China Fines Sinograin, Others for Cooking Oil Transport Scandal

News/Markets/Policy Updates: Aug. 26, 2024

— Equities today: Asian and European stock indexes were mixed overnight. U.S. Dow opened around 45 points higher. In Asia, Japan -0.7%. Hong Kong +1.1%. China flat. India +0.8%. In Europe, at midday, London +0.5%. Paris +0.2%. Frankfurt -0.2%.

U.S. equities Friday: For the week, the Dow Jones average jumped nearly +1.3%, the Nasdaq Composite added +1.4%, and the S&P 500 gained +1.5% after all three benchmark indexes gained more than 1% on Friday, and the Dow and S&P scored their second-highest closes ever — Dow +1.3% to 41,175; S&P 500 +1.5% to 5,635; Nasdaq +1.4% to 17,878.

Major indexes logged their best two-week stretch of the year. The Nasdaq is up 6.8% in the period, while the S&P 500 gained 5.4%. The Dow rose 4.2%, or 1,677 points.

— FTC accuses Albertsons executives of destroying texts amid Kroger merger probe. The Federal Trade Commission (FTC) has accused several executives from Albertsons, including CEO Vivek Sankaran, of deleting and concealing text messages that were relevant to an ongoing investigation into a proposed merger with Kroger. This accusation comes as the executives are set to appear today before a district court judge in Portland, Oregon. The FTC claims that these executives failed to preserve text messages despite receiving a preservation hold and numerous reminders. This action is seen as a significant issue because the deleted messages are believed to contain internal views about the likely effects of the merger, which could include potential price increases. The FTC has requested the court to consider an “adverse inference” against Albertsons, which would mean assuming that the destruction of the messages was intentional and could negatively impact the company’s defense in the case. This type of inference can lead the court to presume that the missing evidence would have been unfavorable to Albertsons. The merger between Kroger and Albertsons is a significant deal, valued at $24.6 billion, and would create the second-largest grocery chain in the United States. The merger has faced scrutiny due to concerns about its potential impact on competition, pricing, and the grocery market.

— Cava, a Mediterranean fast-casual restaurant chain, has been gaining significant attention from investors, with many seeing it as the “next Chipotle.” The company’s stock surged by nearly 20% after reporting better-than-expected earnings, and despite a strong year for fast casual food stocks, it’s worth almost 30% more than competitors Shake Shack and Sweetgreen combined. It also posted its fourth straight profitable quarter since going public a year ago, with net income more than tripling year over year, to $19.7 million. Cava now boasts 341 restaurants across 25 states and D.C. — including 18 new locations opened in the second quarter. It has upped projected store openings slightly for the full year, from 50 to 54 net new stores to 54 to 57. “Chicago has been our best new market opening ever,” CEO Brett Schulman said during an earnings call. “We need to get more restaurants open in Chicago.”

— Key earnings reports this week to shape stock market, led by Nvidia and retailers. A busy week of earnings reports will influence the stock market, with a major focus on Nvidia’s report on Wednesday. Investors are also watching retail sector earnings, including Abercrombie & Fitch, Nordstrom, Foot Locker, and Best Buy, as they seek insights into consumer spending trends. Notable reports include Nordstrom on Tuesday, Foot Locker and Abercrombie & Fitch on Wednesday, and Best Buy, Ulta Beauty, and Lululemon on Thursday.

— U.S. light crude oil prices on Friday increased by more than 2% per barrel after Federal Reserve Chair Jerome Powell suggested that the central bank might be preparing to cut interest rates. Brent crude futures rose by $1.80 (2.33%) to $79.02 a barrel, while U.S. West Texas Intermediate (WTI) crude futures went up by $1.82 (2.49%) to $74.83. Crude oil prices continued their rally today.

— Ag markets today: Corn, soybeans and wheat traded lower overnight in continuation of price pressure from late last week. Corn and wheat futures posted contract lows, while soybeans held above their mid-August low. As of 7:30 a.m. ET, corn futures were trading 4 to 5 cents lower, soybeans were mostly 8 cents lower, winter wheat markets were 4 to 5 cents lower and spring wheat was mostly 6 to 7 cents lower. The U.S. dollar index was about 135 points higher, and front-month crude oil futures were around $2.00 higher this morning.

Wholesale beef prices remain elevated. Wholesale beef prices firmed $1.35 for Choice to $317.34, while Select dropped $1.57 to $300.46 on Friday. Prices are well off their summer peak, but they remain elevated amid tight market-ready supplies.

