Evening Report | October 20, 2023

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Your Pro Farmer newsletter is now available... Markets are showing stronger signs seasonal lows are in place. With U.S. corn and soybean harvest progressing ahead of average, a greater focus has turned to demand. While export demand is still lagging, there have been better results recently. China is short-bought on soybeans and crush margins are robust, so Chinese buyers should show a greater appetite for U.S. soybeans. Meanwhile, U.S. soybean crush started September on a record clip. Markets are also starting to pay closer attention to weather in South America. While rains have been plentiful in southern Brazil, conditions have been dry in central areas of the country and in Argentina. That’s not a major market factor for soybeans yet – and could actually have the greatest impact on safrinha corn in Brazil. On the economic front, bond yields continue to soar, which is helping the Fed in its inflation battle. Chair Jerome Powell said the Fed will be cautious with monetary policy moving forward. In Washington, Republican dysfunction continues in the House and the farm bill could be the next victim of the directionless Congress. We cover all of these items and much more in this week’s newsletter, which you can access here.

Cattle on Feed Report: Unexpectedly Bearish

The USDA’s October 20 Cattle on Feed report stated the October 1 U.S. large-lot (1,000+ head) feedlot population at 11.58 million head, up 71,000 head (0.6%) above year-ago. That easily topped industry expectations that averaged 11.42 million and implies a negative reaction by the futures market on next Monday’s opening. As usual, the monthly placement figure was key to the result and the market’s likely reaction. September placements surged 125,000 head (6.1% above year-ago, whereas traders expected a 2% annual reduction to 2.043 million head. This should theoretically prove most negative for deferred futures, since animals entering lots last month will mostly exit as fed cattle early next year, but selling will likely concentrate in most-active December futures. Traders expected a 6.8% annual drop in September marketings, but that was not the case, with the USDA result stated at 1.663 million head, down 10.6% annually. The drop partially reflected the loss of one workday in September 2023 versus last year, but the marketings reduction clearly fell well short of expectations. This is likely to be viewed negatively as well, since it implies that many more animals are still in feedlots. 

Jordan fails again in attempt to become House speaker... Rep. Jim Jordan (R-Ohio) lost a third vote to become House speaker. Opposition to his candidacy from within his party grew, with 25 Republican lawmakers voting against him, more than the 22 who had opposed in the second round on Wednesday and 20 in the initial voting. It is unclear whether Republicans will be able to unite behind any other candidate if Jordan drops out.

House Republicans are going home for the weekend after ousting Rep. Jim Jordan as speaker-elect via a secret-ballot vote. The House Republican Conference will hold a candidate forum Monday night.

Carbon capture pipeline project canceled... Navigator CO2 Ventures canceled its Heartland Greenway pipeline project, citing “unpredictable” state regulatory processes. The project aimed to capture 15 MMT of carbon dioxide annually from Midwest ethanol plants and store it underground.

China, Russia strengthen food and energy partnership... China and Russia are bolstering their cooperation in food and energy, a move driven by the challenges both countries face amid escalating tensions with Western nations. At recent forums in Beijing, the two nations announced significant developments in their partnership, according to the South China Morning Post.

Notably, they have signed a substantial grain-supply contract worth nearly 2.5 trillion rubles (approximately $25.8 billion), marking the largest food-trade agreement in their history. This deal falls under the Belt and Road Initiative and will see Russia supply China with 70 MMT of grain, legumes and oilseeds. The logistics hub called the New Land Grain Corridor, which is under construction in Russia’s Ural Mountains, Siberia, and the far east, will facilitate this trade.

China, with a strategic focus on food security amid increasing demand and market uncertainties, is set to receive the agreed-upon grain over a 12-year period. The corridor, through which the goods will be transported, is expected to launch soon once an intergovernmental agreement is signed, potentially in late November or early December.

Besides the food agreement, Russia has invited China to consider recognizing its low-carbon energy-certification system, aimed at helping clients reduce their carbon footprint. In return, Russia will support the promotion of a similar Chinese system in the Russian market, fostering the transition to low-carbon energy sources.

Bottom line: Both countries aim to secure international recognition for their energy certificates, allowing counterparties from other nations to access Russian goods and resources with a reduced carbon footprint. This cooperative effort underscores the importance of mutual support in achieving this goal and strengthening bilateral ties in food and energy sectors.

Louis Dreyfus to build Ohio soy crush plant... Louis Dreyfus Company will build a new soybean processing plant in Upper Sandusky, Ohio. Construction on the plant, which will have an annual soy crushing capacity of 1.5 MMT, will start in early 2024. The site will have an edible soybean oil production capacity of 320,000 MT per year and annual lecithin production capacity of 7,500 MT. The company didn’t indicate when the plant was expected to be completed.

House Ag Democrats express outrage over potential farm bill cuts... House Agriculture Committee Democrats voiced strong displeasure over the possibility of cuts to various aspects of the forthcoming farm bill, which might be reallocated to other priorities. According to Politico, Democratic members of the committee met recently to discuss a list of funding shifts amounting to approximately $50 billion in the bill. These shifts encompass provisions related to food/nutrition and climate initiatives.

