Trump Threatens Deere on Plans to Move Some Production to Mexico

News/Markets/Policy Updates: Sept. 24, 2024

— Equities today: Asian and European stock indexes were mostly higher overnight. U.S. Dow opened slightly higher. Chinese investors applauded the latest stimulus blitz, which included 800 billion yuan ($114 billion) of stock market liquidity and allowed funds and brokers to tap central bank facilities to buy equities. China’s blue-chip CSI 300 Index soared 4.3% on the news, after falling to a five-year low earlier this month. The broader Shanghai Composite and Hang Seng Index also advanced significantly, each climbing 4.1% by the end of the session. In Asia, Japan +0.6%. Hong Kong +4.1%. China +4.2%. India flat. In Europe, at midday, London +0.4%. Paris +1.6%. Frankfurt +0.8%.

U.S. equities yesterday: All three major indices ended with modest gains to start the week, but enough for the Dow and S&P 500 to register record closes. The Dow was up 61.29 points, 0.15%, at 42,124.65. The Nasdaq rose 29.95 points, 0.14%, at 17,974.27. The S&P 500 gained 16.02 points, 0.28%, at 5,718.57. Data showing U.S. business activity is robust even as growth moderates generated confidence the U.S. economy can nail a soft landing.

— The yield on the 10-year U.S. Treasury note settled at 3.74% Monday, versus the 3.58% yield on the 2-year note. That gap of 0.16 percentage point is the greatest between the two yields since the first half of 2022.

— Boeing pressures striking workers with final 30% pay raise offer. Boeing presented a 30% pay increase directly to its striking workers, a move intended to end a week-long strike that has halted production across the Pacific Northwest. This offer, an improvement over the rejected 25%, remains below the union’s demand for a 40% increase. The International Association of Machinists (IAM) criticized Boeing for bypassing formal negotiations, accusing the company of disrespecting the union. With the offer valid until Sept. 27, the pressure is on workers to accept the terms, as the strike continues to impact Boeing’s financial standing and production capabilities.

— FTC set to approve Chevron’s $53 million purchase of Hess despite legal challenge. The Federal Trade Commission (FTC) is expected to approve Chevron’s $53 million acquisition of Hess, Reuters reports (link). The deal, announced in October 2023, faces a legal challenge from Exxon and CNOOC, who argue they have the right of first refusal on Hess’s assets in Guyana. This case is set for a May 2025 hearing, with a final ruling expected by late summer or early fall.

— The Department of Justice plans to file an antitrust lawsuit against Visa, accusing the company of monopolizing the U.S. debit card market through exclusive contracts and blocking competition. This follows a three-year DOJ investigation, with Visa’s shares falling 2% in premarket trading. The company has previously defended its practices as being in compliance with the law.

— Crude oil prices closed lower on Monday as demand worries were compounded by disappointing economic numbers flowing from China and a slowdown in European manufacturing. Brent crude futures for November fell 59 cents, 0.8%, to $73.90 a barrel, while U.S. crude futures for November dropped 63 cents, 0.9%, to $70.37.

— Ag markets today: Soybeans rebounded from earlier weakness to trade higher early this morning, while corn and wheat are choppy. As of 7:30 a.m. ET, corn futures were trading steady to fractionally weaker, soybeans were mostly 3 cents higher, winter wheat futures were narrowly mixed, and spring wheat was 1 to 4 cents lower. The U.S. dollar index was tethered near unchanged while front-month crude oil futures are around $1.85 higher.

Beef margins back in the red. The average cash cattle price climbed $1.90 to $184.01 last week, which in combination with recent weakness in wholesale beef prices dropped packer margins below breakeven. Even with the red ink, cash sources expect cash cattle prices to be steady/firmer again this week. Wholesale beef prices firmed $1.62 for Choice to $301.81 on Monday, while Select dropped 80 cents to $287.79.

Cash hog index slipping again. The CME lean hog index is down 7 cents to $84.29 as of Sept. 20, marking the second straight daily decline after a brief uptick late last week. As of Monday’s close, traders narrowed the discount October lean hog futures hold to the cash index to $1.99.

