Russian Drones Hit Ukrainian Grain Infrastructure Near Danube River

Strategy for House farm bill debate | Mortgage costs rise | Nvidia | BRICS | India & sugar

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August 23, 2023 08:09 AM

Strategy for House farm bill debate | Mortgage costs rise | Nvidia | BRICS | India & sugar

Today’s Digital Newspaper

Abbreviated dispatch today as I am in Springfield, Illinois, speaking at the IBA Ag Banking Conference.

— USDA daily export sale: 100,000 metric tons of soybean cake and meal to unknown destinations during the 2023-2024 marketing year.

— Equities: Asian and European stock markets were mixed in quieter overnight trading. U.S. stock indexes are pointed to higher openings. In Asia, Japan +0.5%. Hong Kong +0.3%. China -1.3%. India +0.3%. In Europe, at midday, London +0.7%. Paris -0.2%. Frankfurt -0.1%.

Focus today is on Nvidia. Shares in the graphics-chip maker rose more than 1% premarket, after falling nearly 2.8% Tuesday. The company’s earnings, due after the close, will serve as a test of the popular artificial-intelligence trade.

— Outside markets: The U.S. dollar index was higher, with the euro, yen and British pound all weaker against the U.S. currency with the euro at its lowest point since June 14. The yield on the 10-year U.S. Treasury note was lower, trading around 4.27%, with a mixed tone in global government bond yields. Crude oil futures were posting sharp losses, with U.S. crude around $79.35 per barrel and Brent around $82.75 per barrel. Gold and silver futures were higher ahead of US trading, with gold around $1,932 per troy ounce and silver around $23.89 per troy ounce.

— More U.S. rate hikes needed? James Bullard, who was the longest tenured of the 12 regional Federal Reserve Bank presidents when he stepped down last month, thinks the U.S. economy faces new risks of stronger growth that could require higher interest rates to keep up the fight against inflation in the months ahead. Link to WSJ interview with Bullard.

— Corn and wheat are relatively flat; soybeans continue to slide. Corn and wheat prices have held up relatively well following Monday’s rejection lower, but soybeans have not benefited from the realized hot and dry conditions. As of 7:30 a.m. ET, corn futures were trading 1 to 2 cents higher, soybeans were 8 to 14 cents lower, winter wheat was steady to 2 cents lower and spring wheat was steady to 2 cents higher. Front-month crude oil futures were around $1 weaker at $78.50, and the U.S. dollar index was around 300 points higher.

— Hog futures tumble as fundamentals weaken. Traders continue anticipating a seasonal breakdown in cash hog and wholesale pork values over the coming weeks and months, exemplified by the $18 spread between October futures and current cash prices. That spread has weakened over the past few weeks as the cash index has turned lower. The CME cash index is projected to fall another 77 cents to $98.04 as of Monday. Wholesale prices continue to face weakness as well, with yesterday’s quote continuing midsession weakness and falling $1.56 to $103.65, led lower by bellies for the most part.

— Cattle futures turned fail against resistance. October futures struggled against resistance Tuesday despite strength last Friday into Monday. Cash trade has yet to develop this week as packers and producers seemingly believe they have the edge and are holding out for their respective better prices. Wholesale prices reversed Monday’s weakness, with Choice cutout rising $1.49 to $317.05 and Select cutout rising $2.18 to $289.51, narrowing the Choice/Select spread to $27.54. Increased wholesale prices should give packers confidence to up cash bids, especially if the recent uptrend continues after prices were relatively flat at $300 in late July/early August.

— Eurozone business activity falls most in almost three years. In August, the HCOB Eurozone Composite Purchasing Managers’ Index (PMI) decreased to 47, significantly lower than the anticipated 48.5, as indicated in a preliminary assessment. This recent measurement highlights the most substantial rate of decline in the private sector across the region since November 2020. The contraction is particularly pronounced in manufacturing output, and it’s accompanied by a renewed decline in services activity. This data suggests a challenging economic environment in the Eurozone, with both manufacturing and services sectors experiencing a notable downturn.

