Evening Report | February 16, 2023

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Exchange: Early frost the latest threat to Argentine crops... Early frosts in the coming days could hurt Argentina’s already beleaguered soy and corn crops in southern areas of the country’s main farming region, the Buenos Aires Grain Exchange said Thursday in a report. The exchange says crops are set to endure “cold and dry polar winds that will cause a remarkable drop in temperature, with unseasonably low temperatures, and with the risk of localized frost.”

The exchange rated the Argentine soybean crop 9% good/excellent (down four percentage points from the previous week), 35% fair (down four points) and 56% poor/very poor (up eight points). It rated the country’s corn crop 11% good/excellent (down nine points), 44% fair (down two points) and 45% poor/very poor (up 11 points).

The exchange left its crop estimates at 38 MMT for soybeans and 44.5 MMT for corn but warned it likely will need to further reduce those forecasts, especially for soybeans.

Spring weather outlook offers hopes of improvement for Plains, western Corn Belt... The National Weather Service 90-day forecast continues to give elevated odds of above-normal temps across HRW areas of the Southern Plains through May. But the area expected to see below-normal precip is smaller and has shifted west to cover only the far southwestern portion of the region. Areas of the Central Plains and Northern Plains are expected to see “equal chances” for above-, below- and normal precip from March through May. Equal chances of temps are forecast for most of those areas, though North Dakota through the Pacific Northwest are likely to be colder than normal.

NWS says spring weather is likely to feature “equal chances” of temps over the central Corn Belt, with above-normal readings across the far southern and eastern areas of the region. The precip outlook calls for above-normal rainfall over the eastern two-thirds of the Corn Belt, with “equal chances” for the other locations of the region.

The Seasonal Drought Outlook calls for drought to persist or develop over the western HRW areas of the Southern and Central Plains through May. Drought improvement or removal is likely over eastern and northern HRW areas and the western Corn Belt during spring.

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Drought footprint continues to gradually recede... As of Feb. 14, 57% of the U.S. was covered by abnormal dryness/drought, down three percentage points from the previous week. USDA estimated 57% of U.S. winter wheat areas were covered by drought, down one point from the previous week. Drought coverage for winter wheat included 17% “moderate” (D1), 12% “severe” (D2), 13% “extreme” (D3) and 14% “exceptional” (D4).

In HRW areas, dryness/drought covered 93% of Kansas (55% D3 or D4), 59% of Colorado (2% D3, virtually no D4), 85% of Oklahoma (37% D3 or D4), 77% of Texas (9% D3 or D4), 100% of Nebraska (40% D3 or D4), 100% of South Dakota (0% D3 or D4) and 95% of Montana (4% D3, no D4).

In SRW areas, dryness/drought covered 14% of Missouri, 9% of Illinois, 23% of Indiana, 7% of Ohio, 44% of Michigan, 0% of Kentucky and 0% of Tennessee. None of the drought in these SRW states is classified as D3 or D4.

Across the South, the Drought Monitor noted: “The recent wetter pattern allowed for most of eastern Oklahoma to observe a full category improvement to the drought intensities with abnormally dry conditions removed from the eastern extent and some exceptional drought improved as well. Areas of eastern Texas had improvements made to moderate drought and abnormally dry conditions but saw degradations, mainly on long-term indicators highlighting the changes over portions of the panhandle, central and south Texas.”

In the Plains, the Drought Monitor stated: “Temperatures for the week were warmest over the eastern and northern extent of the region with departures 10-15 degrees above normal while the western areas were 5-10 degrees below normal in portions of Wyoming and Colorado. Most of the region was dry this week with the exception of eastern Kansas where over 200% of normal precipitation was recorded for the week. As temperatures warmed up and the benefits of the snowpack over portions of southern South Dakota and northern Nebraska started to be observed, improvements were made this week to the drought intensity levels along the South Dakota and Nebraska borders. A full category improvement was also made to conditions in eastern Kansas where more moderate drought was eliminated and improvements to severe and extreme drought were made in southeast portions of the state.”

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IGC cuts global corn, soybean crop forecasts... The International Grains Council (IGC) cut its forecast for 2022-23 global corn production by 8 MMT to 1.153 billion MT, driven by downward revisions for the U.S. (down 5 MMT to 348.8 MMT) and Argentina (down 2.5 MMT to 53.5 MMT). Global corn production is now forecast to decline 67 MMT from 2021-22.

IGC cut its 2022-23 global soybean production forecast by 7 MMT to 378 MMT, which would still be up 22 MMT from last year, driven by a smaller U.S. crop estimate and diminished prospects in Argentina.

IGC’s initial projections for 2023-24 include a slight uptick in global corn planted area. IGC says, “Given uncertainty about agricultural activity in uncontrolled territories, figures for Ukraine are highly notional, but with area tentatively seen sharply lower year-over-year.” Its world wheat outlook in 2023-24 calls for smaller supplies and, with overall consumption seen trending higher, IGC expects ending stocks will tighten.

January PPI shows biggest rise in U.S. wholesale prices since June... The U.S. producer price index (PPI) for final demand rebounded 0.7% in January, the largest monthly increase since June, after decreasing 0.2% in December. The rise was led by a 1.2% advance in goods prices, which followed a 1.4% decline in December. A 6.2% jump gasoline prices accounted for nearly a third of the increase in goods. There were also increases in prices for residential natural gas, diesel fuel, jet fuel, soft drinks and motor vehicles. Excluding food and energy, core goods prices jumped 0.6% – the biggest increase in core goods prices in eight months, following a 0.2% gain in December.

In the 12 months through January, the PPI increased 6.0%, down from a 6.5% rise in December.

