhile, yUkrainian President Volodymyr Zelenskyy discussed the grain export deal with Erdogan. Zelenskyy wrote on Twitter: “Continued a friendly dialog with President Recep Tayyip Erdogan. Thanked for the unshakable support of the territorial integrity, sovereignty of Ukraine. Noted Turkey’s special role in the Grain Initiative and its continuation. Ukraine-Turkey interaction in the security sphere highly appreciated.”

SovEcon again raises Russian wheat crop estimate, sees much smaller crop in 2023... SovEcon raised its 2022 Russian wheat crop estimate by 600,000 MT to a record 100.6 MMT. The Black Sea ag research firm now forecasts total grain production of 152.0 MMT, up 600,000 MT from its prior estimate. SovEcon’s estimate is based on the areas controlled by Russia at the beginning of the year.

SovEcon expects Russian will “substantially cut winter grain area amid heavy showers in recent weeks and historically low domestic wheat prices thanks to the strong ruble and the export tax.” The firm lowered its planted area forecast by 700,000 hectares to 18.8 million hectares. SovEcon’s initial 2023 wheat production forecast is 84.8 MMT, which would be down 15.8 MMT (15.7%) from this year’s record crop.  

Oct. 1 feedlot inventory expected to be below year-ago... Traders expect Friday afternoon’s USDA Cattle on Feed Report to show the Oct. 1 feedlot inventory down 104,000 head (0.9%) from year-ago, which would be the first year-over-year decline since December 2021. Placements are expected to have declined 3.6% in September, while marketings are anticipated to have increased 4.0% from year-ago.

Beige Book: Economic activity expands moderately, but headwinds persist... The Fed’s Beige Book highlighting economic activity in the 12 districts noted “economic activity expanded modestly on net since the previous report; however, conditions varied across industries and Districts.” Headwinds included “slowing or weak demand attributed to higher interest rates, inflation, and supply disruptions.” Specifically relating to agriculture, the Fed noted “reports were mixed, as drought conditions and high input costs remained a challenge.”

Fed districts directly addressing agriculture included:

Atlanta: “Agricultural conditions in the District were mixed. Cotton growers noted some softening, which was attributed to slowing demand for textiles. Cattle ranchers reported strong sales and increased prices for livestock. Demand for chicken was strong amid reports of domestic consumers trading down from other protein sources; however, poultry exports weakened due to concerns by foreign importers over avian flu outbreaks. Row crop production remained solid, but farmers were hesitant to invest in equipment amidst concerns over future crop demand.”

Chicago: “Income expectations for agricultural producers in 2022 were unchanged over the reporting period, with a profitable year expected for most despite elevated input costs. Contacts were optimistic that corn and soybean yields would be better than had been expected this summer, even with drought in parts of the District. Corn and soybean prices moved higher during the reporting period. Shipping costs, however, were elevated due to reduced barge capacity from low river levels. Dairy prices, most notably for butter, and egg prices, were up as well. Hog and cattle prices declined.”

St. Louis: “District agriculture conditions have declined modestly since our previous report. Production and yield forecasts declined for corn, rice, and soybeans from August to September. Crop yields have remained stable for corn, fallen for rice and soybeans, and improved for cotton from August to September. However, crop yields have fallen consistently compared with 2021. District production and yields have been affected by extreme weather conditions such as drought, flood, strong winds, and hail. Agriculture contacts remain concerned about rising input prices, global supply chain disruptions, and the extremely competitive nature of the current labor market. Fertilizer prices are up 30% in 2022 after increasing 80% in 2021. Supply chain issues have continued to be a challenge, with one grain processer reporting waits of 48-50 weeks for packaging materials. Contacts do not foresee these conditions changing for the next 6 months.”

Minneapolis: “District agricultural conditions improved modestly and remained strong overall heading into harvest season, even as elevated input costs bit into producer margins. Early indications pointed to solid harvests and good crop conditions throughout most of the District, with the exception of portions of Montana heavily affected by drought.”

Kansas City: “Financial conditions remained strong due to still elevated crop prices. However, contacts reported several adverse developments tied to drought and input costs. At the start of the fall harvest season, nearly one-third of corn and soybean crops were in very poor condition in some District states, heightening concerns about reduced yields. Exceptionally dry conditions also contributed to lower river levels, higher transportation costs, and lower crop prices in some areas in September. In the livestock sector, hog prices declined moderately over the past month, but remained slightly above year-ago levels. Cattle prices continued to increase alongside reports of additional herd liquidations, due, in large part, to higher feed and transportation costs.”

Dallas: “Significant rainfall early in the reporting period greatly improved drought conditions across much of the district, though soil moisture has begun worsening again in recent weeks. Many areas experienced little-to-no row crop production as a result of the drought, causing fields to be plowed under. Significant culling of cattle herds continued, though the pace slowed slightly as much-needed rainfall greened up pastures.”

San Francisco: “Conditions in the agriculture and resource-related sectors worsened somewhat. Overall demand for produce, fruits, and seafood was unchanged. However, labor shortages, transportation delays, elevated input prices, drought conditions, and wide temperature fluctuations continued to hinder production, especially for cherries, pears, and apples. Weaker global activity and an appreciating dollar reduced demand in international markets for domestic agricultural products, especially wheat, nuts, raisins, and tree logs. One producer mentioned that increased energy costs in Europe have prevented European farmers from refrigerating and storing fresh fruit, increasing their immediate supply in the region and heightening competition in export markets.”

Senate skeptics of Kroger/Albertsons merger announce hearing... Two U.S. senators said they will hold a hearing in November on Kroger’s planned $24.6 billion takeover of Albertsons that would highlight its impact on competition among grocery stores. Sens. Amy Klobuchar (D-Minn.) and Mike Lee (R-Utah), the top Democrat and Republican on the Senate Judiciary antitrust panel, expressed “serious concerns about the proposed transaction” in a statement announcing the hearing Tuesday.

Separately, in a joint letter to the U.S. Federal Trade Commission (FTC), Klobuchar and two other Senate Democrats asked the agency to closely scrutinize the deal, saying it “raises considerable antitrust concerns… The grocery industry is essential to daily life, and Americans need the benefits that robust competition bring,” they wrote.

The Senate antitrust panel has no authority over merger reviews, but often holds hearings on high-profile deals. It also makes recommendations on the FTC’s funding for antitrust enforcement actions. Klobuchar and Lee back legislation that would increase the amount of money that companies pay for merger reviews to better fund antitrust enforcement.

The deal is likely to face a tough review at the FTC where Chair Lina Khan has expressed skepticism about grocery mergers that rely on spinoffs to preserve competition in select markets. The agency in 2015 allowed Albertsons to buy Safeway Inc. on condition that it divest 168 stores.

Goldman Sachs CEO: ‘Good chance’ of U.S. recession... There’s a “good chance that we have a recession in the United States,” Goldman Sachs CEO David Solomon said Tuesday. Solomon is the latest investment bank leader to offer a gloomy economic outlook as the Fed aggressively raises interest rates to tame inflation that hovers at its highest level in more than 40 years.

Inflation drives big changes in IRS tax levels for 2023... Record-high inflation translated to some big hikes in the Internal Revenue Service’s dozens of new inflation adjustments affecting individual income tax brackets, deductions and credits for 2023. The IRS will allow Americans to shield more of their income from taxes in 2023, raising income thresholds for all tax brackets. The top tax rate of 37% will apply to individuals with income exceeding $578,125 and married couples filing jointly with income more than $693,750. Both of those amounts are up 7% from 2022 to track with increases in the consumer price index. The estate tax threshold increases to $12.92 million for 2023; double for spouse.