Evening Report | February 26, 2024

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Cold Storage Report: Friendly compared to seasonal tendencies... USDA’s Cold Storage Report showed beef stocks declined contra-seasonally during January, while pork stocks rose less than average.

Frozen beef stocks at the end of January totaled 475.4 million lbs., down 4.9 million lbs. from December, whereas the five-year average was a 2.9-million-lb. increase during the month. Beef stocks fell 59.8 million lbs. (11.2%) from January 2023 and were 40.1 million lbs. (7.8%) below the five-year average.

Pork stocks rose 40.6 million lbs. during January to 468.0 million pounds. The five-year average was a 48.6-million-lb. increase during the month. Pork stocks declined 51.1 million lbs. (9.8%) from January 2023 and were 51.8 million lbs. (10.0%) lower than the five-year average.

Total poultry stocks increased 13.9 million lbs. during January but fell 45.3 million lbs. (3.8%) from last year. Chicken breast meat inventories declined 5.8 million lbs. from last year’s record to 235.4 million pounds.

Food price outlook increases... Food price inflation is back in the outlook for all food, food at home (grocery) and food away from home (restaurant) prices in 2024, according to the latest update from USDA. Food prices are expected to increase 2.9% in 2024, a significant jump from the previous outlook of just 1.3%. Grocery prices are projected to rise 1.6%, returning to an upward trend after briefly being forecast to fall. Restaurant prices are also expected to accelerate, with a projected increase of 5% in 2024, the highest forecast so far.

Despite these forecasts, food prices in 2024 are expected to rise less than the 20-year averages, but dining out will cost more than the five-year average. The increases, while significant, remain below those seen in 2023 and 2022, the latter of which saw the highest rises in over 40 years.

Overall, food price inflation continues to be a significant economic factor, even as overall inflation rates ease.

Of note: Grocery prices have only declined twice in data going back to the 1970s, highlighting the uncertainty surrounding USDA’s previous forecast for a decline in 2024.

Biden administration criticizes China’s slow biotech approval, impacting U.S. farms... The U.S. Trade Representative’s annual review highlights China’s failure to expedite the approval process for agricultural biotechnology products, despite a pledge made in 2020. The lengthy and opaque review process, lasting more than two years on average, disrupts U.S. farm exports and the introduction of new crop strains. China’s inconsistent enforcement of regulations and lack of adherence to science-based international standards further complicate agricultural trade. Despite being the world’s largest importer of certain agricultural products, including cotton and soybeans, China’s approach to biotechnology remains a significant obstacle, with approval times exceeding the agreed-upon target of 24 months. Additionally, China maintains restrictions on imports of U.S. pork, beef and poultry due to concerns about growth stimulants and disease outbreaks. U.S. Trade Representative Katherine Tai emphasized China’s departure from WTO norms, posing a challenge to the international trading system.

China’s trade strategy: Building an alternative architecture... Amid escalating trade tensions with the West, China is accelerating efforts to construct its own trade ecosystem, focusing on developing nations and bolstering bilateral and regional free trade agreements (FTAs), according to the Financial Times. Key points:

• China’s trade strategy shifts focus toward the “global south,” leveraging the Belt and Road Initiative (BRI) to foster ties with over 140 countries.
• The country aims to establish a China-centric network of FTAs to counterbalance the faltering WTO and reduce dependence on traditional markets like the U.S. and EU.
• Despite geopolitical challenges, China’s trade expansion shows significant progress, with FTAs covering a substantial (40%) portion of its exports.
• China’s investments in regions like ASEAN and Africa signal a shift in global trade dynamics, with emerging markets increasingly aligning with China.
• However, uncertainties loom as trade friction with the U.S. and EU persists, posing risks to China’s trade growth despite its alternative architecture efforts.

Bottom line: As tensions escalate, Chinese companies explore strategies like transshipment and nearshoring to navigate trade challenges yet face uncertainties amid evolving trade policies in major markets.

