Evening Report | September 29, 2022

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Erdogan urges Putin to reduce tensions, extend Ukraine grain export deal... Turkey’s Tayyip Erdogan pressed Vladimir Putin in a call today to take steps to reduce tensions in Ukraine and urged the Russian leader to extend a deal protecting Black Sea grains exports. Erdogan also cited Moscow’s plans to annex four Ukrainian regions, which Turkey opposes, and he asked Putin to give peace negotiations another chance, according to Ankara’s readout of the call.

VTB proposes banning Western grain traders’ deals in Russia... Sanctions-hit VTB Bank has urged Vladimir Putin to curb activities of Western grain companies in Russia, citing the need to strengthen Russian traders’ role in the global market, based on a letter seen by Reuters. In the letter dated Sept. 14, VTB Chief Executive Andrei Kostin asked Putin to issue a decree to prohibit companies belonging to “persons related to unfriendly states” from buying grain and oilseeds from Russian farmers for onward export. The order should also prohibit firms related to “unfriendly” states from owning Russian companies involved in grain loading capacity in ports, and grain storage, he said.

“Exporters from unfriendly countries own about 15% of Russian port transhipment capacity in the Azov-Black Sea basin, allowing them to extract additional profits from trade in Russian grain... while the Russian economy and budget are missing out on significant revenues,” Kostin said.

VTB owns stakes in a number of major Russian grain export hubs in the Black Sea.

According to the VTB letter, the measures outlined in the proposal would allow Russia to “determine the main geography of countries importing Russian grain" and give Moscow "a fundamentally different level of influence over market pricing.”

Hand-written notes apparently signed by Putin on the letter suggest that he had asked his aide to review the proposal with the government.

A source close to the Kremlin told Reuters the proposal had been already sent to the government for consideration. “But the main idea is to strengthen the position of Russian traders on the global market, not to prohibit anyone from doing anything,” the source said.

According to one grain trader, the government is expected to prepare its response to VTB’s proposal by Sept. 30.

Drought footprint expands in HRW areas... As of Sept. 27, 75% of the U.S. was experiencing abnormal dryness/drought, according to the U.S. Drought Monitor, up six percentage points from the previous week. Despite rains in areas of the Plains, the drought footprint expanded across HRW wheat areas.

USDA estimates the drought footprint covers 64% of winter wheat acres (up 7 points from last week). Across the Plains, dryness/drought covers 85% of Colorado (up 1 point), 99% of Kansas (up 2 points), 95% of Montana (up 4 points), 100% of Nebraska (unchanged), 100% of Oklahoma (unchanged), 93% of South Dakota (up 4 points) and 85% of Texas (up 6 points).

For the Plains, the Drought Monitor commentary notes: “Half an inch or more of rain fell across parts of North Dakota and Wyoming, with locally an inch or more in parts of Colorado and Nebraska and over 2 inches in parts of Kansas. But most of South Dakota had less than a fourth of an inch of rain as did large parts of Nebraska and Wyoming. More than 70% of the topsoil moisture was short or very short in Kansas, Nebraska, South Dakota, and Wyoming, according to USDA statistics, with the numbers 67% in Colorado and 54% in North Dakota. According to media reports, heat and drought limited forage production in Nebraska and other drought-stricken areas, forcing cattle producers to weigh hay supplies against herd size for the winter. Many growers chopped drought-damaged crops for silage. D0-D2 were pulled back in a few parts of Wyoming, D0-D3 were trimmed in parts of Kansas and Colorado where the heaviest rains fell, and D3 was deleted in western South Dakota. But drought or abnormal dryness expanded in other parts of the High Plains region states, including North Dakota (D0-D2), Colorado (D0-D1), Nebraska (D2-D3), South Dakota (D0-D4), and Kansas (D0-D2 and D4).”

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H&P Report: Herd contraction a little greater than expected, no signs of expansion... USDA estimated the U.S. hog herd at 73.8 million head as of Sept. 1, down 1.1 million head (1.4%) from year-ago and 468,000 head smaller than the average pre-report estimate implied. The breeding herd at 6.152 million head declined 38,000 head (0.6%) from year-ago, while the marketing herd at 67.648 million head fell 1.029 million head (1.5%).

The summer pig crop at 31.947 million head declined 363,000 head (1.1%) from last year. Summer farrowings dropped 1.0% and the number of pigs saved per litter was in line with last year. When combined with the smaller breeding herd, the U.S. hog herd will continue to contract into 2023.

Producers indicated they intend to farrow 2.5% fewer sows this fall and 0.6% fewer during winter. Unless there’s market incentive with sharply higher hog prices, however, we doubt intentions will top those levels, as feed costs will be high.

