Retail Sales, PPI Signal Weaker U.S. Economy and Declining Inflation

Update on new farm bill debate: Experience is overrated; no consensus on dairy policy

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January 18, 2023 08:17 AM

Update on new farm bill debate: Experience is overrated; no consensus on dairy policy

In Today’s Digital Newspaper

Travel format again today as I am in Menomonie, Wisconsin, to attend and speak at an ARM Services conference. Then it’s off to Phoenix, Arizona, to speak at TEGMA’s 2023 annual meeting.

Equities: On Tuesday, the Dow ended down 391.76 points, 1.14%, at 33,910.85. The Nasdaq rose 15.96 points, 0.14%, at 11,095.11. The S&P 500 declined 8.12 points, 0.20%, at 3,990.97. Today: In Asia, Japan +2.5%. Hong Kong +0.5%. China flat. India +0.6%. In Europe, at midday, London +0.1%. Paris +0.2%. Frankfurt flat.

Outside markets: The U.S. dollar index was under pressure in early action, with the euro, yen and British pound all registering gains against the U.S. currency. The yield on the 10-year U.S. Treasury note was moving lower, trading around 3.46%. Crude was moving higher, with U.S. crude around $81.65 per barrel and Brent around $87.15 per barrel. Gold and silver were registering gains, with gold around $1.921 per troy ounce and silver around $24.35 per troy ounce.

Followthrough grain buying overnight. Corn, soybean and wheat futures built on their strong finishes Tuesday during the overnight session. As of 7:30 a.m. ET, corn futures were trading fractionally to 2 cents higher, soybeans were steady to 3 cents higher in most contracts, winter wheat futures were 5 to 8 cents higher and spring wheat was fractionally to 2 cents higher. Front-month crude oil futures were around $1.50 higher and the U.S. dollar index was about 275 points lower.

IEA: Global oil demand set to reach record high as China reopens. Global oil demand is set to rise to an all-time high in 2023 as China relaxes its Covid-19 restrictions in a move that may push crude prices higher in the second half of the year, according to the International Energy Agency (IEA). Demand for crude oil could rise 1.9mn barrels a day to reach an all-time high of 101.7 million b/d, the IEA said in its first monthly oil report of 2023. “Two wild cards dominate the 2023 oil market outlook: Russia and China,” the report said, adding that such robust demand would tighten “the balances as Russian supply slows under the full impact of sanctions.” Russian oil supply had “held steady” in December at 11.2 million b/d despite the introduction of EU sanctions on the import of Russian crude. However, the Paris-based IEA forecast that the “well-supplied” global oil market at the start of the year could “quickly tighten” as western sanctions — particularly an EU ban on the import of refined Russian products from Feb. 5 — take full effect.

Russia/Ukraine update:

Ukraine’s Interior minister, Denys Monastyrksy, killed in Kyiv helicopter crash near a kindergarten on the edge of Kyiv. It also killed at least 17 others, including children. It marks the first cabinet-level death in the war. The cause of the crash, which involved a State Emergency Service helicopter, was not clear, but there was no initial information that the aircraft had been shot down.
The Pentagon is tapping into a stockpile of American ammunition in Israel to help meet Ukraine’s need for artillery shells in the war with Russia, officials said.
Meeting in Germany: Senior defense and military officials from dozens of nations, including NATO states, will meet at Ramstein Air Base in Germany on Friday to discuss sending Ukraine more tanks and other arms.
Russia’s defense minister said its army would expand by 30%, to 1.5 million troops, in the next three years. Karelia, a region on the border with Finland, will get its own army corps. Separately, the Dutch prime minister, Mark Rutte, said the Netherlands was planning to send Ukraine a Patriot missile-defense system, as the U.S. and Germany have done.
India’s power minister, Raj Kumar Singh, defended his country’s imports of Russian oil and gas during a panel at the World Economic Forum on the food and energy crises.
Food reserves worry Putin. Russia, the world’s largest wheat exporter, needs to maintain stable food reserves and “cannot allow everything to be dragged abroad,” said President Vladimir Putin in comments that some say signal restrictions on some of its exports. Link for more via Reuters.

