Evening Report | January 22, 2024

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MARS notes crop risks in Europe... A cold start to the year may have damaged some grain fields in northern Europe while dryness is straining some crops in the south, adding to harvest risks after heavy rain in the northwest of the region, the European Union’s crop monitoring service said. The MARS crop reporting service said cold temps likely caused some losses in Denmark where fields had been waterlogged, while frost damage was also expected in the Baltic states. Dryness was persisting in parts of the Mediterranean rim, with particular concern over the development of durum wheat in Sicily and southern Spain, it said. Parts of northwest Europe continued to endure soggy conditions, with sowing work further delayed in the Benelux countries, MARS said. However, the MARS report did not mention France as a particular risk area, despite torrential rain in some northern and western areas of the country that are expected to reduce winter grain planting.

Ocean shipping costs rise as Red Sea impacts mount... According to London-based Drewry Shipping Consultants, the average worldwide price for shipping a 40-foot container surged 23% in the week ended Jan. 19, reaching $3,777 per container. That represents a doubling of shipping costs in just one month. Disruptions from ongoing attacks by Houthi rebels in and around the Red Sea are primarily impacting trade routes between Asia and Europe. However, the higher shipping costs are also extending to the U.S. West Coast. Spot-market rates for shipping a container from China to Los Angeles increased 38% during the week ended Jan. 18, reaching $3,860.

AFBF president highlights need for guestworker program reform, other key issues for agriculture... Zippy Duvall, president of the American Farm Bureau Federation (AFBF), emphasized the urgent need for Congress to reform the guestworker program to address labor shortages in American agriculture. Speaking at the AFBF convention, Duvall highlighted the importance of addressing this issue, which he described as the most significant limiting factor for American agriculture, along with other focal points. Key points from Duvall’s speech:

• Labor shortages: Duvall stressed that labor shortages are a critical concern for the agricultural industry. He called for reforms to the H-2A visa program, which currently provides seasonal workers, to also allow for year-round workers. Additionally, he suggested setting wages at a more affordable level for employers instead of relying on federally set rates that are becoming increasingly unaffordable.
• Farm bill: Duvall urged the passage of a new farm bill that includes an updated safety net. This safety net should take into account rising production costs and the impact of inflation on the prices of agricultural supplies.
• Reference prices: AFBF and other farm groups are advocating for higher reference prices in the farm bill, a factor that influences crop subsidies. However, the cost of increasing reference prices has led to disagreements and discussions about potential funding sources.
• Animal welfare law override: AFBF is seeking a congressional override of California’s Proposition 12 animal welfare law, which has implications for livestock farming.
• Challenges in Congress: Duvall acknowledged the challenges in achieving these reforms given the current political environment in Washington, D.C. He noted the difficulty in reaching a consensus on comprehensive immigration reform and emphasized the need for action despite the political hurdles.
• Undocumented farmworkers: Approximately half of U.S. farmworkers are believed to be undocumented, and many are nearing retirement age. The agricultural industry has struggled to attract workers for physically demanding tasks in the fields and livestock management.

GSU accepts Viterra offer... Members of the Grain and General Services Union (GSU) in Canada who work for Viterra have voted to accept the company’s latest contract offer. GSU says the support wasn’t overwhelming but enough to accept the offer. Local 1 voted 63% in favor and Local 2 voted 68% to accept. Local 1 represents country operations and maintenance, while Local 2 is the Regina head office. In total they represent 436 workers.

The accepted offer includes salary increases over four years, starting with 4.5% retroactive to Jan. 1, 2023, then 3.75% effective Jan. 1, 2024, and 2.5% in the next two years. The union had been asking for improved work-life balance and workplace respect as well as fair wages.

Market awaits Fed’s clarity on interest rates amidst economic conditions, political uncertainty... The upcoming Federal Open Market Committee (FOMC) meeting Jan. 30-31 faces the challenge of bridging the significant gap between market expectations for interest-rate cuts and the committee’s own projections for policy in 2024. While no rate moves are expected at the end of the two-day meeting, the market will be eager to hear Fed Chair Jerome Powell’s explanation of potential future rate cuts.

Current economic conditions indicate steady growth with low unemployment, inflation above the central bank’s target and favorable financial conditions.

Federal-funds futures continue to price in up to six rate reductions of 25 basis points each by December, although this exceeds the FOMC’s most recent Summary of Economic Projections, which calls for the equivalent of three 25-basis-point reductions by the end of the year.

Fed Gov. Christopher Waller suggested rates could start to come down once the FOMC is confident inflation is sustainably near the 2% target. However, the marked easing in financial conditions, including rising stock prices and improvements in credit markets, points to stronger economic growth ahead.

While politics aren’t supposed to influence Fed policy, the upcoming elections could affect business and consumer expectations, potentially influencing the economy and policy in a counterintuitive way. Fed policy has largely avoided political influence, but there is a historical precedent where economic policy uncertainty ahead of an election influenced business decisions.

Of note: Consumer sentiment is currently at a two-year high, with declining inflation expectations. This doesn't align with the aggressive rate cuts priced in by the futures market. The wide gap between market expectations and central bank projections leaves room for Powell to provide clarity during the upcoming meeting.

Fed officials emphasize incoming data will guide their decision on interest rates... The three officials made it clear they haven’t seen enough evidence yet to begin easing. Chicago Fed President Austan Goolsbee said officials should consider cutting rates as inflation falls to avoid keeping policy too tight. Atlanta Fed President Raphael Bostic said he’s open to changing his views on the timing of cuts depending on the data. San Francisco Fed President Mary Daly said it’s “premature” to think cuts are around the corner.

Of note: The Fed communications blackout period around the Jan. 30-31 FOMC meeting went into effect at midnight on Saturday, Jan. 20, and lasts through midnight on Thursday, Feb. 1.

Yellen to deliver ‘major address’ Thursday... Treasury Secretary Janet Yellen will deliver what the Treasury Department is billing as a “major address” Thursday at the Chicago Economic Club on the state of the economy. Her Jan. 25 remarks will include notes on Biden’s Investing in America agenda and her “modern-supply side economic strategy.”

Two major Wall Street firms are advising investors to consider buying five-year U.S. notes... The recommendation from Morgan Stanley and JPMorgan comes following a recent significant decline in their value. Key points from their recommendations:

Morgan Stanley’s perspective: Morgan Stanley believes there is potential for a rebound in Treasury bonds, particularly the five-year U.S. notes. They base this on the expectation that upcoming economic data in the coming weeks might surprise on the downside, which could have a favorable impact on the bond market.

JPMorgan’s recommendation: JPMorgan also suggests investors consider buying five-year U.S. notes. One reason for this recommendation is that yields on these notes have already increased to levels last observed in December. This could present an opportunity for investors.

Caution regarding rate cuts: Both firms are cautious about the market’s anticipation of early central bank interest-rate cuts. They note that despite recent fluctuations, central bank officials have pushed back against rate cuts, and there have been positive data points, such as healthy retail sales figures. As a result, traders have reduced their bets on the Federal Reserve implementing interest-rate cuts this year.