Defining a U.S. Ag Recession

News/Markets/Policy Updates: Sept. 4, 2024

— Equities today: Stocks in Asia and Europe broadly sold off this morning. In Asia, Japan -4.2%. Hong Kong -1.1%. China -0.7%. India -0.3%. In Europe, at midday, London -0.6%. Paris -0.9%. Frankfurt -0.7%. U.S. Dow openedly slightly lower and then went higher. Investors will watch closely today’s JOLTS employment data, and the Fed’s Beige Book economic report.

U.S. equities yesterday: Major U.S. indexes notched their worst day since Aug. 5. A disappointing economic report dragged down equities. The report on manufacturing showed a fifth-straight month of declines, fueling concern that aggressive rate hikes from the Federal Reserve have inflicted too much damage on the economy. September has historically been an ugly month for stocks. The S&P 500 shed 2.12% (down 119.47 points, at 5,528.93) and the Nasdaq fell 3.26% (down 577.33 points, at 17,136.30). The Dow lost 1.51% (626.15 points, at 40,936.93).

Nvidia shares dropped 9.5%. The company shed about $279 billion in market value, the largest one-day decline in market cap on record for a U.S. company. For the year, Nvidia is still up 118%. Nvidia was subpoenaed as part of a Justice Department antitrust investigation, according to Bloomberg, ramping up the probe and bringing regulators closer to filing a formal complaint against the tech giant. Antitrust officials believe Nvidia may be making it more difficult for buyers to switch to other chip suppliers while penalizing those that do not exclusively purchase their AI chips, Bloomberg reported. The DOJ, which had previously delivered questionnaires to companies, is now sending legally binding requests that oblige recipients to provide information, taking the government a step closer to launching a formal complaint.

The benchmark 10-year U.S. Treasury yield dropped to 3.843%, from 3.910% on Friday.

— Cargill faces profit decline as food prices drop, raising pressure for strategic change. Cargill, America’s largest privately owned company, is experiencing a significant profit downturn as food prices fall, with net earnings dropping to $2.48 billion in 2024 from a high of $6.7 billion in 2021-2022. Bloomberg Opinion’s Javier Blas writes (link) that this decline is expected to reduce dividend payouts to the Cargill/MacMillan family, raising concerns about the company’s strategy moving forward. CEO Brian Sikes is steering the company through cost-cutting measures, but the pressure to innovate and maintain growth is mounting as competitors expand. Some family members may push for a more radical transformation, Blas notes.

— Molson Coors has joined the growing list of companies that are ending some of their diversity, equity and inclusion (DEI) program policies amid a social media backlash. The maker of Miller and Coors Light beers announced that it is working to evolve its culture from a primarily DEI focus to a broader view where all employees are welcomed. Activist and political commentator Robby Starbuck once again claimed credit for the DEI shift. Other companies that have revised their DEI policies in recent months include Tractor Supply, Deere, Harley-Davidson, Lowe’s, and Ford.

— Oil prices plummet amid Libya supply deal and global demand concerns. Oil prices on Tuesday dropped sharply, erasing gains for the year, as news of a potential deal to restore Libya’s oil output shifted traders’ focus back to concerns about weak global demand. Brent crude fell 4.9%, settling below $74 per barrel, marking the lowest intraday price since December 2023. The anticipated return of over half a million barrels of Libyan crude, combined with economic uncertainty in key markets like China and the U.S., has exacerbated fears of excess supply and weak consumption. Additionally, options markets show a deepening bearish sentiment, with traders increasingly protecting against further price declines.

Of note: OPEC+ is discussing a possible delay to an oil output increase planned for October, delegates said, after prices crashed to the lowest since last year.

— Ag markets today: Wheat futures firmed amid followthrough buying overnight, while soybeans pulled back and corn was caught in the middle. As of 7:30 a.m. ET, corn futures were trading near unchanged, soybeans were mostly a nickel lower and wheat futures were 3 to 4 cents higher. The U.S. dollar index was around 170 points lower, and front-month crude oil futures were around 40 cents higher.

Strong start to the week for wholesale beef trade. Wholesale beef prices firmed $1.33 for Choice to $310.67 and $4.29 for Select to $300.11 on Tuesday, while movement totaled 105 loads. September is typically a seasonally weak period for beef demand as retailers gear up for pork features in October, but the wholesale market has given no signs of an extended breakdown.

Pork cutout firms, too. The pork cutout firmed $1.59 on Tuesday as all cuts firmed, led by more than $2.00 gains in primal bellies, hams and ribs. Movement was strong at 337.4 loads, suggesting retailers are gearing up for October pork month features.