Bank of America analysts wrote in a note to clients this week that a U.S. debt default in late summer or early fall is “likely,” while Goldman Sachs called the possibility that the U.S. gov’t would not be able to make good on its bills a “greater risk” than at any time since 2011.

Issue: Today entitlement spending comprises 64% of the federal budget and continues to grow unsustainably. That is why a small group of House GOP hardliners want significant spending cuts in return for increasing or suspending the $31.4 trillion debt limit. House Speaker Kevin McCarthy (R-Calif.) negotiated on this topic with his 20 conservative holdouts to finally attain the speakership. He agreed that the GOP House wouldn’t move to lift the debt ceiling unless Congress slashes at least $130 billion in federal spending next fiscal year or addresses broader fiscal reforms that tackle the ballooning debt.

Timing: Wrightson Research’s debt default deadline current estimates suggest that it is unlikely that the crunch date will arrive as early as the first half June. “If the Treasury is able to stay in business without a debt ceiling fix until June 15, it would probably not face a new deadline until mid-July at the earliest. June 15 individual and corporate taxes would tide it over the second half of June, and some additional accounting flexibility would become available at the end of June. In our base case, things might start to come to a head quickly in the second half of the month.” Treasury Secretary Janet Yellen suggested last week that the deadline won’t be before “early June,” but she didn’t provide a specific deadline.

Political impacts begin. Senate Majority Leader Chuck Schumer (D-N.Y.) in a statement said: “America pays its debts. Period. There should be no political brinkmanship with the debt limit. It’s reckless for Speaker McCarthy and MAGA Republicans to try and use the full faith and credit of the United States as a political bargaining chip. A default would be catastrophic for America’s working families and lead to higher costs.” As for the White House, “We’re not going to negotiate on this,” White House Press Secretary Karine Jean Pierre reiterated to reporters Tuesday, insisting that the debt limit will be raised “without conditions.”

Strategy: Politico says (link) the White House “is already working behind the scenes to work around...McCarthy, including dispatching its top advisers to meet with moderate Republicans – particularly those who won in districts...Biden won in 2020 – in hopes...those GOP lawmakers [will decide to] cross the aisle and lift the debt ceiling.” But other House Republicans “think the White House needs to come at it differently for officials to have any hope at cross-aisle cooperation.”

Impacts: The New York Times says (link), “Wall Street analysts and political prognosticators are warning that a perennial source of partisan brinkmanship could finally tip into outright catastrophe in 2023.” According to the NYT, “Big investors and bank economists” are “assessing what it could mean if the government is unable to pay some of its bondholders and the country defaults on its debt. And they are gaming out how to both minimize risks and make the most of any opportunities to profit that might be hiding in the chaos.”

Bottom line: “It’s playing a game with the U.S. economy and people’s lives that I think is irresponsible.” — Wendy Edelberg, a senior fellow in economic studies at the Brookings Institution, on the debate in Washington over whether Congress should raise the debt ceiling to allow the country to pay its obligations, including to Social Security recipients and federal contractors.

Dollar hovers near seven-month low. The dollar index bottomed around the 102 area, close to levels not seen since June 2022, as prospects that cooling inflation will give the Federal Reserve room to slow its aggressive tightening moved investors away from the greenback. Investors now bet that the Fed will downshift to a smaller 25 bps rate hike in February after delivering a half-percentage point increase in December.

Bank of Japan fends off market pressure and holds firm on yield curve control. Impact: Yen tumbles 2% after the decision to maintain ultra-loose monetary policy. Japan’s 10-year government bond yield fell back to 0.4% after the Bank of Japan decision.