Next CBO budget projections will likely be those used to score new farm bill... Dr. Bart Fischer and Dr. Joe Outlaw of Texas A&M note: “CBO [Congressional Budget Office] typically updates their budget projections early in the year, and yesterday’s (Feb. 15) release follows that pattern. Following the release of the president’s budget in February, CBO will often release a revised outlook in March.  If the president’s budget is delayed, the updated outlook from CBO can stretch into late Spring or early summer – for example, in 2021, the update was released in July.  Why does this matter?  It is generally the update following the release of the president’s budget that is the baseline against which the cost of legislative proposals is ‘scored’ throughout the year.  In other words, while the current release will get a lot of attention, CBO may choose to update their projections again this spring; if they do, that baseline likely will be used for writing the farm bill.  CBO will also typically release — at least to policymakers — their baseline projections by farm bill title.”

Other observations made by Dr. Outlaw and Fischer:

• “Looking back to the April 2018 baseline (the scoring baseline for the 2018 Farm Bill), the spending projections for CCC Price Support and Related Activities, Conservation, SNAP, and Crop Insurance accounted for $865.9 billion, or 99.85% of the $867.2 billion in projected total baseline outlays for the farm bill. Applying the same methodology to CBO’s most recent February 2023 baseline update, those four categories are projected to spend approximately $1.45 trillion over the next 10 years. The significant increase is due to an 81.6% increase in projected spending on SNAP, with SNAP now projected to account for $1.2 trillion, or 83.3% of the total farm bill baseline. By contrast, the income support provisions for agricultural producers that make up the largest component of Title 1 – the Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) programs – are projected to spend $48.6 billion over the next 10 years, or just 3.4% of the total farm bill baseline.”
• “While some may look to the $71.8 billion in CCC Price Support & Related Activities (a $7.5 billion increase) as additional resources with which to write the farm bill, it’s not that simple. In January 2020, CBO began including $100 million per year in the baseline as an estimate of the amount they project the Secretary of Agriculture to spend using discretionary authority available under the CCC. In May 2022, CBO increased that amount to $1 billion per year (or $10 billion over 10 years). In other words, absent the amount that CBO includes in the baseline as a guess of what they expect the Secretary to spend using discretionary CCC authority, the baseline for CCC Price Support & Related Activities would be going down.”
• “These estimates would also likely be considerably lower if one were using USDA's latest market projections which were also released yesterday. For example, USDA projects cotton prices in the long run that are 16% higher than CBO. If USDA's projections were to materialize, ARC and PLC spending would be considerably less and the safety net would still be doing nothing to address the high cost of inputs.”
• “On crop insurance, the increase in projected spending is generally attributable to expanded product availability over the last 5 years along with projected increases in liability coverage due to higher market prices.”

USDA announces CRP general signup for 2023... Ag producers and private landowners can apply for the Conservation Reserve Program (CRP) general signup from Feb. 27 through April 7. Producers and landowners enrolled more than 5 million acres into CRP through signups in 2022. There are currently 23 million acres enrolled in CRP, with 1.9 million set to expire this year. USDA is aiming to reach the 27-million-acre statutory cap for fiscal year 2023.

U.S., Europe hoping to use critical minerals to patch rift over EV subsidies and reduce China reliance... The two sides are looking to form a group that would cooperate on procuring minerals used in clean-energy technologies such as electric vehicle (EV) batteries, the Wall Street Journal (WSJ) reports. Washington and Brussels have been at odds over last year’s Inflation Reduction Act (IRA), which required a significant share of minerals in an EV’s battery must come from the U.S. or a country with a free-trade agreement with the U.S. to be eligible for subsidies. The EU doesn’t have such a deal.

Under the plan for the critical-minerals club, the U.S. would negotiate trade agreements with allies including Japan and the EU, WSJ said, citing people familiar with the plan. The allies could then pursue additional deals with countries such as Ukraine and Zambia to secure supplies of clean-energy raw materials, the people said. A European official said such outreach could help Western countries compete with China and Russia for influence in Africa, while drawing Ukraine closer to the EU.

China blacklists Lockheed, Raytheon over Taiwan arms sales... China imposed fresh sanctions on Lockheed Martin and a Raytheon unit over arms sales to Taiwan, as tensions with the U.S. continued to escalate. Putting the companies on its “unreliable entities list” prohibits them from export and import activities related to China. Under China’s latest sanctions, Lockheed Martin and Raytheon Missiles and Defense won’t be able to conduct trade relating to China or make any new investments in the country. China also banned senior company executives from entering China or obtaining a work permit. The Chinese commerce ministry also said it was imposing fines on the two companies that are worth twice the value of the arms that each company has sold to Taiwan since September 2020.

The sanctions are expected to have a limited impact since American defense companies are broadly barred from making military sales to China.

Booming oil exports boost U.S. role as global price maker... U.S. crude exports increasingly shape global oil prices, as well as the financial instruments bought and sold by producers, refiners and traders to avoid or capitalize on price swings. In June, a Texas-produced crude will be formally added to the Brent complex, the global benchmark. A spurt in U.S. crude production over the past decade accelerated the shift, pushing exports to new heights. Following Russia’s invasion of Ukraine, Western sanctions on Russian energy cemented the trend by making Europe more reliant on U.S. shipments, the Wall Street Journal reports.

Ukraine war to take sharp economic toll in Eastern Europe... Russia’s war in Ukraine will cause a sharp slowdown in economic growth across Eastern Europe this year, deterring foreign investment and lifting energy prices and borrowing costs, the European Bank for Reconstruction and Development (EBRD) warned. Most of the European countries that are closest to the front line showed surprising resilience during the first year of the war. But many economies in the region are more reliant on energy-intensive factories than their counterparts in Western Europe and they could see their market share erode as their costs increase. “We are expecting this year to be tough,” said Beata Javorcik, the EBRD’s chief economist.