Russia: All Ships Bound for Black Sea Ports Considered ‘Potential Carriers of Military Cargo’

Dump of amendments on FY 2024 Ag appropriations bill signals trouble ahead for farm bill

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July 20, 2023 07:19 AM

Dump of amendments on FY 2024 Ag appropriations bill signals trouble ahead for farm bill

In Today’s Digital Newspaper

A revised format today as I am in Jackson, Mississippi, to attend and participate at a Mississippi Farm Bureau meeting.

— Equities: Asian and European stock markets were mixed in overnight trading. U.S. stock indexes are pointed toward mixed openings.

— Extreme heat hasn’t budged natural-gas prices. Despite an increase in natural gas usage due to the ongoing heat wave this summer, U.S. natural gas prices have remained stable, not mirroring the previous two summers when such conditions led to price spikes. Currently, benchmark natural-gas prices are approximately 60% lower than last year, when they reached an all-time high in the shale era, and 30% lower compared to July 2021. This relative stability is attributable to two main factors: the unusually warm winter, which left a significant amount of gas unburned, and the bolstered generation from renewable sources, which has alleviated reliance on gas-fired power plants in some of the nation’s hottest regions, such as California and Texas.

— Two-sided trade in grains overnight. Corn, soybeans and wheat traded on both sides of unchanged during the overnight session. As of 7:30 a.m. ET, corn futures were trading mostly 2 cents lower, soybeans were 1 to 3 cents lower, SRW wheat was mostly a nickel lower, HRW wheat was 1 to 2 cents higher and HRS wheat was mostly 8 cents higher. Front-month crude oil futures and the U.S. dollar index were both trading near unchanged this morning.

— Analyst Jim Wyckoff’s outlook for key markets:

U.S. dollar depreciation: The U.S. dollar index this week hit a 15-month low. Veteran market watchers know that trends in the currency markets tend to be stronger and longer lasting than price trends in other markets. Look for the USDX to continue to trend lower until at least early September. After the U.S. Labor Day holiday in early September, market participants will get back down to more serious business, what with summer vacations over and the kids back in school. Markets can become more volatile in September, so the price downtrend in the U.S. dollar index could accelerate, or reverse. Until then, the path of least resistance for the USDX will remain sideways to lower—barring an unexpected geopolitical event that would likely drive safe-haven demand into U.S. dollars.
U.S. stock indexes trending up: The U.S. stock indexes have been trending higher since early May and this week hit new highs for the year. So much for the old stock market adage, “Sell in May and go away.” The uptrends in the stock indexes have been unassuming and with low volatility. Those are signs the uptrends can continue in the coming weeks—at least until early September. Veteran stock market traders know the months of September and October can be rocky ones for the equities market.
Crude oil prices on the rise: Nymex crude oil futures prices in mid-July hit a 2.5-month high and are presently trending higher. That’s a bullish element for most of the raw commodity sector. Rising oil prices also suggest the general marketplace thinks the U.S./global economy will not slip into recession in the coming months. It appears Nymex crude will continue to trend up in the coming weeks. However, there is strong chart resistance at the $82.00 to $85.00 area that will likely cap gains.
Gold and silver bulls come to life: The past couple weeks have seen the gold and silver markets negate their near-term price downtrends on the daily charts and begin price uptrends. The eroding U.S. dollar index, easing inflation fears and a rally in crude oil prices are bullish elements for the precious metals that should continue to support sideways-to-higher price action into the end of summer.
Government bond yields have dipped: Notions of “light at the end of the tunnel” regarding hawkish major central banks and their interest rate hikes have stabilized government bond yields and even allowed some to decline a bit. This is due to inflationary pressures easing over the past several months. Look for the trajectory of inflation to continue to be down until at least September. That means likely declining government bond yields in the coming weeks, albeit probably just modest dips.
Grain market bulls coming back to life: The grain market bulls are back in business this week amid weather forecasts for the U.S. Midwest that are turning hotter and drier as the calendar turns to August, and amid the end of the Russia-Ukraine grain-shipping deal this week. Russia attacked a major Ukraine grain terminal earlier this week to add keener uncertainty regarding any grain shipments coming out of the Black Sea region. Technicals are presently fully bullish for soybeans, turning more bullish for corn, and neutral to slightly bearish for wheat. However, if the corn and soybean markets continue to rally, wheat markets will very likely follow suit. The month of August is the most critical growing month of the U.S. soybean crop. So look for soybeans to be the leader of the grain markets in the coming weeks.