House Ag Committee Ranking Member David Scott (D-Ga.) presented the list to members, even as the House remains without a Speaker, creating a temporary legislative hiatus. Ben Goldey, a spokesperson for House Agriculture Committee Republicans, clarified the list was not a comprehensive Republican proposal, emphasizing that every member of Congress has distinct priorities for the farm bill.

House Ag Committee Chairman Glenn “GT” Thompson (R-Pa.) refrained from confirming the specific cost implications of the potential cuts or offering detailed information about the plan. Thompson mentioned his efforts to identify areas within the bill that could yield funding for safety net programs, research, and expanded trade tools. However, he acknowledged that lawmakers were unlikely to reach a consensus on everything included in the list of potential cuts, illustrating the challenges faced in crafting the next farm bill.

The limited funding available for enhancements to farmer safety and other key areas presents a significant hurdle for lawmakers. Additionally, Senate Agriculture Committee Chair Debbie Stabenow (D-Mich.) expressed concerns about the financial outlook for 2024, further intensifying the urgency of passing the farm bill this year.

Russia lowers wheat export tax... Russia’s wheat export tax for Oct. 25-31 will be 5,297.7 rubles ($55.50) per metric ton based on an indicative price of $252.60. That’s down from a rate of 5,734.7 rubles per metric ton the previous week and the first weekly decline since Sept. 27-Oct. 3.

Farmers tap savings instead of borrowing as high interest rates impact ag loans... Farmers are opting to tap into their savings from recent prosperous years instead of taking out loans at the highest interest rates since 2007, according to surveys conducted by regional Federal Reserve banks. Reports indicate that the average operating loan issued in the past summer was almost 20% smaller than the previous year’s average.

The Kansas City Fed noted lending activity has weakened, influenced by nearly two years of rising interest rates on farm loans, which have significantly increased financing costs for farmers. While the farm economy has recently shown moderation due to narrower profit margins driven by commodity prices and increased expenses, credit needs have risen for many farmers, mainly due to high input costs. However, many producers have been able to supplement their financial needs with savings amassed during previous profitable years.

USDA predicts net farm income, a broad measure of farm profitability, will amount to $141.3 billion this year, marking a 22% decline from the record $183 billion in 2022. Despite this decrease, the income for this year would still be the second highest ever recorded and $40 billion above the 10-year average. The decline in income is attributed to lower receipts from crop and livestock sales, coupled with higher expenses. The debt-to-asset ratio, which indicates solvency, is expected to decrease slightly.

The Kansas City Fed also reported that the average interest rate on various types of farm loans, after rising for nearly two years, has reached the highest level since 2007, standing at 8.34%. This surge in financing costs may have prompted farmers with substantial liquidity to limit their debt usage. However, any softening in farm finances could deplete cash reserves and result in increased demand for loans.

Because of reduced farm lending, the volume of operating loans exceeding $1 million has decreased by half compared to the previous year, and the volume of smaller-sized loans has dropped by 15 percent. This shift has favored smaller banks, which typically handle smaller loans, as they witnessed a 25 percent increase in non-real estate lending, while larger banks experienced a decline. The average operating loan for the summer amounted to nearly $59,000. Additionally, the average duration of new farm real estate loans has gradually increased over the past year, significantly exceeding the average loan duration from 2010 to 2020, while maturity dates for operating, livestock, and equipment loans remained stable.

Freight carriers sound alarm bells... Freight carriers in the U.S. are sounding alarm bells for the country’s industrial markets. Union Pacific’s third-quarter earnings report, while beating expectations, revealed a concerning 19% profit decline compared to the previous year, with earnings totaling $1.5 billion. Beneath the surface, the report unveiled signs of weakening demand in major business segments, including decreased volumes and revenue across critical industrial commodities, the Wall Street Journal reports. This comes in the wake of J.B. Hunt Transport Services’ earnings report earlier in the week, which showed a steep drop in earnings of over 30% for the last quarter and an 18% decline in revenue compared to the previous year. These carriers are now reflecting the effects of the subdued peak season that industry executives had been anticipating.

Union Pacific’s report highlighted sharp declines in intermodal volume and pricing, raising questions about the direction of industrial production. Additionally, revenue reductions were evident across coal, metals and chemicals carload lines, further highlighting concerns about the state of the industrial sector. The 13% decrease in forest product loads indicates the weakness in the U.S. housing market is reverberating through supply chains, compounding the challenges faced by freight carriers.

DOE announces monthly purchases to SPR... The Department of Energy (DOE) unveiled its plan to conduct monthly solicitations for oil purchases intended to restock the Strategic Petroleum Reserve (SPR) through at least May 24. The initiative will kick off with a solicitation for 3 million barrels of crude on Oct. 24, slated for delivery to the reserve in December, and another 3 million barrels on Nov. 1, earmarked for January arrival. These purchases aim to be fiscally responsible, with the administration targeting a price of $79 per barrel or below, significantly lower than the average $95 per barrel received for emergency SPR sales in 2022.

DOE has already acquired 4.8 million barrels for SPR replenishment at an average cost of less than $73 per barrel. Additionally, the administration expressed a desire for “legislative solutions” to prevent mandated sales from the SPR. However, replenishing the SPR with sour crude may pose challenges, as refiners are currently buying this type of crude to take advantage of high diesel fuel margins. Current prices for sour crude exceed $86 per barrel, potentially complicating the SPR replenishment efforts.