Evening Report | December 22, 2023

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Your Pro Farmer newsletter is now available... Each year is unique, presenting a new set of circumstances that shape agriculture and our lives. As 2023 comes to a close, it’s time to look back on the stories, events and people that were most influential over the past year. This issue includes the stories, events and people we believe had the most impact on agriculture and your farming operations in 2023. We also have outlooks for the ag markets we cover. This is your final issue of Pro Farmer for 2023. For market and policy updates during the holidays, go to www.profarmer.com. Click here to access this week’s newsletter.

Merry Christmas from Pro Farmer... All markets and government offices are closed on Monday, Dec. 25 for Christmas, so there will be no Pro Farmer reports that day. Grain and livestock markets resume trading at 8:30 a.m. CT on Tuesday, Dec. 26. Pro Farmer wishes you a blessed Christmas!

H&P Report: Hog herd virtually unchanged from year-ago... USDA estimated the U.S. hog herd at 74.971 million head as of Dec. 1, up 15,000 head from year-ago, whereas traders expected a 481,000-head decline based on the average pre-report estimate. The market hog inventory increased 221,000 head (0.3%) from year-ago, while the breeding herd declined 205,000 head (3.3%). The fall pig crop dropped only 0.2%. While fall farrowings fell 4.0%, litter size jumped 3.9% to a record 11.66 head.  

Market hog inventories were higher than expected in each category, though fractionally under year-ago in the three lightest categories. Based on this data, slaughter should run steady to fractionally smaller than year-ago through summer.

Looking forward, hog producers intend to farrow fewer sows in the next two quarters, with winter intentions down 1.8% and spring intentions down 1.2%. But if pigs per litter continue to mark new record highs, the winter and spring pig crops would likely top the previous year.

USDA made wholesale revisions to the hog numbers for the past two years. The Sept. 1, 2023 hog population and market hog totals were boosted by 798,000 and 781,000 head (to 73.323 million and 69.144 million), respectively, while the breeding herd was cut by 73,000 to 6.179 million. The June 1 population and market hog numbers were increased by 897,000 (to 73.551 million) and 909,000 (to 67.345 million), respectively, while the breeding herd was trimmed by 12,000 to 6.206 million. The March 1 population and market hog numbers were raised by 877,000 (to 74.126 million) and 889,000 (to 67.990) million, respectively, whereas the breeding herd was left virtually unchanged (down 2,000 to 6.146 million).

These shifts came on top of big, mostly upward, revisions to the  2022 numbers as well, ranging from approximate 500,000-head increases in the March, 2022 numbers for the population and market hog totals and a 50,000-head cut to the March 1, 2022 sow herd, to 105,000-head and 100,000-head upward revisions to the Dec. 1, 2022 population and breeding herd numbers, while the market hog figure inched up just 6,000 head from December 2021.  

Based on the pre-report expectations, the data leans negative, but isn’t overly bearish. However, the sharp revisions to past data will increase trader skepticism toward these numbers and may cause them to believe USDA’s sampling methodology is consistently undercounting hog numbers.

Cattle on Feed Report: Dec. 1 feedlot inventory slightly bigger than expected... USDA estimated the Dec. 1 large feedlot (1,000-plus) head inventory increased 313,000 head (2.7%) from year-ago. Traders expected feedlot supplies to rise 257,000 head (2.2%). November placements of cattle into feedlots declined 1.9%, though traders anticipated a 3.8% decline. November marketings fell 7.4% compared with the expected 6.7% drop.

Placements were unchanged from year-ago for lightweights (under 600 lbs.), down 4.3% for 6-weights, down 5.0% for 7-weights, up 1.1% for 8-weights, up 3.7% for 9-weights and down 5.6% for heavyweights (1,000-plus lbs). Placements fell 37,000 head from year-ago, with Kansas down 35,000 head, Nebraska down 15,000 head and “other states” down 17,000 head, while Texas increased 20,000 head and Colorado rose 10,000 head.

The data is mildly negative compared to pre-report expectations, though we doubt it will have much of lasting market impact since traders won’t get to trade the data until after Christmas.

Cold Storage Report: Pork stocks drop less than average during November... USDA’s Cold Storage Report showed frozen pork inventories dropped about half of their normal rate during November, while the rise in beef inventories was close to normal.

At the end of November, beef stocks totaled 454.7 million lbs., up 9.0 million lbs. (2.0%) from October. The five-year average was a 10.4-million-lb. increase during the month. Beef stocks fell 68.6 million lbs. (13.1%) from year-ago and were 49.0 million lbs. (9.7%) less than the five-year average.

Pork inventories totaled 416.1 million lbs., down 21.8 million lbs. (5.0%) from October. The five-year average was a 45.2-million-lb. decline during the month. Pork stocks dropped 35.5 million lbs. (7.9%) from year-ago and were 55.1 million lbs. (11.7%) under the five-year average.

The five-year average is a 10.4-million-lb. increase in beef stocks and a 45.2-million-lb. decline in pork stocks during the month.

Texas border railroad crossings reopened... The National Grain and Feed Association (NGFA) and the North America Export Grain Association (NAEGA) issued the following statement in response to the U.S. Customs and Border Patrol’s (CBP) reopening of international rail crossings at Eagle Pass and El Paso, Texas.

“The NGFA and NAEGA are pleased to see the reopening of the Eagle Pass and El Paso, Texas railroad crossings to allow for the immediate passage of trains between the United States and Mexico. The North American agricultural supply chain is deeply integrated. Any closure of crossings into Mexico is unacceptable and significantly impacts the flow of grain and oilseeds for both human and livestock feed to one of the United States’ most important export markets and trading partners.

“We call on the governments of the United States and Mexico to continue to dialogue and to put in place measures on both sides of the border to ensure this does not happen again. The free flow of trade across the border is critical to food security for our countries and the region at large. A plan must be in place to keep the border open to commerce between our nations.