— Agriculture markets yesterday:

• Corn: December corn rose 8 1/4 cents to $4.09 1/4, closing near the session high and at the highest level since July 29.
• Soy complex: November soybeans surged 12 cents to $10.12 but closed well off session highs. December meal closed $7.80 higher at $320.80, nearer session highs. December bean oil futures fell 103 points to 40.98 cents.
• Wheat: December SRW wheat rose 15 1/4 cents to $5.66 3/4, near the daily high. December HRW wheat gained 11 cents to $5.76 1/4 and nearer the session high. Both markets hit three-week highs. December spring wheat futures rose 6 3/4 cents to $6.07 1/4.
• Cotton: December cotton rose 51 points to 70.50 cents, marking a high-range close.
• Cattle: October live cattle rose 67 1/2 cents to $179.275. October feeder cattle gained $1.575 at $239.325. Both markets closed nearer their session highs.
• Hogs: October lean hog futures climbed 30 cents to $82.525 and settled nearer session high.

— Of note:

• Chance of a half-point interest rate reduction has increased to about 30% from 20% last week, according to swaps.

• The Fed is caught in a political contest. Donald Trump is warning the Fed to hold off on lowering borrowing costs until after Election Day, and progressive Democrats, including Sen. Elizabeth Warren of Massachusetts, are urging the central bank not to delay.

• U.S. Steel threatens mill closures if Nippon deal falls through. U.S. Steel CEO David Burritt has warned that the company may shut down older mills and potentially relocate from Pittsburgh if its $14 billion sale to Nippon Steel fails. Both presidential candidates have opposed the deal, emphasizing the need for U.S. Steel to remain American-owned as they appeal to blue-collar voters in the key battleground state of Pennsylvania. Link to more via the Wall Street Journal.

• A new kind of Bug. “The economic environment became even tougher, and new competitors are entering the European market.” — Volkswagen Group CEO Oliver Blume on potential plans to close vehicle production and component factories in Germany.

— Immigration remade the U.S. labor force. Since the end of 2020, more than nine million people have migrated to the U.S. — nearly as many as the number that came in the previous decade. The Wall Street Journal illustrates (link) how America’s largest immigration wave in generations is changing the makeup of the U.S. labor force in ways that are likely to reverberate through the economy for decades.

Market perspectives:

— Outside markets: The U.S. dollar index was weaker, with the euro and British pound both firmer against the greenback. The yield on the 10-year U.S. Treasury note was lower, trading around 3.82%, with a lower tone in global government bond yields. Crude oil futures were moving higher ahead of U.S. trading with U.S. crude around $70.90 per barrel and Brent around $74.15 per barrel. Gold and silver were narrowly mixed ahead of US market action with gold weaker around $2,519 per troy ounce and silver firmer around $28.39 per troy ounce.

— Average price of regular gasoline in the U.S. is approximately $3.33 per gallon.

Three most expensive states for gasoline
• Hawaii: $4.68 per gallon.
• California: $4.64 per gallon.
• Alaska: $3.72 per gallon.

Three least expensive states for gasoline
• Mississippi: $2.96 per gallon.
• Louisiana: $2.94 per gallon.
• Alabama: $2.94 per gallon.

— Average price for diesel fuel in the U.S. has seen some fluctuations recently. As of September 2024, the national average diesel price was approximately $3.625 per gallon. This represents a decrease compared to previous months, providing some relief to sectors like agriculture that heavily rely on diesel fuel.

Of note: The national average suggests that states with lower fuel taxes and costs typically have lower diesel prices. Generally, states in the South and Midwest, such as Texas and Oklahoma, often have lower fuel prices due to lower state taxes and proximity to refineries.

— East and Gulf coast dockworkers begin wage talks today amid strike threat. The union representing East and Gulf Coast dockworkers is meeting in New Jersey for two days of wage negotiations with port employers, under the looming threat of a strike that could disrupt trade from Houston to Boston. Talks between the International Longshoremen’s Association and the United States Maritime Alliance have stalled since June, affecting nearly 45,000 workers. The union is seeking an 80% wage increase over six years, significantly higher than what West Coast dockworkers received. With the Sept. 30 deadline approaching, U.S. retailers are urging the White House to intervene to avoid a potential economic fallout.

— Indonesia considers lowering palm oil export levy to boost competitiveness. Indonesia is planning to reduce its palm oil export levy to enhance competitiveness amid growing pressure from large global supplies of soybean and sunflower oils, which have become more price competitive. Dida Gardera, a senior official at the Coordinating Ministry of Economic Affairs, said the move aims to improve smallholders’ welfare and palm oil’s price advantage. Currently, the export levy ranges from $55 to $240 per metric ton, with the government considering simpler price brackets for the levy system.