— Agriculture markets yesterday:

• Corn: December corn rallied 11 3/4 cents to $4.13 1/2, closing near the session high at the highest level since July 25.
• Soy complex: November soybeans rocketed 27 1/4 cents higher to $10.39 1/4 and settled near session highs. December meal futures climbed $9.5 to $328.7, near session highs. December bean oil futures firmed 48 points to 41.84 cents.
• Wheat: December SRW wheat rose 14 cents to $5.82 1/2. December HRW wheat rose 13 1/4 cents to $5.77 1/4. Both markets closed nearer their session highs. December spring wheat futures rose 11 cents to $6.19.
• Cotton: December cotton fell 8 points to 73.44 cents, closing nearer the session low.
• Cattle: December live cattle rose 62 1/2 cents to $183.825 and near mid-range. November feeder cattle rose 97 1/2 cents to $242.75 and nearer the session high. Both markets hit seven-week highs.
• Hogs: December lean hog futures climbed 65 cents to $74.875 and settled nearer session highs. Lean hog futures ended the day higher, led by the deferred contracts.

— Quotes of note:

• Fed officials open to more rate cuts but caution against rapid moves. Several Federal Reserve officials, including Chicago Fed President Austan Goolsbee (a nonvoting member), indicated on Monday that while additional interest rate cuts are possible, they remain cautious about moving too aggressively. Goolsbee emphasized the need to lower rates to a “neutral” level, estimating that current rates are still “hundreds” of basis points above neutral. While he advocates for significant rate reductions to maintain favorable employment and inflation conditions, others, like Atlanta Fed President Raphael Bostic, warn against hasty cuts, citing ongoing uncertainties in the labor market and inflation. The Fed’s next meeting is set for Nov. 6-7, just after the presidential election.

• “I am just notifying John Deere right now: If you do that, we are putting a 200 percent tariff on everything that you want to sell into the United States.” — Donald Trump, at a campaign stop in Pennsylvania yesterday, responding to its plans to move some production to Mexico. Mark Cuban, the billionaire entrepreneur and a vocal Trump critic, said such a move would be a “good way to destroy a legendary American company and increase costs to American buyers.”

• “The gap in shipbuilding and shipbuilding capacity with China is probably too large at this point to close.” — Bryan Clark, a retired U.S. Navy official.

— Moody’s warns U.S. must tackle rising deficits to maintain top credit rating. Moody’s Ratings cautioned that the next U.S. administration must address widening budget deficits to preserve the country’s Aaa credit rating. In a new report, analysts predict a divided government will limit sweeping fiscal reforms, necessitating bipartisan compromises. Without significant policy changes, Moody’s warns of a weakening fiscal position, unsustainable debt levels, and potential credit rating downgrades. The expiration of the federal debt limit early next year is highlighted as a key challenge.

Market perspectives:

— Outside markets: The U.S. dollar index was weaker, with several foreign currencies higher against the greenback. The yield on the 10-year U.S. Treasury note was higher, trading around 3.79%, with a mixed tone in global government bond yields. Crude oil futures remained higher, with U.S. crude around $72 per barrel and Brent around $74.80 per barrel. Gold and silver were narrowly mixed, with gold weaker around $2,648 per troy ounce and silver firmer around $31.18 per troy ounce.

— Japan’s rice harvest to ease supply shortage, but prices to remain high. Japan’s rice harvest is expected to replenish depleted stockpiles after weather and panic buying caused a shortage. However, higher contract prices for farmers mean consumers will continue facing elevated costs, with prices potentially rising by 50% as supplies are restored in October. Link for more via Bloomberg.

(Ministry of Ag, Forestry & Fisheries, Bloomberg )

— India’s removal of price floor boosts basmati rice exports to key markets. India’s decision to remove the $950 per metric ton price floor on basmati rice exports is expected to drive exports to the Middle East, Eastern Europe, and the Americas, helping India regain market share lost during export restrictions, according to analysts.

— The Panama Canal isn’t as reliable as it once was, and Mexico is racing to build a new corridor connecting the Pacific and Atlantic Oceans aimed at filling the gap. The WSJ in a video report (link) looks at the $7.5 billion Interoceanic Corridor. So far, it’s not clear whether the 189-mile railway route would be faster or cheaper.

