Evening Report | June 9, 2022

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Drought footprint continues to recede... Drought continues to cover much of the western half of the country, though the footprint has receded, especially in the Plains. As of June 7, the U.S. Drought Monitor shows 58% of the country covered by some form of dryness/drought.

USDA says 49% of U.S. winter wheat area is covered by dryness/drought, down four percentage points from last week. For other crops, USDA estimates the drought footprint at 19% for corn, 10% for soybeans, 25% for spring wheat and 51% for cotton – all unchanged from last week.

Drought Monitor commentary notes: “A couple of low-pressure systems and trailing cold fronts are forecast to bring widespread, heavy rainfall to the Northeast and Mid-Atlantic through June 11. Along a nearly stationary front, a swath of heavy rainfall is forecast to spread southeastward from the Ozarks Region to the northern Gulf Coast on June 9 and 10. The wet pattern is likely to continue from the Pacific Northwest eastward to the northern Rockies and northern Great Plains through June 13, as another low-pressure system emerges from the northeastern Pacific. Meanwhile, a heat wave is forecast to expand from California and the Desert Southwest eastward to the south-central U.S. during mid-June. The Climate Prediction Center’s 6-10 day outlook (valid June 14-18) depicts large probabilities (more than 70 percent) for above-normal temperatures across the southern Great Plains, lower Mississippi Valley and Southeast. Below-normal temperatures are favored to persist across the Pacific Northwest. Below-normal precipitation is favored for the central to southern Great Plains, middle to lower Mississippi Valley, and much of the Corn Belt. Probabilities for above-normal precipitation are elevated across the Pacific Northwest along with parts of the Southwest.”

FAO: Global food import costs will hit record, higher input costs could worsen situation... The United Nations Food and Agricultural Organization (FAO) said in a report global food imports will hit a record $1.8 trillion in 2022, up $51 billion from 2021, as higher commodity and transportation costs are garnering most of the increase. FAO said that $49 billion of the forecast increase is from higher prices. Animal fats and vegoils are the biggest contributor. Rising input costs are also contributing to lower production, with the FAO Global Input Price Index launched in 2021 at an all-time high, rising faster than the FAO Food Price Index over the past 12 months.

Conclusion: The situation does “not augur well for a market-led supply response that could conceivably rein in further increases in food prices for the 2022-23 season and possibly the next.”

Exchange cuts wheat planted area... The Buenos Aires Grain Exchange lowered its forecast for Argentina’s wheat planted area to 6.4 million hectares, down 100,000 hectares from its prior forecast due to dryness. “If things don’t turn around in the coming weeks, the lack of water could extend to other regions we’re analyzing and result in new adjustments to the planting forecast,” the exchange said in its weekly crop report.

As we reported in “First Thing Today,” the Rosario Grain Exchange cut its wheat planted area forecast to 6.2 million hectares.

Mortgage applications fell to lowest level in 22 years... That’s another sign the U.S. housing market is cooling as the Federal Reserve raises interest rates to contain inflation. Applications fell 6.5% in the week ended June 3, the fourth consecutive week of declines, according to the Mortgage Bankers Association. Refinance and purchase activity fell 6% and 7%, respectively. Higher interest rates have been weighing on demand for refinances all year, but now there are signs the slowdown has spread to purchase demand as well.

ECB ends bond-buying program, will start raising interest rates... The European Central Bank (ECB) confirmed it will end a long-running bond buying program on July 1 and signaled a string of interest rate hikes will start in July as it battles high inflation. ECB said it would end its Asset Purchase Program – the main stimulus tool since the euro zone debt crisis – and raise rates by 25 basis points in July, then hike rates again in September, possibly by a bigger margin.

ECB now sees inflation averaging 6.8% this year, well above the 5.1% predicted in March. It expects inflation to be 3.5% in 2023 (2.1% previously) and 2.1% in 2024 (1.9%).

ECB cut its economic growth forecast for this year to 2.8% from 3.7% previously. It now forecasts euro zone GDP at 2.1% for both 2023 and 2024. The forecast for next year is down from 2.8% previously, but the outlook for 2024 is up from 1.6% in March.

ECB President Christine Lagarde said, “This meeting focused primarily on the challenge of high inflation facing the euro area and on taking further steps on our normalization path that we started back in December. It’s not a question of catching up, it’s a question of using all of the tools that we have. It’s not a step, it’s a journey... Inflation will remain undesirably elevated for some time. The critical point is monetary policy transmission and we are very attentive to make sure that it transmits throughout the entire euro area. So, there is no specific levels of yields increase, or lending rates or bond spreads that can unconditionally trigger this or that. The principle is that we will not tolerate fragmentation that would impair monetary policy transmission. We will determine on the basis of circumstances, of countries, how and when that risk is likely to materialize and we will prevent it... If it is necessary as we have amply demonstrated in the past, we will deploy either existing adjusted instruments or new instruments that will be made available.”

IMF: Yen’s ‘significant’ depreciation reflects fundamentals... The fall in the Japanese yen to 20-year lows is a “significant” depreciation that reflects market fundamentals, including that Japanese monetary policy is not on a path toward tightening like the U.S. and other major economies, International Monetary Fund (IMF) Japan Mission Chief Ranil Salgado said. “We believe that the yen’s movements reflect fundamentals,” Salgado said. “We see both positive and negative effects in yen depreciation.”

 The yen’s depreciation will help the country as the Bank of Japan (BOJ) seeks to boost inflation to its 2% goal, but will also hurt importers, businesses and households by increasing costs, he added. “Inflation in the medium-term will remain well below the BOJ’s target once the cost-push factors go away,” Salgado said. “We consider it appropriate for BOJ to maintain monetary easing until inflation is achieved in a stable and durable manner.”

Russian inflation eases, though still high... Russia’s annual rate of inflation fell in May for the first time since the country’s invasion of Ukraine on Feb. 24, indicating a surge in prices that hobbled the economy is beginning to ebb. Russia’s statistics agency said consumer prices were 17.1% higher in May than a year earlier, a slight slowdown from the 17.8% rate of inflation recorded in April. Consumer prices rose rapidly in the weeks after Western governments responded to the invasion with a package of sanctions that have since been expanded, weakening the ruble and pushing the cost of imports higher.