DMC enrollment starts on Wednesday.... Beginning Feb. 28, dairy producers can enroll in the 2024 Dairy Margin Coverage (DMC) program. The enrollment period for 2024 DMC coverage will run until April 29, with payments potentially commencing as early as March 4 for any eligible payments triggered in January. FSA has revised the DMC regulations, allowing eligible dairy operations to make a one-time adjustment to their established production history. This adjustment involves combining previously established supplemental production history with DMC production history for dairy operations that participated in the Supplemental Dairy Margin Coverage in prior coverage years. Additionally, the authorization for DMC has been extended through calendar year 2024, following a 2018 Farm Bill extension that mandated regulatory changes to the program.

Farm groups urge USDA action on milk pricing issue... Top farm groups, including the American Farm Bureau Federation (AFBF) and National Farmers Union (NFU), are urging USDA to expedite an interim rulemaking process to address a milk pricing issue stemming from the 2018 Farm Bill. This change aims to revert the Class I milk pricing formula to its pre-2018 version, known as the “higher of” formula.

The current formula, implemented since May 2019, averages the prices of Class III and Class IV milk, whereas the previous formula paid farmers based on the higher of the two prices. The farm groups argue the current formula has resulted in significant revenue losses for dairy farmers, amounting to over $1 billion since its implementation.

The groups emphasize the need for an expedited return to the previous formula, especially given ongoing market dynamics and persistent losses faced by dairy farmers. They highlight that waiting for the full rulemaking process could prolong these losses and threaten farmers' livelihoods.

To address this issue promptly, the farm groups urge USDA to issue an interim final decision to expedite the change to the Class I milk pricing formula. They suggest that this could speed up implementation by six months or more, providing much-needed relief to dairy farmers facing financial challenges.

Malanga: Challenging path toward reaching Fed’s inflation target, achieving soft landing... Dr. Vince Malanga, President of LaSalle Economics, says January’s performance highlighted evidence of slowing economic growth and persistent inflation, painting a concerning picture. However, he notes seasonal adjustments may be clouding the data, as this January experienced wintry conditions compared to the more spring-like weather of last January. Despite this, real GDP, hours worked, industrial production, housing starts and retail sales all declined in January. Government spending continued to expand, with an additional $1.5 billion allocated from the Chips Act.

As weather conditions improved in February, data reports are expected to show a rebound, Malanga believes. Overall, the expectation remains for real GDP growth of about 2% annually. Layoffs and restructurings have been occurring but have yet to be fully reflected in data reports. Jobless claims remain low, while continuing claims are rising steadily.

The downward trend in inflation halted in January, although the yearly rate decreased slightly. Malanga says this is concerning for several reasons, including the need for more progress on inflation before spring and the potential for rising oil and gasoline prices in the coming months. Additionally, signs indicate China’s deflation may be ending as its economy stabilizes.

Despite expectations for an early rate cut from the Federal Reserve, recent rhetoric suggests the Fed is hesitant to take this path. Malanga concludes this leaves the Fed reliant on steady price moderation. However, if inflation remains stubborn while the economy struggles, or if nominal GDP growth is driven by inflation rather than real growth, the Fed may face difficult decisions. The possibility of stagflation looms, Malanga adds, raising concerns about political interference and prolonged inflation beyond 2024. Despite this, optimism remains about rising productivity positively impacting profits.

Morgan Stanley: New U.S. population estimates may boost economic resilience... Morgan Stanley economists suggest new U.S. population estimates released by the Congressional Budget Office (CBO) earlier this month, incorporating an increase in immigration, could help explain the unexpected resilience of the economy in 2023. Ellen Zentner, the bank’s chief U.S. economist, says if CBO’s projections hold true, it could imply significantly higher steady-state payroll growth rates than previously believed. Previously, Zentner estimated the potential monthly payroll gain in the U.S. at 90,000, indicating a very strong recent trend averaging 248,000 over the past six months. However, a faster expansion of the prime-working-age population, as suggested by CBO’s figures, could elevate the country’s potential for economic growth. Zentner emphasizes the variance between CBO’s figures and those of the Census Bureau, underscoring the importance of monitoring potential revisions, particularly concerning undocumented immigrants, which could impact both population estimates and economic projections.