— Russia attacked Ukraine’s Black Sea ports for a third consecutive night and declared that all ships bound for them would be considered “potential carriers of military cargo.” However, they did not specify what actions they might take in response. This pronouncement enhances already existing worries about possible military actions against such ships. In response, the White House expressed concerns that Russia could be planning attacks on civilian shipping. Adam Hodge, a spokesman for the White House National Security Council, stated that their information suggests Russia has planted more sea mines around the Ukrainian ports. He believes that this is a planned effort by Russia to justify any potential aggressions against civilian vessels in the Black Sea. He also suggested that Russia could attribute these attacks to Ukraine. Ukrainian President Volodymyr Zelenskyy said the Russians targeted areas that store about a million tons of food.

Wheat prices in the U.S. and Europe ended Wednesday sharply higher in response to Russia’s bombardment of Ukrainian grain-export facilities on the Black Sea. U.S. benchmark prices made their biggest daily jump since February 2022, when Russia invaded Ukraine and threatened the global food supply chain. Wheat prices remain well below record levels reached last year. Still, analysts say Wednesday’s attacks show that traders were right to fear the end of an agreement that allowed Ukraine, one of the world’s largest food exporters, to move grain shipments out of Black Sea ports.

— Ukraine hopes to continue grain shipments via Romania. Ukraine is hoping to resume exports without Russia’s participation and was setting up an alternative route via Romania. But no ships have sailed from Ukrainian ports since Russia pulled out of the Black Sea grain deal on Monday and insurers have had doubts about whether they will be able to underwrite policies for trade in a war zone. Ukrainian Foreign Minister Dmytro Kuleba called for the Black Sea grain deal to be restored, noting “land corridors cannot export the full amount of cereals available for export.”

— Asian buyers seek alternatives to Ukraine grains. Asian millers, which have booked more than 1 MMT of Ukrainian and Russian wheat for shipment in coming months, will seek alternatives as attacks on Ukrainian ports after the Black Sea grain deal ended create supply risks. A Singapore-based trader at an international trading company told Reuters that Asian millers likely will look to Europe, Romania, Bulgaria and Australia to fill their needs.

— Ag trade: Japan purchased 106,366 MT of wheat, including 48,061 MT U.S., 34,042 MT Canadian and 23,263 MT Australian. Iran passed on a tender to purchase up to 180,000 MT of corn.

— EPA issued a notice (link) detailing the reasons for rejecting 26 small refinery exemptions. These exemptions pertain to the obligations these refineries have under the Renewable Fuel Standard (RFS), which requires small refineries to demonstrate that adhering to the RFS would lead to ‘disproportionate economic hardship’ (DEH). The rationale for the July rejections follows the precedent set by similar decisions made in April and June 2022.

In their investigation, the EPA found that all refineries faced equivalent costs when obtaining Renewable Identification Numbers (RINs)—which serve as proof of complying with the RFS—irrespective of whether they procure them by blending renewable fuels or buying them on the open market. The market price for fuels rises to accommodate the RIN cost, much like it would due to higher crude prices. The end effect is that these obligated parties can recoup their expenditure on RINs through the market price of the fuel they produce. This process is universal, and the EPA clarifies there is no disproportionate cost for any party, including small refineries, as the costs are recovered in the market price.

Under the Clean Air Act, those affected by this decision have the right to request a judicial review with the US Court of Appeals for the District of Columbia Circuit within 60 days of the notice’s Federal Register publication. Several of the small refiners involved have declared their intention to lodge such petitions.

— USDA announced acceptance of about 2.7 million acres from a total of 4.63 million acres offered under the grassland Conservation Reserve Program (CRP) signup. The acres approved will enter contracts starting from Oct. 1, with the national average rental for the ground being $18.02 per acre. Under CRP signup 205, the highest possible score was 195, and the USDA stated that offers with a score of 77 or higher were generally accepted. USDA plans to start informing applicants from July 26 about the acceptance or rejection of their offers.