Market hog inventories signal hog slaughter will run roughly 1.5% under year-ago through next spring.

With every category coming in lower than the average pre-report trade estimate, the report data should support hog futures, especially given the recent heavy selling.

Ian squeezes oranges, other crop losses likely limited... Hurricane Ian is poised to ravage Florida’s orange crop and could increase the need for the U.S. to import fruit at a time when supply is tight in other areas of the world. This year’s already high orange juice prices were soaring as Hurricane Ian struck the heart of Florida’s citrus-growing region. Frozen concentrate orange-juice futures trading on ICE are up 33% this year and topped $1.95 a pound today before easing from that level. Orange production is down 22.7% in Florida this year, according to USDA, hurt by the spread of an incurable plant disease. Florida grows most of the oranges used for juice in the United States.

World Weather Inc. says, “Damage to cotton fiber quality is expected and a small amount of crop loss is likely. Other crops like soybeans, unharvested corn and groundnuts are not likely to sustain much damage, although there could be a soybean quality decline.”

U.S. Q2 GDP confirms second quarterly contraction... The U.S. economy contracted by 0.6% in the second quarter, according to the third and final estimate from the Commerce Department, unchanged from the previous second-quarter reading. That marked the second straight quarterly contraction, a measure many economists use to define a recession. But some economists contend the strong jobs market signals the U.S. economy is not yet in recession, a belief held by the Biden administration.

The first look at the economy’s third-quarter performance will be released Oct. 27. Economists, on average, expect that GDP returned to growth in the third quarter, expanding at around a 1.5% annual pace.

Meanwhile, Commerce released revised GDP data for the past two years. The revisions showed GDP rose by 5.9% in 2021, up from the previously reported 5.7% growth. The economy contracted 2.8% in 2020, up from a previously published 3.4% drop.

Second tentative agreement between railroads, unions... Major U.S. railroads reached a new tentative contract agreement with the machinists’ union that rejected an earlier pact. The National Carriers Conference Committee (NCCC), representing most Class I railroads and many smaller ones, has reached a second tentative agreement with the International Association of Machinists and Aerospace Workers (Machinists). The effort tweaked a tentative agreement rejected by that union’s members in a ratification vote earlier this month. The tweaked version will be resubmitted to the membership for a second ratification vote. The cooling off period will now put IAM District 19 members back on schedule with many other rail unions. The new cooling off period will expire on Dec. 9, 2022. All 12 rail unions and the NCCC have reached tentative agreements, but each is subject to a member ratification vote. District 19 Machinists, so far, are the only one of the 12 to reject tentative agreements reached with the carriers. Members of two other rail labor organizations — the Transportation Communications Union (TCU) and Brotherhood Railway Carmen (BRC), both also affiliated with the Machinists — voted to ratify, while nine other rail unions either have ratification votes pending or are preparing to poll members. Collectively, the 12 unions represent some 125,000 workers affected by these contract talks.

U.S. merchandise-trade deficit narrowed in August to the smallest since October 2021... Both imports and exports dropped, suggesting a tailwind for economic growth in the third quarter. The shortfall shrank 3.2% to $87.3 billion last month, Commerce Department data showed. Exports declined 0.9% to $179.8 billion, the first drop since January. Imports retreated for the fifth straight month to $267.1 billion. Inbound shipments of consumer goods advanced 4.5% to $283.2 billion. While imports of consumer merchandise have fallen from a record earlier this year, they remain well higher than the pre-pandemic average. The dollar strengthened for a third straight month in August, lowering the cost of imports and making exports more expensive. The U.S. currency has since gained even more as the Federal Reserve presses on with significant interest-rate hikes, signaling further difficulty to exporters ahead.

USTR official vague on possible U.S./U.K. trade deal, TPA renewal... The Biden administration is still trying to figure out its strategy on how to pursue the trade relationship with the U.K., Deputy Assistant U.S. Trade Representative (USTR) for Agricultural Affairs Leslie Yang acknowledged to members of the National Association of State Departments of Agriculture (NASDA). She said examination of the free trade agreement (FTA) negotiations begun under the Trump administration is still ongoing and the decisions on the next steps will not happen until that is completed. Lang was also vague when asked about whether the administration would push for renewal of Trade Promotion Authority (TPA) which allows an administration to negotiate trade agreements and for Congress to vote on it via an up-or-down vote tally with no amendments.

Perspective: Some veteran trade policy analysts say the hesitancy to inking new trade accords and using whatever political capital they have to push for TPA renewal show trade policy is not a priority in the Biden administration.