“NGFA and NAEGA are particularly appreciative of USDA Secretary Tom Vilsack and members of Congress on both sides of the aisle for their unwavering support and tireless efforts to convince the Department of Homeland Security and CBP of the importance of reopening these crossings to agriculture trade between the United States and Mexico.”

Brazil strengthens global soybean market competitiveness with infrastructure improvements... Brazil has become a stronger competitor with the U.S. in the global soybean market over the past decade, thanks to significant improvements in its transportation infrastructure, according to a report from USDA. These improvements in roads, railways and ports have enhanced Brazil’s competitiveness, solidifying its position as the world’s largest soybean producer and exporter.

USDA forecasts Brazil will export twice as many soybeans as the U.S. in the current trade year, accounting for 58% of international soybean sales, while the U.S. market share will decrease to 28%, down from 38% two years ago. Brazil’s advancements in transportation infrastructure have led to a $21-per-metric-ton reduction in transport costs over the past decade, making the country more competitive in the global market.

One significant development has been the paving of BR-163, the so-called “soybean highway” in the state of Mato Grosso, which has lowered the cost of transporting soybeans to northern ports. These ports, closer to the Panama Canal, have also contributed to reduced overall transport costs. However, the report acknowledges Brazil’s transportation infrastructure and ports still face challenges in terms of efficiency, operating costs and attracting investment to support the expansion of the ag sector.

Of note: Brazil relies more on higher-cost trucking for transportation, while the U.S. primarily uses rail and river transport for soybeans. Additionally, the U.S. has shorter distances from farms to ports, which can impact transportation costs. Despite these challenges, Brazil is expected to continue expanding its soybean production and exports, with USDA’s long-term baseline projecting significant growth in production and exports. Brazil surpassed the U.S. as the world’s largest soybean exporter more than a decade ago, and its competitive position in the global soybean market is expected to strengthen.

CARB unveils proposed update to LCFS program... The California Air Resources Board (CARB) on Dec. 19 unveiled a proposed update to its Low Carbon Fuel Standard (LCFS) program, which holds potential benefits for the U.S. soybean industry. The American Soybean Association (ASA) has actively engaged with CARB over the past two years to shape this proposed update, aimed at reducing greenhouse gas emissions through a credit-generating program.

The proposed LCFS update contains several key points that impact soybean oil, notes ASA.

• CARB intends to end the existing LCFS exemption for interstate jet fuel. Currently, only in-state air travel is subject to the LCFS program, with petroleum jet fuel resulting in a deficit while sustainable aviation fuels generate credits. By ending the interstate exemption, all air travel through California, including two major airports, will be required to participate, likely leading to increased production of sustainable aviation fuel (SAF). CARB cited federal tax credits and the Renewable Fuel Standard as reasons for this change, along with commitments from domestic airlines to boost SAF utilization.
• Additionally, the update includes a new prohibition on palm oil-derived feedstocks. As California is a significant importer of used cooking oil from China, this prohibition may reduce imports of palm-based cooking oil and potentially create a larger market share for soybean oil.

One major concern for ASA is a proposal to prevent deforestation by mandating point-of-origin tracking for crop-based feedstocks by 2028. While the Renewable Fuel Standard also has deforestation prevention provisions, it employs a mass-balance approach. ASA says it will advocate for CARB to adopt a similar approach and collaborate with industry partners to identify existing national and international standards related to deforestation prevention.

Of note, the proposal did not include a cap on agricultural feedstocks, despite earlier recommendations during the workshop phase. This omission is seen as a positive development, ASA says, as it eliminates one of the potential threats to soy and other vegetable oils in the California market.

Since the LCFS was implemented in 2009, California has become a significant consumer of biofuels, including biodiesel and renewable diesel. This program has been replicated in Oregon, Washington and British Columbia, increasing demand for soy-based biofuels.

More details: CARB’s proposal would tighten requirements for fuel makers to generate tradable credits after a glut of low carbon fuels like renewable diesel pushed credit prices notably lower. Higher prices for the credits incentivize investment in producing low carbon fuels that help the state meet its climate change targets. Regulators proposed targeting a 30% carbon intensity reduction in transportation fuels from a baseline level, up from 20% currently, a new 90% carbon intensity reduction target by 2045, and interim reduction targets. CARB added a mechanism that will pull forward the standards by one year if the program is in credit surplus for the previous year and the bank of credits exceeds the quarterly surplus by three times. As noted, CARB will also require producers of crop-based biofuels to have independent certification that the crops are not contributing to deforestation.

The proposed update to California’s LCFS will undergo a comment period and public review. The public comment period will run from Jan. 5, 2024, to Feb. 20, 2024, with a hearing on March 21, 2024.

Fed’s preferred inflation gauge falls in November... The U.S. personal consumption expenditures (PCE) price index decreased 0.1% in November, the first monthly decline since April 2020. On an annualized basis, PCE dropped to 2.6%, marking the lowest level since February 2021. Core PCE, which excludes food and energy costs, eased to 3.2%, its lowest point since mid-2021.

On a six-month annualized basis, core inflation eased to 1.9%, suggesting the Fed is well on its way to reaching its target. Markets signal traders anticipate the Fed will start lowering interest rates in March.

Perspective on rerouting away from Red Sea... Global shipping companies have redirected their operations in the Red Sea amid concerns about potential attacks by the Houthi rebel group in Yemen. Some trade routes are witnessing a 40% increase in ocean freight rates. As of Dec. 21, 158 ships carrying approximately $105 billion worth of cargo had redirected away from the Red Sea. Logistics CEOs warn if these elevated costs persist for a month or longer, it will lead to inflationary pressures affecting supply chains.