Details: The Bank of Japan (BOJ) maintained its key short-term interest rate at -0.1% and that for 10-year bond yields around 0% during its January meeting by a unanimous vote. The central bank also kept its 0.5% cap for bond buying, defying market speculation and signaling that policymakers aren’t seeking a looser grip on bond yields after the bank unexpectedly tweaked its yield curve control range in December. The BOJ said it had spent $265 billion on sovereign bonds since Dec. 20 to try and keep bond yields within its target range — “a whopping 6% of annual GDP!”, Deutsche Bank pointed out in a note to clients this morning. But Haruhiko Kuroda, the bank’s governor, defended the policy as “sustainable,” saying it would take time for the yield-curve decision to play out.

What’s next? Investors looking for a pivot may have to wait for the next B.O.J. governor. Kuroda, the BOJ’s longest serving governor, will step down in April, and his last meeting will be in March. Analysts expect little change in policy until a successor is named.

China update:

China past Covid infections peak, top economic official claims. Chinese vice-premier Liu He tells Davos meeting that country is returning to normal faster than government expected. Meanwhile, China’s Ministry of Finance says more money is being made available, particularly for rural areas where resources are being exceedingly stretched thin by China’s coronavirus outbreaks.
China’s population decline creates two major economic challenges, writes Paul Krugman. The state pension system will struggle to handle the unbalanced ratio of older adults to the working population. And the decline may harm China’s overall productivity. Another key quote: “The Chinese economy is entering a critical transition phase, no longer able to rely on an abundant, cost-competitive labor force to drive industrialization and growth,” said HSBC chief Asia economist Frederic Neumann. “As the supply of workers begins to shrink, productivity growth will need to pick up to sustain the economy’s heady pace of expansion.”
U.S. Treasury Secretary Janet Yellen met China’s vice-premier and economic tsar, Liu He, for the first time, in Zurich. To maintain stable relations, the pair committed to discuss topics of mutual economic interest including trade and climate change. Before the meeting Yellen remarked that their countries shared a responsibility to “manage our differences.”
The University of Texas at Austin, one of the largest public universities in the nation, banned TikTok from its wi-fi and across its wired networks yesterday. The university is complying with Texas Gov. Greg Abbott’s recent decision to forbid state employees from having the app on government-issued devices. Public universities in at least five states, including Auburn University in Alabama, the University of Montana, and schools in the University System of Georgia, have banned the app.
China’s December pork imports largest since November 2021. China imported 200,000 MT of pork in December, up 20,000 MT (11.1%) from November and 20.1% greater than last year. For 2022, China imported 1.76 MMT of pork, down 52.6% from the previous year.
China to buy pork for state reserves after holiday. China will organize purchases of pork for state reserves after the Lunar New Year holiday, an ag ministry official said.
China’s sow herd above ‘reasonable’ level. China’s sow herd at the end of 2022 was slightly higher than a reasonable level at nearly 44 million head, an ag ministry official said. “We... hope that the majority of farms will stabilize the number of high-quality reproductive sows and take early measures to deal with the downward price of pigs,” the official said. The official also said China’s hog slaughter increased 18.3% from November and 7.3% from last year in December.

Economic and market briefs:

U.S. retail sales fall more than expected. Retail sales in the U.S. declined 1.1% month-over-month in December of 2022, following an upwardly revised 1% drop in November and worse than market forecasts of a 0.8% fall. Sales at gasoline stations recorded the biggest decrease (-4.6%), followed by furniture stores (-2.5%), motor vehicle dealers (-1.2%), electronics and appliances stores (-1.1%), miscellaneous (-1.1%) and nonstore retailers (-1.1%). In contrast, sales were up 0.3% in building materials and garden equipment stores (0.3%) and sporting goods, musical instruments and book sellers (0.1%). Sales at food and beverage stores were flat. Retail sales aren’t adjusted for inflation. Excluding sales at gasoline stations, retail sales were down 0.8%, in another sign of a weaker-than-expected holiday shopping as consumer spending slows amid high inflation and interest rates.
U.S. producer prices fall most since April 2020. U.S. producer prices dropped 0.5% in December, the largest decline since April 2020 and compared with market expectations of a 0.1% fall, adding to signs that inflationary pressure in the world’s largest economy cooled sharply. Goods prices dropped 1.6%, led by a 7.9% slump in energy cost, while services prices were slightly up. On a yearly basis, the PPI increased 6.2% in December, the least since March 2021.
Used car prices, driven to record highs in recent year, just saw their biggest annual drop since 2009.
Wall Street’s biggest banks set for fed climate impact exercise. Wall Street banks including Goldman Sachs Group, JPMorgan Chase and Wells Fargo will begin a Federal Reserve pilot program to measure how hurricanes, drought and other extreme weather events can affect their portfolios. The central bank on Tuesday released details on how the new “climate scenario analysis exercise” will work. The measures mark the Fed’s most concrete steps yet to ensure that banks are ready for risks brought on by a changing climate and severe weather events.
Weekly mortgage demand shot up after rates came down a little bit, showing just how sensitive the market is to rate movement. Overall demand rose 28% last week, according to the Mortgage Bankers Association, as the interest rate on the popular 30-year fixed-rate mortgage declined to 6.23% from 6.42%. A year ago the rate was 3.64%, and demand was much stronger for purchases and refinancing.
Microsoft is set to announce thousands of job cuts today, according to multiple news reports, potentially becoming the latest tech company to shrink its workforce. Sources say the reported layoffs could affect roughly 5% of the company’s workforce and largely impact the company’s engineering divisions. Microsoft employs 221,000 people around the world, including 122,000 in the U.S.
Inflation in Britain slowed in December for a second consecutive month. Prices rose by 10.5% year on year, down from the 41-year high of 11.1% in October and 10.7% in November. The drop was driven partly by falling fuel prices. Core inflation, which strips out items with volatile prices, remained unchanged at 6.3%.
Why orange juice is so expensive. Florida orange growers are harvesting their smallest crop in nearly 90 years, the result of an ill-timed freeze, two hurricanes and citrus disease that is laying waste to its groves. Short supplies of Florida’s juice oranges have lifted frozen concentrate orange-juice futures to near records. Juice at the grocery store has never cost more. Link for more via the WSJ.

Policy updates:

Biden administration WOTUS definition details are in in today’s Federal Register (link). EPA announced it Dec. 30. It becomes effective March 20. The definition reflects regulations in place before 2015 with adjustments based on court rulings since that time. EPA also included standing exemptions for agriculture in the updated version and appears to have jettisoned its initial plans to initiate yet another rulemaking to develop yet another definition of WOTUS. But the key WOTUS decision ahead comes in June when the U.S. Supreme Court issues its ruling on the topic.
Rise in CFAP 2 payouts. Payments under the Coronavirus Food Assistance Program 2 (CFAP 2) increased to $19.31 billion as of Jan. 16, up from $19.16 billion previously, reflecting USDA’s announced effort to push out additional payments under the program. The increase reflected a rise in original payments to $14.44 billion ($14.33 billion prior) and top-up payments to $4.87 billion ($4.83 billion prior). There was essentially no change in CFAP 1 payments.
Payments under the Emergency Relief Program (ERP) increased to $7.33 billion in the latest week ($7.31 billion prior) as non-specialty crop payments edged up to $6.24 billion ($6.23 billion prior) and specialty crop payments were essentially unchanged at $1.09 billion.
USDA developing impact statement on bird flu control efforts. USDA’s Animal and Plant Health Inspection Service (APHIS) announced (link) it will prepare an Environmental Impact Statement (EIS) to examine “potential environmental effects” from its control efforts for highly pathogenic avian influenza (HPAI). EPA is seeking public comment to “further define the scope of the EIS, identify reasonable alternatives and potential issues, as well as relevant information, studies, and/or analyses that APHIS should consider in the EIS.” The agency said it wants, where possible, “references and data sources supporting the information provided in the comment,” which could include scientific data, studies or research.
APHIS outlined potential environmental impacts as being those to “soil, air, and water quality; humans (including effects on health and safety; agricultural lands; industries and the economy; public perception; cultural and historic resources; equity and environmental justice; children’s health; and Tribes); and wildlife and plant populations, especially birds of conservation concern, eagles, and threatened and endangered species.”
The agency is also seeking comments on impacts related to climate change.
Comments on this phase of the process are due by Feb. 17. APHIS intends to release a draft EIS in November 2023 with a 45-day public review and comment period, with a final EIS expected to be made public by Oct. 30, 2024, with a record of final decision no later than Dec. 1, 2024.
Sen. Hoeven outlines new farm bill priorities. At the North Dakota Grain Dealers Association’s annual convention, Sen. John Hoeven (R-N.D.) outlined his efforts to maintain strong farm policy to benefit both agriculture producers and American consumers. Some items he listed:
- Ensure North Dakota farmers and ranchers have the opportunity to give direct input as work begins on the next farm bill.
- Address supply chain constraints to ensure access to reliable transportation services, including rail and ocean carriers. “The delays we’ve experienced in both rail and ocean carrier service represented a real challenge for our farmers and agri-businesses. That’s why we sponsored and passed our Ocean Shipping Reform Act to help this nation’s exporters, while also pressing the Surface Transportation Board and railways to ensure reliable rail service continues for North Dakota’s shippers.”