— Economists predict the Federal Reserve will increase interest rates for one more time in its July 25-26 meeting, marking the end of a 16-month hiking series that has been part of the most rigorous anti-inflation strategy in the U.S. for the past 40 years. The Federal Open Market Committee is expected to raise rates by a quarter point to a range of 5.25% to 5.5%, the highest level since 2001, in its July 25-26 meeting, based on a Bloomberg survey of economists. Given the decline in price pressures last month, most economists forecast no rate changes in the September meeting, with only one-fifth of the surveyed economists projecting another hike by the November meeting.

— The International Longshore and Warehouse Union Canada (ILWU Canada), which had sent its members back to the picket lines on July 18 after the rejection of a previously proposed agreement, removed their notice for a strike slated for this Saturday. The decision was made following a meeting with Prime Minister Justin Trudeau. The PM urged both disputing parties to seek all avenues towards resolving their differences. In addition, he commanded his ministers and senior officials to adopt any possible measures to ensure the stability of supply chains and safeguard Canadian jobs and the economy. Notably, the strike initiated by the IWLU Canada on Tuesday was declared illegal due to the union’s failure to provide the mandatory 72 hours’ notice. The current challenge lies in both parties managing to agree on a deal that is acceptable to both the union members and the port operators.

— To boost business confidence amidst a decline in economic growth, China has increased its backing for the yuan, resulting in the currency’s value increasing after the country set a stronger-than projected reference rate. This comes alongside modifications to China’s capital restrictions to attract inflows. To stimulate home purchases in major cities, authorities are reportedly contemplating the relaxation of home-buying limitations in some of the country’s largest urban areas, including Beijing and Shanghai — a move anticipated to lift a longstanding barrier that has been damping demand.

— China’s ambassador to Washington warned that his country would retaliate if America hits it with more sanctions and export controls, such as restricting access to semiconductor technology. Xie Feng said China “does not want a trade or tech war” but “will not flinch from provocations.” Last week Xie discussed security issues with American officials at a rare meeting at the Pentagon.

— The Senate is set to vote on legislation that could block China from buying oil from U.S.’ emergency reserve, an issue gaining heightened attention given the country’s Strategic Petroleum Reserve (SPR) is at a 40-year low. This amendment is part of the crucial fiscal year 2024 National Defense Authorization Act (NDAA). However, the White House clarified that the Energy Department is legally obligated to sell oil from the SPR through a competitive auction to the highest bidder, regardless of the bidder’s nationality or corporate status.

— Yellen meets Vietnamese PM. To foster trade relations and reduce the US’ reliance on China, Treasury Secretary Janet Yellen met today with the Prime Minister of Vietnam, Pham Minh Chinh. This meeting is part of the Biden administration’s strategy to refashion global supply chains. After her attendance at the G20 finance chiefs’ meetings in India earlier this week, Yellen traveled to Vietnam. Both India and Vietnam are essential partners in lessening the US’ dependence on a select number of countries for crucial components and products, therefore helping to protect the US economy from geopolitical risk.

— Biggest winners in U.S. climate law: Foreign companies. The 2022 climate law (IRA) in the U.S., aimed at supporting the clean-energy sector, appears to be facilitating significant gains for foreign companies —predominantly those from South Korea, Japan, and China, the Wall Street Journal reports (link). The legislation, known as the Inflation Reduction Act, has resulted in around $110 billion being invested in U.S. clean-energy projects since its implementation a year ago, according to an analysis by the WSJ. Surprisingly, over 60% of these investments involve foreign firms. The 20 biggest investments feature 15 foreign enterprises, with most of these funds directed towards battery factory projects. Impact: These overseas businesses stand to benefit from billions of dollars in tax credits.

— The House easily rejected an effort to add flights to Washington Reagan National Airport. The vote was 205-229. This is a win for United, American and Alaska and a defeat for Delta, which helped an outside group to push for this change. Bottom line: This effort is dead for this year, and likely beyond.