— Ag trade update: Japan is seeking 112,580 MT of milling wheat in its weekly tender.

— A brewing storm in the Caribbean is forecast to strengthen into a hurricane over the next few days and make landfall along Florida’s Gulf Coast as early as Thursday — possibly as a Category 3 system named Helene. Florida Gov. Ron DeSantis has declared an emergency for at least 41 of the state’s 67 counties. Helene would be the fourth hurricane to make landfall in the U.S. this year and the fifth hurricane to slam Florida since 2022. Already, BP, Chevron, Equinor and Shell have begun evacuating personnel from offshore locations and have paused some production due to the approaching storm.

— NWS outlook: Potential Tropical Cyclone Nine is forecast to pass not too far from the Florida Keys Wednesday night as a hurricane before skirting up the West Coast of Florida by Thursday morning... ...Much needed rainfall from the Ohio Valley into the central to southern Appalachians, Upper Tennessee Valley and Mid-Atlantic... ...Much above average temperatures continue across the West into the Northern Plains and across the Gulf Coast into the Southeast.

(NWS)

Items in Pro Farmer’s First Thing Today include:

• Soybeans firmer, corn and wheat choppy this morning
• Cordonnier again trims U.S. soybean yield, production forecasts
• Corn, soybean CCI ratings slip despite USDA’s unchanged conditions

— House Republicans push FY 2025 CR under suspension amid party pushback. House Republican leaders have decided to advance the fiscal year (FY) 2025 Continuing Resolution (CR) under suspension of the rules, avoiding a full chamber vote on the package. This change comes after pushback from GOP members and allows for limited debate with no amendments, requiring two-thirds support to pass. The move aims to expedite the measure’s passage before the upcoming extended break, with the Senate expected to act before the weekend.

— Iranian President Masoud Pezeshkian expressed a willingness to de-escalate the conflict on the condition that Israel shows the same level of commitment. His remarks, made just before the UN General Assembly, occur against the backdrop of heightened tensions, particularly after a deadly explosion in Lebanon. Although Iran blames Israel for the explosion that killed several Hezbollah members and injured Iran’s ambassador, Israel has not confirmed or denied involvement. The broader picture remains volatile, with both Iran and Israel poised for further confrontations, but Pezeshkian’s statements indicate an opening, albeit conditional, for diplomacy in the region.

— Trump criticizes Ukraine policy, calls Zelenskyy ‘greatest salesman in history.’ At a Pennsylvania rally ahead of the UN General Assembly, Donald Trump stated he would handle the Ukraine conflict “differently” than current leaders, marveling at Ukrainian President Volodymyr Zelenskyy’s ability to secure substantial U.S. aid. Trump suggested that if he wins the 2024 election, he would push both Zelenskyy and Russian President Vladimir Putin to negotiate peace, calling the ongoing war “crazy.” Zelenskyy, currently in the U.S. to discuss his war strategy with Kamala Harris and President Biden, responded by questioning Trump’s understanding of the conflict, calling some of his comments politically driven. He also criticized Trump’s running mate, JD Vance, for proposing a demilitarized zone between Ukraine and Russia, deeming it “unacceptable” for Ukraine to bear the costs of ending the war.

— China to cut reserve requirement and mortgage rates to boost economy. China’s central bank announced plans to lower its reserve requirement ratio by 0.5% (50 basis points) and reduce mortgage rates for existing housing to stimulate the economy. It did not provide a specific timeline. It also announced it would cut the seven-day reverse repurchase rate from 1.7% to 1.5%. People’s Bank of China Governor Pan Gongsheng shared these measures during a press conference Tuesday, emphasizing additional efforts to support the stock market through new monetary tools. These moves aim to stabilize economic growth amid financial challenges. Pan also said that authorities could cut the loan prime rate by 0.2 to 0.25 percentage points, without specifying whether he was referring to the one-year or five-year. The one-year LPR currently stands at 3.35% and five-year LPR is at 3.85%. Other measures also include reducing down payments for second homes, as well as 1 trillion yuan ($141.78 billion) of long-term funds.