— The euro continued its decline against the U.S. dollar, approaching $1.08, which marked its lowest value since June 14. This drop followed the release of data indicating that business activity in both Germany and the Eurozone experienced a more significant decline than anticipated in August. The Eurozone’s business activity contracted notably, the most since November 2020. This contraction was driven by a sharp decline in German business activity, the steepest in over three years, with the service sector unexpectedly entering a period of contraction.

— Investors are eagerly awaiting upcoming speeches from ECB President Christine Lagarde and Federal Reserve Chief Jerome Powell at the Jackson Hole Symposium. These speeches are expected to provide insights into the future monetary policy direction of their respective central banks. Current expectations suggest that the European Central Bank will likely pause its ongoing tightening cycle during its September meeting. Meanwhile, U.S. interest rates are projected to remain elevated for an extended period due to significant upward inflationary pressures. This situation reflects a complex interplay of economic factors affecting the euro’s value and the monetary policies of both the Eurozone and the United States.

— Xi Jinping, China’s president, called for an expansion of the BRICS group of countries and said “hegemonism is not in China’s DNA” in comments delivered via China’s commerce minister at the BRICS summit in South Africa.

In recorded remarks Vladimir Putin, Russia’s president, said his country was ready to fill the gap left by Ukraine as a global supplier of grain.

— In July, home sales in the U.S. experienced a decline, marking the fourth drop in five months and further extending a significant downturn in the housing market. The National Association of Realtors reported that sales of existing homes, which constitute the majority of purchases, decreased by 2.2% in July compared to the previous month. The seasonally adjusted annual rate of home sales was 4.07 million, marking the slowest pace of sales since January and the slowest July rate since 2010. This data underlines a persistent and notable slump in the housing market, reflecting challenges and changes in the real estate landscape.

— The U.S. housing sector is experiencing a slowdown attributed to rising mortgage rates. Mortgage rates have reached their highest point since December 2000, reaching 7.31% for the week ending on Aug. 18, based on data from the Mortgage Bankers Association survey. This surge in rates has led to a significant decline in mortgage applications, reaching their lowest level in 28 years. Refinancing applications have also plummeted to their lowest point since December.

— Both Dick’s Sporting Goods and Macy’s have raised concerns about the state of consumer spending in the U.S. as they reported weaker quarterly earnings and offered cautious predictions for the rest of the year. These developments suggest that the recent robustness in consumer spending might be reaching its limits.

Dick’s Sporting Goods noted that sales growth slowed following a surge in demand for outdoor gear during the pandemic. Additionally, the company highlighted higher-than-expected incidents of merchandise theft.

Macy’s warned that a growing number of shoppers are falling behind on their credit card payments. Such delinquencies serve as a measure of consumer financial well-being and are a significant concern for the department store chain, as they jeopardize an essential revenue stream.

Bottom line: These signals from both companies indicate that consumer spending, which has been a key driver of economic recovery, might be encountering challenges and potential vulnerabilities. This cautious outlook reflects the evolving dynamics of consumer behavior and the broader economic landscape.

— UPS union workers ratified a five-year contract delivering significant wage increases, ending the threat of a strike, with an impressive 86% of members voting in favor. This development could potentially provide momentum to ongoing labor negotiations in various industries, including the discussions between the United Auto Workers (UAW) and major auto manufacturers in Detroit. Teamsters General President Sean O’Brien emphasized that the union has set higher standards for pay, benefits, and working conditions within the package delivery sector. This comprehensive deal covers a substantial workforce of 340,000 employees at UPS, a major logistics company. UPS had previously stated that the contract would be mutually beneficial, allowing the company to maintain competitiveness while retaining flexibility.

The new contract for UPS workers includes annual pay raises of 5% to 6%, potentially leading to increased costs for the company.