Cash hog index extends slide, pork cutout jumps. The CME lean hog index is down another 61 cents to $88.22 as of Aug. 22, extending the pullback from the early August seasonal top. October lean hog futures finished Friday at a $7.67 discount to today’s cash quote. The pork cutout value rose $2.62 Friday, rebounding from losses earlier in the week, as all cuts except ribs firmed.

— Agriculture markets Friday:

• Corn: December corn futures slipped 3 1/4 cents to $3.91 at Friday’s close. That represented a weekly drop of 1 1/2 cents.
• Soy complex: November soybean futures rose 11 1/2 cents to $9.73 and near the daily high. December meal rose 10 cents to $304.50 and September bean oil gained 103 points to 41.47 cents.
• Wheat: December SRW wheat futures fell 7 1/2 cents to $5.28, near the daily low and closed at a contract low close. December HRW futures lost 10 cents to $5.35, near the session low and hit a contract low. December spring wheat futures fell 11 3/4 cents to $5.72 1/4.
• Cotton: December cotton rallied 157 points to 70.91 cents, ending the session above the 40-day moving average.
• Cattle: Cattle and feeder futures traded mixed-to-lower Friday. Expiring August live cattle futures inched up 2.5 cents to $182.575, while most-active October dipped 20 cents to $175.70. That marked a weekly decline of $2.80. The expiring August feeder contract advanced 60 cents to $242.575, whereas most-active October rose 12.5 cents to $234.375, which represented a weekly drop of $1.575.
• Hogs: The nearby October contract rallied 92.5 cents to $80.55 to end the week, which represented a weekly gain of $5.475.

— Quotes of note:

• Bullard: Powell’s Jackson Hole speech ‘not quite a victory lap.’ Former Federal Reserve Bank of St. Louis President James Bullard described Chair Jerome Powell’s recent speech at the Jackson Hole economic forum as “not quite a victory lap,” but close. Powell indicated that the economic distortions caused by the pandemic are diminishing and that the U.S. is increasingly on a sustainable path to the 2% inflation target. He suggested that there’s “good reason to think” this target can be achieved while maintaining a stable job market, and hinted that it may be time for the Fed to consider lowering interest rates. Bullard noted that the way inflation was managed without triggering a recession will be studied for years. Powell added that this period will be analyzed and debated long after the current policymakers are gone. A crucial factor in this success, besides the aggressive rate hikes, was the public’s belief in the Fed’s commitment to price stability. This belief prevented households and businesses from acting as if high inflation would persist, which could have entrenched high prices for years.

• Summers praises Fed’s strong actions in tackling inflation, avoiding recession. Former Treasury Secretary Lawrence Summers, a frequent critic of the Federal Reserve, acknowledged the Fed’s efforts in addressing inflation. Summers praised the policymakers for acting decisively, which he believes has helped the U.S. navigate the inflation crisis without triggering a major recession. Summers shared his views during an appearance on Bloomberg TV, where he serves as a paid contributor (link).

• A real violation. “By feeding sensitive data into a sophisticated algorithm, RealPage has found a modern way to violate a century-old law through systematic coordination of rental housing prices.” — Deputy Attorney General Lisa Monaco.

— Dr. Vince Malanga, president of LaSalle Economics, discussed Federal Reserve Chair Jerome Powell’s recent remarks at the Jackson Hole Conference. Powell hinted at a potential rate cut in September, though he didn’t specify whether it would be 25 or 50 basis points. He emphasized that the decision would depend on upcoming economic data. Malanga noted that while markets expect a series of rate cuts, Powell signaled that any rate cuts would be cautious and data dependent.

Malanga also highlighted the importance of upcoming economic indicators, including the consumption price deflator, ISM data, and labor market reports, which will all be released before the next FOMC meeting Sept 17-18. He observed that if inflation rates, particularly in the CPI, come in low, it could reduce the yearly inflation rate to 2% just before the election, but he cautioned that the Fed would likely maintain a cautious stance, focusing on the broader economic conditions rather than celebrating a specific target.

Despite a decline in the ten-year note yield and a weakening dollar, Malanga noted the housing market has not yet responded to lower mortgage rates. Malanga suggested that a sustained drop below 3.75% might be necessary to stimulate demand, but noted that this could be challenging due to high federal deficits and potential risk premiums demanded by investors, which could stifle a housing rebound.

Market perspectives:

— Outside markets: The U.S. dollar index was higher, with the euro, yen and British pound weaker against the greenback. The yield on the 10-year U.S. Treasury note rose, trading around 3.82%, with a mixed-to-positive tone in global government bond yields. Crude oil futures were higher, with U.S. crude around $77.05 per barrel and Brent around $80.25 per barrel. Gold and silver futures were gaining ground, with gold at around $2,562 per troy ounce and silver at around $30.17 per troy ounce.