Hoeven recently hosted Sen. John Boozman (R-Ark.), Ranking Member of the Senate Agriculture Committee, in North Dakota for a discussion with local producers and commodity groups on the following priorities for the next farm bill:

- Maintaining strong crop insurance, the primary risk management tool for many producers.
- Improving the farm safety net, including the Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) programs.
- Strengthening livestock disaster programs, including the Livestock Indemnity Program (LIP), the Livestock Forage Program (LFP) and the Emergency Livestock Assistance Program (ELAP).
- Cutting red-tape and ensuring programs are farmer-friendly.
- Improving Access to Reliable Transportation Services.
Is the need for farm bill experience really a key requirement? If you read the general farm media, the answer is yes. But based on covering 11 of the 19 farm bill debates (including the current version), the answer is no. Reasons: Farm policy is usually out of date by the time it becomes law and is frequently inflexible to deal with the changing economic environment. Any incoming new lawmaker must have (1) the ability to see market implications of policy decisions, (2) a good staff and (3) the ability to listen to actual farmers and producers and other ag industry stakeholders to get ground truth on what is needed… and not needed.
BTW, Pennsylvania is one if not the only state to have its own farm bill, largely designed to complement the national farm bill to foster ag policy programs at the state level, including state-funding for key priorities.
There is no consensus within U.S. dairy industry as to what changes are needed via new farm bill. This is despite some big dollars being paid for experts to help create and lobby for changes some groups want. About the only agreement in the dairy industry is that most do not want supply management programs put in place.
NASDA wants more money in farm bill for land stewardship. The new farm bill should expand funding for USDA soil and water conservation programs and allow payments to the so-called early adopters of climate-smart farming practices, said the National Association of State Departments of Agriculture (NASDA) On Tuesday. NASDA said the farm bill “must remain unified” by pairing farm support and public nutrition programs in one piece of legislation.

Albertsons can pay out a $4 billion dividend. Washington State’s highest court declined to hear a lawsuit by the state’s attorney general seeking to block the move, which would precede the grocery chain’s sale to Kroger. It’s a victory for Albertsons as it faces more regulatory scrutiny over the sale.

Danone targets dairy emissions. International food company Danone set a goal of reducing methane emissions from its fresh milk supply chain by 30 percent by 2030 through regenerative dairy practices and other innovations. Link for more.