The palm oil market is currently influenced by several factors, including stagnant production in major producing countries like Indonesia and Malaysia, and growing demand for palm oil in biodiesel production. These factors are expected to contribute to higher average palm oil prices globally in 2024. Additionally, the El Niño weather phenomenon could impact palm oil yields, further affecting supply and prices. Also, China announced an anti-dumping investigation into Canadian canola exports, following Canada’s recent decision to impose 100% tariffs on Chinese electric vehicles and a 25% levy on Chinese steel and aluminum. China is Canada’s second-biggest rapeseed-export market, worth C$5 billion ($3.7 billion).

— Ag trade update: Taiwan purchased 101,700 MT of U.S. milling wheat. South Korea purchased 65,000 MT of optional origin feed wheat, excluding Russia, Argentina, Pakistan, Denmark and China. Japan tendered to buy 65,000 MT of feed wheat and 25,000 MT of feed barley. Thailand tendered to buy 120,000 MT of optional origin feed wheat.

— NWS outlook: Heat wave builds over the Southwest and the West Coast this week... ...Heavy rain and flash flood potential continues for the Gulf Coast states the next couple of days.

(NWS)

Items in Pro Farmer’s First Thing Today include:

• Varied price tone in grains overnight
• Corn, soybean CCI ratings continue late-season slip
• Crop Progress Report highlights
• ENSO-neutral conditions to continue for now but La Niña building
• Eurozone business activity gets Olympic boost

— White House seeks Ukraine aid, transition funds in stopgap spending bill. The Biden administration is urging Congress to include several key provisions in a stopgap funding bill to avoid a gov’t shutdown on Oct. 1. The requests include additional funds for Navy shipbuilding, preparation for the presidential transition, and extended benefits for Ukrainian refugees. The White House also seeks to prevent doubling rescissions of unspent funds from previous legislation and calls for nearly $8 billion in presidential authority to support Ukraine and Israel. Additionally, funding anomalies are requested for the Virginia-class submarine program, veterans’ healthcare, and various defense and security programs.

Of note: The request says “Language is needed to extend authorities for the Livestock Mandatory Reporting program, which expires on Sept. 30, 2024. Without the anomaly, livestock market participants would no longer be required to report price and supply information, which facilitates market competition through open and transparent price discovery.”

The White House also is requesting $7.7 million in funding for the Special Supplemental Nutrition Program for Women, Infants, and Children — half a million more than House appropriators have indicated, according to the Biden administration’s “anomalies” request.

The White House further requested $425 million for the Commodity Supplemental Food Program, one of the two USDA nutrition food aid programs that experienced shortages after the department changed vendors. Without the funding, the White House warns, “10,000 participants would have to be removed from the program and commodities would not be available in a timely manner.”

Meanwhile, some farm-state lawmakers want to attach a one-year extension of the 2018 Farm Bill to the CR measure, but others oppose that move, saying the “real” deadline is at the end of this Congress.

— Congress schedules joint hearing on food aid shortages for tribal communities and seniors. House lawmakers have scheduled a rare joint subcommittee hearing next week to investigate ongoing food aid shortages affecting tribal populations and low-income seniors. The crisis began in May after USDA consolidated distribution for key programs, causing severe shortages and delivery disruptions. Nearly half of the Food Distribution Program on Indian Reservations (FDPIR) sites remain impacted, affecting tribes in at least eight states. Congressional scrutiny is increasing as bipartisan lawmakers demand answers from USDA and push for solutions to restore essential food aid.

— DOJ charges senior Hamas leaders for Oct. 7 attack in Israel. The U.S. Dept. of Justice has charged six senior Hamas officials, including Yahya Sinwar, over their involvement in the Oct. 7 terrorist attack in Israel. This marks the DOJ’s first criminal step in holding individuals accountable for the attack. The indictment was unsealed following the death of Israeli/American hostage Hersh Goldberg-Polin in Gaza, with President Biden vowing that Hamas leaders would “pay for these crimes.”

— Israel open to long-term security solutions in Gaza/Egypt border area. Israel’s Strategic Affairs Minister Ron Dermer stated that Israel cannot leave the Gaza/Egypt border, known as the Philadelphi corridor, without a “solution on the ground” due to security concerns. In an interview with Bloomberg TV, Dermer also mentioned that while negotiations on a truce with Hamas continue, with several unresolved issues, a deal is more likely if Israel and the U.S. align their positions closely.