— The decline in the U.S. Dollar Index, which fell toward 100.5, marks its weakest level since July 2023. This decline is influenced by Federal Reserve Chair Jerome Powell’s recent comments, which have increased market expectations for an interest rate cut at the Sept. 17-18 FOMC meeting. Powell’s remarks, delivered at the Jackson Hole symposium, emphasized the need to adjust monetary policy due to rising risks to the labor market and a belief that inflation is on track to meet the Fed’s 2% target. The anticipation of a rate cut has led to a depreciation of the dollar against major currencies such as the euro and the British pound, as well as the Japanese yen, as other central banks also signal their monetary policy intentions.

Of note: The impact of a declining U.S. dollar on exports can vary, but generally, it takes some time for the benefits to materialize. Studies suggest that the positive effects on exports from a weaker dollar are typically observed over a period of several quarters.

— Brent crude oil prices rose above $80 per barrel, marking an extension of gains for the third consecutive session. This increase is largely driven by concerns over potential supply disruptions amid escalating geopolitical tensions in the Middle East. The fears of a broader conflict in the region have heightened the perceived risk to global energy supply routes, contributing to the upward pressure on oil prices. Several factors are influencing the current oil market dynamics:

• Geopolitical tensions: The situation in the Middle East is a significant factor. Recent events, such as the killing of a political leader from Hamas, have raised concerns about a potential widening of the conflict, which could disrupt oil supplies from the region.
• Supply-side concerns: There are ongoing worries about supply-side issues, including disruptions in oil production in regions like Libya, which have further supported the rise in oil prices.
• Economic indicators: Positive economic data and indications from the Federal Reserve about potential interest rate cuts have also played a role in alleviating some demand concerns, thereby supporting oil prices. Lower interest rates can weaken the U.S. dollar, making crude oil cheaper for holders of other currencies, which can boost demand.

— Canadian rail workers to return as CIRB enforces arbitration in labor dispute. Over 9,000 railway workers from Canadian National Railway (CN) and Canadian Pacific Kansas City Railway (CPKC) will return to work today following a Canada Industrial Relations Board (CIRB) decision. The CIRB upheld the federal labor minister’s directive for binding arbitration to resolve ongoing contract disputes between the railways and the Teamsters Canada Rail Conference (TCRC) union. This ruling follows a shutdown of the Canadian rail system due to lockouts over issues like worker scheduling and compensation. The CIRB’s order requires the resumption of operations by Aug. 26 and extends the terms of the previous labor agreement until new contracts are finalized through arbitration, which is scheduled to begin on Aug. 29. The Teamsters union plans to appeal the decision, citing concerns over the precedent it sets for future labor disputes. Although the shutdown was relatively short, the recovery process for the railways and affected industries was expected to take several days. The backlog of shipments and the need to restore normal operations added to the economic strain. Still, rail shippers may remain uneasy about long-term labor peace.

Another labor concern brews. There’s still uncertainty around the labor negotiations for dockworkers and their employers at U.S. East and Gulf coast ports. Those talks are at an impasse with just over a month before the current contract expires on Sept. 30.

— Cattle on Feed Report slightly negative. USDA estimated there were 11.095 million head of cattle in large feedlots (1,000-plus head) as of Aug. 1, up 31,000 head (0.3%) from year-ago, 65,000 head more than analysts expected. July placements increased 5.8% (3.2% increase expected), while marketings rose 7.7% (8.1% increase expected).

— Supportive frozen meat stocks data. USDA’s Cold Storage Report Friday afternoon showed beef stocks in frozen storage at the end of July at 407.1 million lbs., down 799,000 lbs. from June, whereas the five-year average was a 10.8-million-lb. increase during the month. Beef stocks declined 3.3 million lbs. (0.8%) from year-ago and were 36.4 million lbs. (8.2%) less than the five-year average. Pork stocks totaled 450.7 million lbs., down 24.2 million lbs. from June, far greater than the five-year average 7.2-million-lb. decline for the month. Frozen pork inventories fell 20.1 million lbs. (4.3%) from last year and were 51.5 million lbs. (10.3%) below the five-year average.

— Brazil’s upcoming sugar production data will be crucial in determining the global market’s supply outlook. As the world’s top sugar exporter, Brazil is halfway through its sugar-cane harvest, with strong production so far driving prices down nearly 12% this year. However, dry weather poses a threat to yields, and traders are eagerly awaiting a report from industry group Unica, due this week, for further insights. Link to more via Bloomberg.