Congress updates:

Santos chosen for low-profile Small Business, Science panels. Embattled New York Republican George Santos has been chosen for two low-profile House committees despite questions about his finances and the fabrications on his resume. Santos was given spots on Science, Space and Technology as well as Small Business by the Republican steering committee, despite reservations from at least one committee chairman.
Senior House Republicans are preparing to hold hearings on the problems at the southern border, which they say could serve as a prelude to an impeachment inquiry against Homeland Security Secretary Alejandro Mayorkas. It’s exceedingly rare for a Cabinet secretary to be impeached as it has only happened once in U.S. history in 1876.

Elections & Politics:

Roll Call analysis: Democrats face tough fight to keep Senate majority in 2024. In an analysis (link), Roll Call says that unlike the 2022 midterms, “the 2024 battlefield looks historically lopsided against Democrats” looking to maintain their Senate majority. DSCC Chair Sen. Gary Peters (D-Mich.) “helped Democrats grow their Senate majority in 2022. ... Democrats couldn’t afford to lose a seat on a battlefield that included states that [President] Biden won narrowly in 2020.” But in 2024, Democrats “are defending eight vulnerable seats, while Republicans don’t have any. It’s the first time in at least 28 years that one party doesn’t have at least one vulnerable seat on the initial Senate battlefield.” But “Peters and the Democrats prevailed in 2022. So, it’s premature to count them out in 2024 in the face of a uniquely difficult battlefield.” Still, “holding onto the Senate again will be tough, and it probably depends on the outcome of the presidential race at the top of the ballot.”
Centrist Republican Dolan announces challenge to Sen. Brown in Ohio. The AP reports (link) Ohio state Sen. Matt Dolan (R) announced Tuesday that he will challenge Sen. Sherrod Brown (D-Ohio) in 2024. Dolan, “a centrist Republican from the Cleveland suburb of Chagrin Falls and a member of the family that owns baseball’s Cleveland Guardians, is the first of his party to jump into that race.” He “cast himself as tough but pragmatic when he ran for Ohio’s open U.S. Senate seat last year. Though he entered the primary late and lacked the profile of several other candidates, Dolan surged” late, though finished third. Axios says (link) that the race is expected to be “contentious” in a state “that has turned increasingly red.” The New York Times reports (link) that in his campaign announcement, Dolan, “the chairman of the Ohio Senate’s finance committee, emphasized border security, fighting inflation and his support for the police. He accused Brown of ‘blind loyalty to his party.’” Dolan said, “Ohioans want a problem solver who has successfully faced big challenges impacting our quality of life, not the political blame game that lacks commonsense solutions. I have a proven conservative record of success that has yielded results for Ohio families, workers and businesses.”

DOJ declined to send FBI agents to oversee search of Biden’s Homes for classified documents. In an exclusive, the Wall Street Journal reports (link) the Justice Department had considered sending FBI agents to oversee the search of Biden’s homes for classified documents, but decided against doing so because Biden’s attorneys were cooperating, sources said. Meanwhile, while Senate Minority Leader McConnell (R-Ky.) has feuded with Trump over the past two years, McConnell on Tuesday called on special counsels at the Department of Justice to treat [Biden and Trump] equally as they investigate their possession of classified documents at Trump’s Mar-a-Lago resort and Biden’s Washington office and home in Delaware.

Who says Delta stands for Doesn’t Ever Leave Airport? Despite what Delta’s CEO called “the most difficult operational year in our history,” the airline ranked first among nine carriers in WSJ’s 15th annual airline scorecard — its second consecutive top finish, and fifth of the past six. Alaska Airlines was a repeat runner-up, followed by Southwest Airlines, despite its year-end meltdown. But even the top airlines did worse than in prior years.

United Airlines reported stronger-than-expected fourth quarter profit, lifted by strong demand.

NWS weather: Winter storm to impact the Central Plains into the Upper Midwest through Thursday... ...Potential for severe thunderstorms and flash flooding from the Lower Mississippi Valley into the Ohio Valley Wednesday... ...Unseasonably warm temperatures for much of the southern U.S., with a Critical Risk of Fire Weather Wednesday... ...Light to moderate rain/snow to affect the western U.S. Wednesday/Thursday.

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