— More than 125 amendments being proposed to legislation concerning fiscal year 2024 Agricultural-FDA spending. A significant number of these amendments, introduced largely by Republicans, aim to tighten work stipulations linked to the Supplemental Nutrition Assistance Program (SNAP). GOP House lawmakers have also sought to restrict funding for the USDA’s diversity and equity programs further than what was initially proposed.

Prior work prerequisite expansions in SNAP were solidified by Republicans during debt ceiling negotiations. Despite those measures, the party is pushing for additional constraints through the appropriations procedure. There will not likely be enough House votes for the SNAP amendment(s) as no Democrat will support the attempt if not the bill, and Republicans can afford only four GOP dissentions.

Of note: This signals arch GOP House conservatives will likely push similar if not more amendments during the farm bill process.

— Crop insurance measure proposed. To encourage fair treatment of specialty crop and small farmers, Sen. Cory Booker (D-N.J.) and Rep. Andrea Salinas (D-Ore.) are proposing a new bill: the Insuring Fairness for Family Farmers Act (IFFFA). The measure changes the current compensation strategy for crop insurance agents. Instead of being paid a percentage of the policy premium, which can often favor agents working with larger farms, compensation under the IFFFA would be calculated based upon the effort required to sell or service the policy. The IFFFA also includes provisions for offering rewards to agents who provide insurance to previously uninsured farms or farms growing specialty crops, which traditionally require more work. Although the payment model is changing, lawmakers affirm that the reform would be revenue neutral with an anticipated increase in agent commissions due to the implementation of the bill.

— A Chinese-built railroad, costing nearly $6 billion, is reshaping a previously quiet town in Laos, turning it into a bustling commerce center filled with warehouses and trade businesses. This forms a necessary part of China’s Belt and Road Initiative. Known as the 262-mile Laos-China Railway, this project is the start of Beijing’s strategic plan to create a railway network from China’s business hub, Kunming, all the way to Thailand and Malaysia. According to the Wall Street Journal (link), this project is seen in parallel to how the first transcontinental railroad transformed North America by creating thriving towns along the route. Despite many of its projects having stalled or being embroiled in controversy due to unsustainable debt levels, this railroad proves that China’s Belt and Road Initiative is still ongoing. Although Laos is burdened with a significant cost for the railway, the advantages so far include increased trade, with goods such as fruit and iron being exported to China. Moreover, Chinese companies are also buying adjoining properties to establish farms and factories which is further promoting economic growth in the region.

— Around 340,000 United Parcel Service (UPS) employees are considering a strike at the end of the month unless a swift agreement can be formed concerning workers’ contract negotiations. Talks will commence again next week after both parties walked away from discussions earlier this month. Although 95% of the contract has been settled, critical issues concerning worker pay remain a point of contention. UPS has made some concessions, such as agreeing to include air-conditioning in new vehicles and upgrading older ones with fans, in addition to making changes to their wage system. However, if a resolution is not reached and the strike does materialize, it could cost the U.S. economy an estimated $7.1 billion, making it the most expensive work stoppage in U.S. history, as per economic experts.

— Dueling trade initiatives. In a recent discussion, two former officials from the U.S. and South Korea pondered if there is a necessity for two Western-led mega-regional trade pacts in Asia, namely the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Indo-Pacific Economic Framework (IPEF). The consensus was a sort of affirmative, citing these frameworks counterbalance China’s economic influence in the region.

The IPEF, initiated by the Biden administration and some other countries, plans to strengthen trade links, global supply chains, encourage infrastructure investment and formulate new tax and anti-corruption regulations in the Indo-Pacific region. Processed as an alternative to the 12-country CPTPP, IPEF’s operation complements the CPTPP, which is geared towards market access commitments and industrial subsidies across the Asia-Pacific.

During the panel conducted by the Peterson Institute for International Economics, South Korea’s ex-Trade Minister, Yeo Han-koo, stated both platforms are essential in addressing the multifaceted challenges of the global trading system. He emphasized that new problems like supply chain disruptions and the necessity for decarbonization aren’t adequately managed by existing free trade agreements, thus justifying the need for IPEF.

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