(Bloomberg)

— NWS outlook: A couple of days of intense heat and humidity expected to impact the Midwest... ...Severe storms and isolated flash flooding possible across the Northern
Plains/Upper Midwest today and the Great Lakes on Tuesday... ...Daily monsoonal thunderstorms shifting eastward into the southern Rockies/High Plains.

(NWS)

Items in Pro Farmer’s First Thing Today include:

• Grains under pressure to open the week
• Warm, mostly dry U.S. week ahead
• China rolls over maturing loans, injects cash

— McConnell pushes to avoid gov’t shutdown, urges House conservatives to drop immigrant voting demand from funding bill. Senate Minority Leader Mitch McConnell (R-Ky.) is actively working to prevent a government shutdown by discouraging House conservatives from attaching controversial demands to a short-term funding bill that will keep the gov’t opened beyond the start of fiscal year (FY) 2025, which begins Oct. 1, Axios reports (link).

Specifically, McConnell’s staffers are trying to persuade these conservatives to drop their push for an immigrant voting crackdown, which they want to include as part of the funding legislation. This effort is driven by concerns that adding such conditions could prompt Democrats to introduce their own legislative priorities, such as the John Lewis Voting Rights Act, which aims to restore parts of the 1965 Voting Rights Act.

The Republican focus on immigrant voting fraud has become a significant campaign issue, tying together concerns about illegal immigration and election integrity. The SAVE Act, which mandates proof of citizenship for voter registration, was passed by the House with support from some vulnerable Democrats. House Speaker Mike Johnson (R-La.) has indicated a willingness to attach this measure to a funding bill, despite its likely rejection in the Democrat-controlled Senate and strong opposition from President Biden.

McConnell’s team is advocating for the passage of clean short-term funding bills to avoid complicating negotiations and to prevent a potential government shutdown. This strategy reflects a broader effort to maintain legislative focus and avoid contentious political battles that could derail funding agreements.

— U.S. tightens sanctions on Russia, targeting 400 entities to disrupt military supply chains. The U.S. on Friday escalated its sanctions against Russia, targeting nearly 400 individuals and entities to disrupt Russia’s supply chains supporting its military operations in Ukraine. Announced by the U.S. Treasury, State, and Commerce Departments, these sanctions focus on transnational networks that facilitate Russia’s procurement of weapons, technology, and financial resources crucial for its defense industry. The measures also aim to cut off Russia’s access to U.S. technology and address sanctions evasion by entities in countries like China. This is part of a broader strategy, backed by G7 commitments, to maintain pressure on Russia in response to its ongoing aggression in Ukraine.

— Peru’s Chancay port: China’s $3.5 billion trade hub raises U.S. concerns over strategic influence. Chancay, a small tourist town in Peru, is set to become a major commercial hub with the inauguration of a $3.5 billion port controlled by China’s COSCO Shipping in October. This port, part of China’s Belt and Road Initiative, will significantly reduce shipping times from South America to China, enhancing trade and deepening China’s influence in the region. While Peru views the project as an economic opportunity, the U.S. sees it as a strategic threat, raising concerns over potential Chinese military use. Despite political instability, the project has garnered consistent support from Peru’s leadership, although it has also exposed the country to potential coercion from China. Link to The Wire (paywall) for details.

In July, Sens. Mark Kelly (D-Ariz.), Marco Rubio (R-Fla.), and Rick Scott (R-Fla.) introduced the Strategic Port Reporting Act, a bipartisan bill that would require the Defense Department devise a strategy to counter China’s growing influence at key global ports.

(Florida International Univ. Security Research Hub)

— PBOC holds key rate steady amid cautious economic support, bond market cooling. The People’s Bank of China (PBOC) kept its key one-year policy loan rate, the medium-term lending facility (MLF), steady at 2.3% after a 20-basis point cut in July. This move is part of a cautious approach to managing the economy, balancing growth stimulation with cooling an intense government-bond buying spree. The PBOC also withdrew a net 101 billion yuan from the banking system, indicating its intent to maintain balanced liquidity. Despite a rare contraction in bank loans and stress tests on bond investments, economists suggest further easing may occur by the end of the year as the Federal Reserve is expected to begin its rate-cut cycle.