Of note: As negotiations continue between automakers like General Motors, Ford Motor, Stellantis, and the UAW, the successful pay raise agreements achieved by unions in different sectors could exert pressure on these companies to provide similar increases. Looking ahead, the UAW contract is set to expire in mid-September. Teamsters’ President O’Brien has indicated that the new UPS agreement could serve as a model for compensation and protection for workers across the country.

— The European Union (EU) and India are set to work on progressing trade negotiations this week, although discussions have been hindered by the EU’s insistence on stringent sustainability criteria. European Commission Vice President Valdis Dombrovskis is scheduled to engage with Indian Commerce Minister Piyush Goyal during a Group of 20 trade meeting in India. Both the EU and India aim to reduce their economic reliance on China through this potential trade agreement.

Hurdles: While the EU is eager to finalize the trade deal, the implementation of its rigorous sustainability regulations has become a major obstacle in negotiations with various countries. These regulations are complicating trade talks by setting high standards for sustainability that must be met by trading partners. Despite these challenges, both the EU and India are motivated to diversify their trade relationships and enhance their economic ties through this agreement.

— Reuters reports that India is anticipated to impose a ban on sugar exports in the upcoming season beginning in October. Government sources suggest that this move will mark the first time in seven years that India has prohibited sugar mills from exporting the product. The country had already limited sugar exports to 6.1 million metric tons (MMT) in the current year, significantly down from 11.1 MMT in the previous year.

The decision to ban sugar exports comes in the wake of poor monsoon rains in key production regions, leading to expectations of a decline in India’s sugar output. India is taking these measures to address food price inflation concerns, which reached 7.44% at the retail level in July. Food prices saw a significant increase of 11.5%, marking the largest surge in over three years. Apart from the sugar export ban, India has also prohibited certain rice exports and is reportedly considering importing wheat as part of its efforts to control inflation.

— Farm bill update:

Sen. Chuck Grassley (R-Iowa) is predicting that if a new farm bill is not finalized by the end of 2023, there will likely be a one-year extension of the 2018 Farm Bill, ensuring that there’s a safety net for the farming industry. Grassley made these comments during a weekly call with reporters.
Possible farm bill strategy for House floor debate. The House Agriculture Committee plans to act in September in releasing a draft, with Committee markup a week or so later. But that timeline, according to contacts, depends on when House leaders signal time for floor debate of a final farm bill package. Farm bill leaders do not want too much time between completing a markup and consideration of the measure on the House floor. But some sources see a potential opportunity for farm bill consideration. Reason: House leaders from both political parties want to get some significant legislation through the chamber, and a farm bill would fit that classification.

— Huawei’s secret chip plants. Huawei Technologies, a prominent telecommunications company, is reportedly establishing hidden semiconductor manufacturing facilities in various locations across China. This covert network of chip fabrication plants is being constructed with the intention of enabling Huawei to bypass U.S. sanctions and continue pursuing its technological goals. The Semiconductor Industry Association, representing global chip companies, has raised concerns about this development. Despite being blacklisted due to its involvement in the U.S./China conflict, Huawei entered the chip production sector recently and is believed to be receiving substantial financial support from the Chinese government, estimated to be around $30 billion.

— China expressed strong opposition to Japan’s plans to release treated nuclear wastewater from the Fukushima site into the Pacific Ocean. China’s Deputy Foreign Minister, Sun Weidong, criticized this move, calling it selfish and irresponsible as it transfers the potential risk of nuclear pollution to neighboring countries and the international community. China vows to take necessary measures to protect the marine environment, food safety, and public health if the releases proceed as planned.

The potential fallout from China’s response includes the threat to agricultural and seafood purchases from Japan, valued at around $1.9 billion last year. Hong Kong has extended import curbs on products like seafood and seaweed from certain areas. Japan’s Prime Minister, Fumio Kishida, who confirmed the wastewater releases, is scheduled to meet with China’s Premier Li Qiang soon. Japan defends its plan, citing a review by the International Atomic Energy Agency that concluded the impact on people and the environment would be negligible. The treated water will primarily contain tritium, a form of hydrogen, and experts assert that the additional radiation introduced will be minimal.