Market impact: China equities rallies and commodities pushed higher, with iron ore spiking and copper advancing to the highest since July.

Economists acknowledge that recent support measures for China’s economy are helpful, but insufficient to address deeper structural issues like sluggish growth, falling prices, a worsening real estate crisis, and escalating trade tensions. They argue that Beijing must take stronger actions to control the real-estate downturn and implement significant steps to boost domestic consumption to achieve sustained economic recovery.

— China’s wheat purchase policy for 2025-2026:
• Maximum purchase volume: China has set a cap of 37 million metric tons (MMT) for wheat purchases at the minimum price for both 2025 and 2026.
• Minimum purchase price: The minimum purchase price for third-grade wheat is set at 119 yuan per 50 kilograms ($16.92), which equals 2,380 yuan per metric ton.
• Purpose: This policy aims to support wheat farmers and maintain food production by guaranteeing a minimum price when market prices fall below that level.
• Time frame: The policy covers wheat produced in 2025 and 2026.
• Policy continuity: This represents a continuation of China’s long-standing minimum price purchase policy for wheat, which has been a key tool in supporting domestic grain production.
• Government involvement: The policy was announced by the National Development and Reform Commission (NDRC), China’s top economic planning agency.

Of note: By setting the purchase volumes and prices for two years in advance, it provides some certainty to farmers and the grain market. However, the 37 MMT cap is lower than China’s total wheat production, which typically exceeds 130 MMT annually, indicating that the government expects market prices to generally remain above the minimum level for most wheat transactions.

— China probes U.S. firm PVH over suspected boycotting of Xinjiang products. China will launch an investigation into PVH, the parent company of Calvin Klein and Tommy Hilfiger, for suspected boycotting of cotton sourced from its Xinjiang region, the commerce ministry said. The ministry said PVH is suspected of “unjustly boycotting” Xinjiang cotton and other products “without factual basis.” The company must provide documentation and evidence within 30 days detailing any “discriminatory measures” taken regarding Xinjiang products over the past three years.

— U.S./Mexico tensions rise over Vulcan Materials dispute, impacting USMCA future. The relationship between the U.S. and Mexico is experiencing increased strain as President Andrés Manuel López Obrador’s (AMLO) term comes to an end, with tensions rising over plans to seize property owned by U.S.-based Vulcan Materials. This dispute is adding to existing concerns about the future of the US-Mexico-Canada Agreement (USMCA) ahead of its scheduled review in 2026.

The Vulcan Materials dispute. AMLO has announced plans to turn Vulcan Materials’ facility on Mexico’s Caribbean coast into a protected natural area, a move the company considers illegal and equivalent to expropriation. In response, a bipartisan group of U.S. senators has introduced legislation aimed at deterring Mexico from seizing the port. The proposed bill would:

• Prevent ships using the seized port from unloading or getting repairs in the U.S. or its territories.
• Aim to render the port useless for shipping and cruises.

Broader implications. This dispute is part of a larger pattern of tensions between the U.S. and Mexico:
• Judicial independence: AMLO’s party has pushed through an overhaul that could erode judicial independence, raising concerns among companies about investment protection and Mexico’s adherence to international trade regulations.
• Trade disputes: The Vulcan Materials issue adds to existing disagreements between the two nations on various trade matters, including energy, corn, and motor vehicles.
• USMCA review: The ongoing tensions could complicate the upcoming review of the USMCA, scheduled for 2026.

U.S. lawmakers are taking several steps to address these issues:
• Urging negotiations: They are calling on U.S. Trade Representative Katherine Tai to pursue negotiations with both AMLO and President-elect Claudia Sheinbaum, who takes office on Oct. 1, 2024.
• Warning of consequences: In a recent letter, lawmakers cautioned that changes in Mexico could make the 2026 USMCA review “more difficult” and potentially compromise US investors’ access to a stable and unbiased regulatory framework.
• Proposed legislation: The Defending American Property Abroad Act, introduced by a bipartisan group of senators, aims to protect U.S. business interests in Mexico and impose retaliatory measures if Mexico profits from confiscated property.