— PBOC starts bank stress tests to avoid bond bubble bursting. China has initiated stress tests with financial institutions on their bond investments, to make sure they can handle any market volatility should a record-breaking rally reverse, according to state-run Financial News. PBOC has made a gradual start to the tests recently, wary that a bull run might lead to one-sided bets in long-term government bonds. Financial institutions should be able to cope with large drops in bond prices, as crowded holdings in debt positions could easily turn into a “stampede” in the event of a sharp yield reversal, Financial News said. That can raise the likelihood of a liquidity crisis and threaten financial stability, it added.

— China fined seven companies a total of 11 million yuan (approximately $1.5 million) for their involvement in a tainted cooking oil scandal that has raised significant concerns over food safety across the country. The scandal involved the transportation of edible oil in tanker trucks that had previously carried coal oil, without being properly cleaned afterward. This incident has been described as “extremely severe” by the Food Safety Commission of the State Council, as it violates basic safety and ethical standards.

Among the companies fined, a unit of the state grain stockpiler China Grain Reserves Corp., known as Sinograin, received the largest penalty of 2.86 million yuan. The investigation, led by the State Council, uncovered that the trucks used for transporting the cooking oil were not adequately cleaned after carrying industrial materials, which is a serious breach of food safety regulations.

Besides the fines, the authorities have filed criminal charges against two drivers involved in the transportation of the tainted oil. These drivers, identified by their surnames Yao and Zhang, have been arrested, and three other individuals responsible for falsifying cleaning records have also been detained. The investigation revealed that out of the 67 tons of contaminated oil transported, portions were sold in Inner Mongolia and used for animal feed, while the rest was seized before reaching consumers.

Background: In early July, news broke that two large oilseed processors, including a subsidiary of state-owned Sinograin, had used dirty fuel tankers to ship edible oils to some of the country’s largest commercial cooking oil companies. In response, China’s highest food safety body dispatched a five-ministry team to investigate. The investigators reached a damning conclusion: “The incident…was of an extremely severe nature, violated basic common sense, trampled on ethical bottom lines and legal red lines, and presents a classic case of illegal and criminal behavior that must be severely cracked down on.”

The Chinese government has emphasized a “zero tolerance” approach to such violations and has vowed to strengthen oversight across the entire supply chain to ensure food safety. This incident has revived fears of food safety in China, reminiscent of past scandals such as the 2008 melamine-tainted milk incident, which had devastating effects.

There was one bright spot in the report: A nationwide spot check didn’t identify any similar issues. Trivium China wrote: “Beijing appears to have successfully defused what could have been an explosive food safety scandal without undermining public trust in a broader range of foods. That’s a win in our book.”

— U.S. industry seeks easing of steep Biden-Harris China tariff hikes. The Biden/Harris administration this week is expected to announce final implementation plans for steep tariff increases on certain Chinese imports, and if U.S. industry gets its way, many of the planned duties would be softened. Link to more via Reuters.

— Walmart has issued a recall for nearly 10,000 cases of Great Value brand apple juice due to the discovery of potentially harmful levels of arsenic. This recall affects stores across 25 states, Puerto Rico, and the District of Columbia. The contaminated juice, produced by Florida-based manufacturer Refresco Beverages U.S., was found to have arsenic levels exceeding industry standards. Although the levels could potentially cause sickness, the FDA has indicated that they are not expected to lead to severe health consequences. Walmart has removed the product from affected stores and is collaborating with the supplier to investigate the issue.

— Telegram founder Pavel Durov detained in France amid investigation into illegal activity on platform. Pavel Durov, the founder and CEO of Telegram, was detained by French authorities at Le Bourget airport near Paris as part of an investigation into the alleged misuse of Telegram for illegal activities, including child pornography and drug trafficking. The investigation focuses on Telegram’s moderation practices, which French authorities claim are inadequate. Durov’s arrest has led to diplomatic tensions, with the Russian Embassy seeking clarification on his rights. The incident has drawn international attention, with debates over its implications for privacy and free speech. Durov, who has resisted government demands for access to encrypted communications, founded Telegram in 2013 after leaving Russia due to conflicts over his previous social media platform, VKontakte.

— Boeing’s Starliner to return uncrewed amid safety concerns, NASA opts for SpaceX’s Crew Dragon. Boeing’s Starliner capsule will return to Earth without astronauts after NASA decided to prioritize safety due to identified issues with the capsule’s thrusters and helium leaks. The two astronauts delivered to the ISS by Starliner will now return to Earth in February 2025 aboard SpaceX’s Crew Dragon. Initially planned as a short test flight, the mission has been extended to an eight-month stay on the ISS. NASA and Boeing are working to resolve the technical issues, with the Starliner set to return uncrewed in September for further analysis. Despite setbacks, NASA remains confident in Starliner’s future for crewed missions.

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