Evening Report | January 30, 2023

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China’s demand for Brazilian corn concerns meat processors... Expected large Brazilian corn exports to China in 2023 are worrying Brazil’s meat companies, according to a statement from Santa Catarina’s meat processors lobby Sindicarne. The group said competition from Chinese buyers is already reducing local supplies and making corn used to feed poultry and pork an “overpriced” commodity.

“Even with the sector being more prepared for negotiations and more attentive to its stocks and purchases, there is always competition from the international market,” Sindicarne said. “For 2023 the signs are worrying.”

According to Sindicarne, which represents global poultry and pork processors including JBS and BRF, the government must also “do its part” to attract investments aimed at reducing Brazil’s logistical bottlenecks. The group said that while Brazil has created a decent logistics network to export grains, there are no railroads connecting grain regions in the center west to southern Brazil, where pork and chicken are typically raised and processed.

 

Another forecast calling for deep cut in Ukraine’s grain production... Ukraine’s grain production is likely to fall to 35 MMT to 40 MMT this year, including 12 MMT to 15 MMT of wheat and 15 MMT to 17 MMT of corn, according to the president of the Ukrainian Agribusiness Club. At that level, Ukraine would be able to export only around 7 MMT of wheat and 10 MMT of corn.

USDA put Ukraine’s 2022 production at 21 MMT of wheat and 27 MMT of corn. It forecasts Ukraine will export 13 MMT of wheat and 20.5 MMT of corn in 2022-23. Those production and export tallies represent significant reductions from 2021-22.

 

Russia seeks ‘new level’ of China ties... Russia said on Monday it wanted to take ties with China to a “new level” and was looking forward to face-to-face talks with Beijing’s leadership. “We are convinced that the potential for Russian-Chinese bilateral cooperation is still far from exhausted,” Russia’s foreign ministry said. The ministry’s comments came after Russia’s Vedomosti newspaper reported that China’s chief diplomat Wang Yi was set to visit Moscow in February. According to the newspaper, Wang may visit Russian President Vladimir Putin during his stay. The purpose of Wang’s visit is unclear but may be related to preparations for an upcoming visit to Russia by Chinese President Xi Jinping, it added.

 

More cattle herd contraction expected... Traders expect USDA’s Cattle Inventory Report on Tuesday will show further contraction of the U.S. cattle herd. Based on an Urner Barry survey, analysts expect the Jan. 1 U.S. cattle herd to be down 2.9% from year-ago, with beef cows/heifers down 4.2% and beef replacement heifers 3.5% under year-ago. The dairy cow inventory is anticipated to be down 0.1%, while milk replacement heifers are expected to rise 0.1%. The annual calf crop is expected to decline 2.6%.

Cattle Inventory

Average estimate
(% of year-ago)

Range of estimates
(% of year-ago)

All cattle/calves (Jan. 1)

97.1

96.7 – 97.5

Cow/heifers that have calved

96.8

96.7 – 97.0

  Beef cows

95.8

95.6 – 96.0

  Dairy cows

99.9

99.0 – 100.5

Heifers 500 lbs.+

97.7

97.0 – 98.3

Beef heifer replacements

96.5

95.8 – 97.5

Dairy heifer replacements

100.1

98.6 – 101.1

Other heifers

97.4

96.0 – 98.9

Steers 500 lbs.+

97.0

95.9 – 98.7

Bulls 500 lbs.+

96.8

96.0 – 97.2

All calves 500 lbs. and under

97.2

96.9 – 97.7

Calf crop

97.4

95.5 – 98.4

 

 

RBC: Lack of layoffs in industrials bodes well for soft landing... With the Fed interest rate decision coming on Wednesday and the January employment data scheduled for Friday, market participants are scanning the labor market for any signs of loosening. As interest-rate sensitive big tech sheds jobs in anticipation of an economic downturn, RBC Capital Markets suggests industrials is the sector to watch.

“It’s worth noting that big spikes in Industrial layoffs occurred during each of the big periods of economic stress that we examined,” writes Lori Calvasina, head of U.S. equity strategy at RBC. “But this time around, industrial layoffs have remained extremely low. The lack of major layoffs in the industrial segment of the economy so far supports the soft landing thesis, in our view.”

 

Even small uptick in unemployment rate can signal recession... Investors who foresee a soft landing for the U.S. economy cite the tight labor market with the unemployment rate at just 3.5% as reason to downplay any recession risk. But a look at the 10 recessions since the end of World War II, excluding 1980 and during the pandemic, shows unemployment does not have to rise much to signal an economic slump, says Joseph LaVorgna, chief U.S. economist at SMBC Group.

With one exception, the unemployment rate rises before the economy peaks. The trough in that rate coincided once with the onset of recession, when it fell to 7.2% in June 1981 and economic activity peaked the next month, with the jobless rate steady, he said. In 1953 and 1969, the unemployment rate increased only one-tenth before the onset of a recession. In 1973, the rate gained just two-tenths, while in 1948, 1957 and 1960 it rose 0.4% before a recession ensued.

More recent recessions have experienced slightly larger increases before the peak in real GDP. The unemployment rate increased 0.5% ahead of the 1990 and 2001 downturns, and there was a 0.6% increase before the 2008-09 recession.

The pandemic and 1980 recessions were not considered because of their unique characteristics, LaVorgna said.

 

Minihan warns of potential war with China by 2025... In a memo, Air Mobility Command head Gen. Mike Minihan warned troops he predicts the U.S. will be at war with China by 2025, NBC reported. The four-star Air Force general predicts Beijing could move on Taiwan next year, when both Washington and Taipei are consumed by elections.

In an internal memo leaked to NBC News, Minihan told his troops: “I hope I am wrong. My gut tells me we will fight in 2025.” The general runs the Air Mobility Command, the Air Force’s tank-refueling operation, and he says in his memo that he wants his force to be “ready to fight and win in the first island chain” off the eastern coast of continental Asia. He called for taking more calculated risks in training.

The Wall Street Journal (WSJ) notes that U.S. Navy Adm. Phil Davidson told Congress in 2021 that he worried China was “accelerating their ambitions to supplant the United States,” and could strike Taiwan before 2027. Gen. Minihan came to his post after a tour as deputy of Indo-Pacific Command. “He like many others suggested that 2025 may be a ripe moment for Chinese President Xi Jinping to move. Taiwan and the U.S. both have presidential elections in 2024 that China may see as moments of weakness,” WSJ notes in a commentary item on the topic.

 

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