Japan anticipates a substantial negative effect on its seafood exports due to a ban on imports imposed by Hong Kong and Macau in response to Japan’s decision to release water from the damaged Fukushima nuclear reactor. An official from Japan’s Ministry of Agriculture, Forestry and Fisheries (MAFF) stated that there will be a “significant” impact on seafood exports due to this ban.

Hong Kong and Macau have decided to prohibit imports of aquatic products from ten specific regions in Japan due to concerns surrounding the water release from the Fukushima site. China, a primary destination for Japanese seafood exports, has expressed its intention to safeguard its marine environment, food safety, and public health, as stated by its foreign ministry. China has already imposed import bans on certain Japanese regions as a precautionary measure. This situation underscores the complex interplay between international trade, food safety concerns, and environmental considerations.

— Russian President Vladimir Putin has called for measures to manage the movement of money leaving Russia and to stabilize the country’s financial markets. He expressed concerns about potential inflation due to the decline in the value of the ruble. Putin emphasized the need for collaboration between the government and the Bank of Russia to curb unproductive and speculative economic activities, oversee the flow of capital out of the country, and closely observe the actions of other participants in the financial markets. He made these remarks during a televised meeting with officials.

— Russia/Ukraine update:

Ukrainian authorities have reported that Russia launched drone attacks on Ukrainian ports in the southern Odesa region and the Danube River, resulting in one grain storage facility catching fire. However, the fire was swiftly brought under control. The attack also led to the destruction of nine drones, with reports suggesting that a total of 11 out of 20 Russian drones were shot down during the incident.
In an effort to aid Ukraine in transporting its grain to sea ports, the European Union (EU) has offered compensation. This financial support is expected to assist in moving Ukrainian grain to export destinations. The Deputy Agriculture Minister, Taras Vysotskiy, mentioned that the Ukrainian government appealed to the European Commission for compensation of 30 euros per metric ton for logistics costs. However, the compensation will be applicable only for grain transported to distant European ports. Previously, there were indications that the EU might not have funds available for covering additional transportation expenses.
In terms of grain exports, Ukraine has shipped 3.83 million metric tons of grain in the 2023-24 season (July/June). This includes 1.8 million metric tons of corn, 1.6 million metric tons of wheat, and 440,000 metric tons of barley. Notably, grain shipments in August amounted to 1.56 million metric tons. This data reflects the ongoing grain trade dynamics and the various challenges faced by Ukraine in ensuring its exports, including geopolitical tensions and logistical concerns.

— India solidified its status as a significant player in space exploration by successfully landing its Chandrayaan-3 spacecraft on the moon’s unexplored south pole. The mission, launched last month, achieved its touchdown on the lunar surface at approximately 8:34 a.m. ET. This accomplishment places India as the fourth country to achieve a moon landing, following Russia, the United States, and China. Importantly, India is also the first nation to achieve a successful landing on one of the moon’s lunar poles, further marking its prowess in space exploration.

— The devastating wildfires in Hawaii, which claimed the lives of at least 115 people, have led to substantial economic losses estimated at up to $6 billion, as projected by Moody’s RMS. These fires caused significant damage, with over 2,200 structures being damaged or destroyed, and approximately 2,170 acres of land burned due to the Lahaina Fire on Maui, according to information from FEMA and the Pacific Disaster Center. Around 75% of these economic losses are anticipated to be covered by insurance, owing to the high insurance penetration rates on the island. Moody’s RMS, a risk modeling agency, noted that the majority of these losses are concentrated in Lahaina, where the insured property value ranged between $2.5 billion and $4 billion. In addition to the immediate financial impact, the emotional toll of the wildfires is immeasurable. The rebuilding process for Maui is expected to be particularly costly due to the high construction costs in Hawaii, which are approximately 44% more expensive compared to the mainland U.S. This highlights the significant financial and practical challenges associated with recovery efforts following such catastrophic events.

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