— Ukraine’s grain exports reach 7.2 MMT in 2024-25, surpassing last year’s figures. Ukraine’s grain exports in the 2024-25 marketing year have reached 7.2 million metric tons (MMT) as of Sept. 4, a significant increase from 4.9 MMT at the same point in 2023-24, according to the Agriculture Ministry. Shipments include 3.8 MMT of wheat, 2.3 MMT of corn, and 1.1 MMT of barley. However, shipments in early September totaled 212,000 metric tons, down from 297,000 metric tons during the same period last year.

As previously noted, the Ukrainian government has agreed with traders and agriculture associations to limit wheat exports for the 2024-25 season to 16.2 MMT. This cap is part of an annual memorandum where officials promise to maintain existing trade terms and not restrict exports within the agreed volume, while traders commit to not exceeding this volume.

Of note:
• EU market: The European Union remains a major destination for Ukrainian grains, with the temporary suspension of import duties and quotas contributing to this trend.
• Crop shift: Ukrainian farmers are allocating more areas to oilseeds compared to the pre-war period, which may affect grain production and exports.
• Port infrastructure: Recent Russian attacks on port infrastructure in the Odesa region have slowed the transit of grain shipments to Black Sea ports, although this is not expected to significantly affect overall export volumes.

— China weighs mortgage rate cuts to ease burden on households, banks brace for profit hit. China is considering cutting interest rates on up to $5.3 trillion in mortgages in two phases to reduce borrowing costs for millions of households, Bloomberg reports (link). The proposed cuts could total 80 basis points, with the first reduction expected in the coming weeks. This move aims to stimulate consumption amid a property downturn, but it risks squeezing bank profits, already at record lows. Regulators are balancing economic recovery efforts with maintaining the stability of China’s $66 trillion financial system.

— China’s economic troubles deepen as growth concerns mount. China’s economy continues to struggle, with recent data showing a slowdown in services activity for August and four straight months of contraction in manufacturing. Global investment banks, including Bank of America, have lowered growth forecasts, casting doubt on China’s ability to meet its 5% annual growth target. Western companies like Volkswagen are feeling the pressure of weak demand, though many, including Germany, continue to invest in China despite rising competition and trade tensions. Germany’s increased investment contrasts with the EU’s more cautious stance on China, creating a policy divide.

— China’s anti-subsidy probe on EU dairy imports offers limited relief to struggling domestic sector. China’s investigation into EU dairy imports aims to alleviate pressure on local farmers, but the impact will be minimal as it targets only a small portion of imports, Bloomberg reports (link). The dairy sector is grappling with oversupply, declining demand, and falling milk prices, with 80% of farmers facing losses. China’s dairy production surged 40% in the past decade, but economic slowdown and shifting consumer habits have exacerbated the industry’s challenges. While curbing imports makes strategic sense, the measure is seen as a response to EU tariffs on Chinese goods.

— Trade War II will be easy to lose for China. Washington will be less likely to give Xi the benefit of the doubt in negotiations, making any de-escalation far more difficult. The stakes will be higher too. Link to more via Reuters.

— Chinese researchers propose ‘shadow government’ for Taiwan in report obtained by U.S. think tank. Chinese researchers at Xiamen University’s Cross-Strait Institute of Urban Planning wrote a report proposing the establishment of a “shadow government” for Taiwan. The report, titled “Start Taiwan Takeover Preparations as Soon as Possible,” was obtained by the Center for Strategic and International Studies (CSIS), a Washington-based think tank. The document has since been deleted from the institute’s website. The authors recommend creating a “Central Taiwan Work Committee” to act as a proto-provincial government that could be transplanted to Taipei following an invasion. The proposal includes establishing a Taiwan Governance Experimental Zone in Fujian province to simulate Taiwan’s administrative environment and test governance policies.

The authors argue that the “one country, two systems” model used for Hong Kong is no longer viable for Taiwan and instead advocate for rapid full integration. The plan aims to ensure a smooth transition in key areas such as education, military, trade, and other critical sectors in the event of Taiwan’s integration with China.

Of note: This is a proposal from researchers and does not necessarily reflect official Chinese government policy. However, the report does provide insight into some of the ideas being discussed within China regarding potential strategies for Taiwan. The Center for Strategic and International Studies (CSIS), which obtained and reported on this document, is generally considered a credible source with minimal bias and high factual reporting.

— DOE grants first LNG export license since freeze lifted. The Department of Energy (DOE) issued its first liquefied natural gas (LNG) export license to New Fortress Energy since a federal judge lifted the Biden administration’s pause on new permits. The five-year license allows LNG exports from a small-scale plant in Altamira, Mexico, to non-free trade agreement (FTA) countries. While the license does not increase New Fortress Energy’s overall LNG export capacity, it enables expanded exports to non-FTA countries. The DOE is continuing to review and update its LNG export policies based on the latest science.