— Lawmakers push to extend clean fuels tax credit, limit to U.S. feedstocks. A bipartisan group of lawmakers has proposed extending the 45Z tax credit for low-carbon biofuels through 2034, restricting the credit to U.S.-produced feedstocks like corn ethanol and vegetable oils. The 45Z credit is currently set to expire at the end of 2027. The tax credit, set to begin in January under the Inflation Reduction Act, currently allows foreign feedstocks.

There are concerns that without this restriction, the credit could incentivize increased imports of feedstocks like used cooking oil from China or ethanol from Brazil, potentially undermining U.S. producers. This push comes as biofuel and agricultural groups are actively lobbying on how the 45Z credit should be implemented. The Treasury Department has yet to release final rules/guidance for the credit. The lawmakers argue that restricting the credit to domestic feedstocks would align with the original intent of supporting U.S. energy independence and creating new markets for American farmers. However, this change could face opposition from some fuel producers who currently rely on imported feedstocks.

Lawmakers proposing legislation related to the 45Z Clean Fuel Production Credit include:
• A bipartisan group of senators led by Sherrod Brown (D-Ohio) and Roger Marshall (R-Kan.).
• Reps. Mike Carey (R-Ohio), Claudia Tenney (R-N.Y.), Ann Kuster (D-N.H.), and Mariannette Miller-Meeks (R-Iowa), who introduced the “Biodiesel Tax Credit Extension Act of 2024.”
• Congressman Brad Finstad (R-Min.), who led a bipartisan, bicameral letter with 51 colleagues urging action on the 45Z credit.
• Reps. Eric Sorensen (D-Ill.), Mariannette Miller-Meeks (R-Iowa), and Nikki Budzinski (D-Ill.), who co-led Finstad’s letter.
• Sens. Joni Ernst (R-Iowa), Tammy Duckworth (D-Ill.), John Thune (R-S.D.), and Amy Klobuchar (D-Min.), who also co-led Finstad’s letter.
• A group of 39 bipartisan members of the U.S. House of Representatives who wrote to Treasury Secretary Janet Yellen.

— Brazil is making significant strides in the development and production of sustainable aviation fuel (SAF), positioning itself as a potential leader in this emerging market.

Production potential. Brazil has the potential to produce around 50 billion liters (13.2 billion gallons) of feedstock-based aviation fuel by 2030, according to Airbus Brazil President Gilberto Peralta. This ambitious target highlights Brazil’s commitment to becoming a major player in the SAF industry.

Brazil possesses several advantages that make it well-suited for SAF production:
• Biofuel experience. Brazil has a rich history in biofuel production, especially ethanol from sugarcane, which provides a solid foundation for pioneering SAF.
• Abundant feedstock. The country has access to vast natural resources and growing renewable energy infrastructure, which are crucial for SAF production.
• Aviation sector. Brazil’s expansive aviation sector, with over 100 airports and a fleet of over 2,000 aircraft, provides a strong domestic market for SAF.

Initiatives and projects. Several initiatives are underway to advance SAF production in Brazil:
• BioQAv project: Led by Boeing, Embraer, GOL, and World Energy, this project aims to produce hydro processed esters and fatty acids (HEFA) from used cooking oil.
• BioValor project: Amyris, TotalEnergies, and LanzaTech are collaborating to produce alcohol-to-jet (ATJ) fuel from sugarcane bagasse.
• H2Fly project: Siemens Energy, Airbus, and EMBRAPII are working on producing synthetic paraffinic kerosene (SPK) from green hydrogen and carbon dioxide.

Despite the promising outlook, there are challenges to overcome: • Feedstock competition. Brazil will need to strategically ensure feedstock availability for both SAF and green diesel production, considering its current dependence on sugarcane for ethanol and soybean oil for biodiesel.
• Sustainability requirements. Not all biofuels meet the strict environmental, social, and economic sustainability certification requirements for SAF. Deforestation concerns, particularly related to soybean production, need to be addressed.
• Infrastructure and investment. Significant investments in infrastructure and technology will be required to scale up SAF production to meet the projected potential.

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