— USDA advances pre-rule on fed cattle market pricing to OMB. USDA has sent a pre-rule to the Office of Management and Budget (OMB) to gather input on addressing pricing issues in the fed cattle market. The rule aims to enhance price discovery, transparency, and protect producers from unfair practices and market manipulation. The pre-rule stage will assess whether regulatory action is necessary or if alternative solutions exist. A proposed rule is expected by this month, with a final rule anticipated by May 2025. However, the November elections could affect any unfinished rulemaking if there is a change in control of the White House.

— Nebraska’s largest feedlot set to open amid local concerns and innovation claims. Blackshirt Feeders, soon to be Nebraska’s largest cattle feedlot, is preparing to receive cattle later this month, the Nebraska Examiner reports (link). The state-of-the-art facility near Haigler aims to expand to 150,000 head of cattle, featuring innovations like a rolled concrete base and biodigesters to produce methane from manure. While local officials and residents express both hope and skepticism, concerns remain over water use, increased traffic, and potential environmental impact. The $200 million project could boost local employment but faces scrutiny from environmental experts and smaller operators.

— Slotting fees: Financial hurdles for manufacturers and market impact. The practice of grocery retailers leasing shelf space to food manufacturers, commonly known as slotting fees, involves several costs and implications for both manufacturers and retailers:

• Slotting fees: These are payments made by manufacturers to retailers for shelf space to introduce new products. The fees can vary significantly based on factors such as product category, the perceived sales potential, and the geographic area of the retailer. On average, slotting fees can be around $1,500 per store per SKU, but they can range from $1,000 to $10,000 or more, depending on the store and product.
• Impact on manufacturers: For manufacturers, especially smaller ones, these fees can be a significant financial burden. They may need to pay substantial amounts upfront without a guarantee of product success, which can limit their ability to introduce new products and compete with larger companies that can afford these fees. For example, a nationwide product launch could require $1.5 to $2 million in slotting allowances.
• Barriers to entry: Slotting fees can create barriers to entry for smaller manufacturers and startups, as they may not have the financial resources to pay these fees. This can lead to reduced competition and innovation, as only larger companies with significant capital can afford to place their products in prime shelf locations.
• Retailer benefits: For retailers, slotting fees represent a significant revenue stream. They help offset the risk associated with stocking new products, as retailers are compensated for the shelf space regardless of the product’s success. This practice also allows retailers to manage their product assortment more strategically.
• Market dynamics: The practice can influence market dynamics by favoring established brands and products over new and innovative ones. Retailers may prioritize products from manufacturers who can afford higher fees, potentially reducing product variety and consumer choice.

Bottom line: While slotting fees can provide financial benefits to retailers and help manage inventory risk, they also pose challenges for manufacturers, particularly smaller ones, by increasing the cost of market entry and potentially stifling competition and innovation.

Rising food prices have influenced the value of grocery store properties in several ways:
• Increased revenue potential: As grocery prices rise, grocery stores may see an increase in revenue, which can enhance their attractiveness as tenants. This potential for higher income can make grocery-anchored retail properties more valuable to investors, as they are seen as stable and reliable sources of income.
• Demand for grocery-anchored real estate: Grocery stores are considered essential businesses, and the demand for them remains consistent even during economic downturns. This makes grocery-anchored real estate a desirable investment, as it is relatively resilient to economic fluctuations compared to other retail sectors.
• Impact on local property values: The presence of grocery stores can increase local property values by improving local amenities and attracting complementary businesses, such as restaurants and other retail services. This effect can be amplified when grocery prices rise, as the stores become even more critical to the community’s daily needs.
• Consumer behavior and foot traffic: Rising grocery prices can affect consumer purchasing habits, potentially reducing foot traffic in physical stores as consumers seek more budget-friendly options or shift to online shopping. This change in consumer behavior might impact the perceived value of grocery store properties if the decrease in foot traffic is significant.

Upshot: While rising grocery prices can enhance the revenue potential and investment appeal of grocery store properties, they can also lead to shifts in consumer behavior that might affect foot traffic and, consequently, the value of these properties.

Of note: It would be interesting to know whether the increase in slotting fees has contributed to rising food prices. The Biden/Harris administration is not specifically investigating the practice of slotting fees, but there is a broader focus on addressing anti-competitive practices in the grocery and food industries, which may include slotting fees as part of the investigation. Democratic lawmakers have urged President Biden to investigate grocery store chains for price manipulation and other exclusionary practices, which include slotting fees, as part of their efforts to lower food prices and ensure fair competition.

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