U.S. GDP Growth Revised Higher; Initial Jobless Claims Fall Most Since 2021

With Congress out, good time to size up new farm bill prospects

Relatively quiet week for ag export sales to China. USDA’s weekly Export Sales report for the week ending June 22 showed limited sales of U.S. ag commodities to China. Net sales activity for 2022-23 included 9 metric tons of corn, net reductions of 6,000 metric tons of sorghum, net sales of 3,805 metric tons of soybeans and 77,397 running bales of upland cotton. Activity for 2023-24 included net reductions of 3,000 metric tons of soybeans and net sales of 15,840 running bales of upland cotton. Activity for 2023 included net sales of 2,486 metric tons of beef and 236 metric tons of pork.

First quarter U.S. economic growth was 2%, up from 1.3% first reported in major GDP revision. Meanwhile, U.S. initial jobless claims unexpectedly drop. Updates on both below.

Vladimir Putin reportedly began a shake-up of Russia’s military leadership as he seeks to reassert his authority following the Wagner mutiny. According to Reuters, Russia’s president may have frozen out Valery Gerasimov, the army chief of staff, and Sergei Surovikin, second-in-command of the invasion of Ukraine. Neither man has appeared in public since the aborted insurrection on Saturday. Promotions were also announced for several Putin loyalists. More in Russia & Ukraine section.

The Chinese balloon shot down by the U.S. earlier this year was packed with American equipment, the WSJ reports. Meanwhile, China stepped in to support the yuan for a third time this week, but failed to prevent the currency from extending a seven-month low. Also in the China section: China is considering the introduction of a broad-based food security law in response to burgeoning threats to the nation’s food supply. These threats stem from various factors such as trade disputes, climate change impacts, and disease outbreaks.

Banks pass Fed stress test. The 23 largest U.S. lenders showed they can withstand a severe global recession. Details below.

With Congress out for the July 4th recess, time to bottom line where the farm bill process is going. Details in Policy section.

Prices for genetically modified seeds have risen much faster than non-GM seeds. More in Markets section.

EPA releases more info on WOTUS rule. More below.

The Panama Canal is expected to maintain restrictions on shipping companies throughout this year due to a sustained drought causing water levels to fall to a four-year low in its main lake.

In the Trade Policy section:

• The European Union (EU) rejected a proposed solution by the United States to end tariffs on steel and aluminum.
• Ag trade issues to surface next week at USMCA confab.
  

A report from McKinsey & Company proposes key strategies required to achieve the decarbonization level necessary for keeping global warming within 1.5 degrees Celsius above pre-industrial levels. It includes several ag sector comments.

Study: Plans for controlling an ASF outbreak did not halt its progress. More below.

USDA Secretary Tom Vilsack today in Iowa will announce another tranche of spending on meat processing.

Big retail inventory drawdown is starting to impact food suppliers. More in Food section.

Aspartame, an artificial sweetener commonly used in diet sodas and low-calorie packaged food, is expected to be declared a possible carcinogen next month by the World Health Organization’s cancer research arm. A joint FAO/WHO panel on food additives is also reviewing aspartame use and will announce its findings around the same time.

U.S. energy regulators have approved the Mountain Valley Pipeline’s request to resume construction. More in Energy & Climate Change section.

Sabato’s Crystal Ball is out with its first Electoral College rankings of the 2024 cycle. Details in Politics & Elections section.

The Supreme Court is expected to decide soon on the Biden administration’s proposal to erase up to $20,000 in federal student loan debt per borrower.

Due to smoke from Canadian wildfires, more than a third of the U.S. population is currently under air quality alerts. It’s the second time that similar wildfires have affected the air quality in the U.S. just weeks after the first incident. Over 120 million individuals spread across several states from the Midwest to the East Coast are affected by these alerts. In Canada, the wildfire situation is severe, being described as the country’s worst fire season ever recorded. Close to 500 fires are simultaneously active across the nation, as stated by the fire officials. In responding to this situation, authorities are urging the public to adhere to safety precautions to minimize potential health risks.

Equities today: Asian and European stock markets were mixed to weaker in quieter overnight trading. U.S. Dow opened slightly higher and is now up around 100 points. In Asia, Japan +0.1%. Hong Kong -1.2%. China -0.2%. India closed. In Europe, at midday, London -0.2%. Paris +0.9%. Frankfurt +0.2%.

U.S. equities yesterday: Major U.S. stock indices ended Wednesday mixed to mostly lower after a session where the Dow was unable to climb into positive territory and the Nasdaq and S&P 500 also shifted between losses and gains. The Dow ended down 74.08 points, 0.22%, at 33,852.66. The Nasdaq rose 36.08 points, 0.27%, at 13,591.75. The S&P 500 edged down 1.55 points, 0.04%, at 4,376.86.

The world’s dealmakers are roughly $1 trillion down in one of their worst six months in a decade. That’s the year-on-year drop in the value of IPOs and M&A in the first half, a period in which inflationary pressures, financing constraints and geopolitical tensions nixed activity.

Agriculture markets yesterday:

• Corn: July corn fell 33 cents to $5.90, the lowest close since May 25. December corn fell 24 1/4 to $5.36 3/4, near the session low. Both contracts ended the session below their respective 20-, 100- and 40-day moving averages.
• Soy complex: November soybeans dropped 29 1/4 cents to $12.65 and nearer the session low. August soybean meal fell $6.30 to $393.70 and nearer the session low. August bean oil closed lost 123 points at 57.67 cents, nearer the session low after hitting a 3.5-month high early on today.
• Wheat: July SRW futures fell 29 1/4 cents before settling at $6.55 3/4, near the session low. July HRW futures led the complex lower, falling 37 cents before closing at $8.00 3/4, while July spring wheat futures fell 29 1/2 cents to $8.03 3/4.
• Cotton: December cotton rose 30 points to 77.36 cents but finished nearer the session low.
• Cattle: Expiring June live cattle futures (which expire at noon Friday, 6/30) rose 32.5 cents to $179.625 Wednesday, while most-active August jumped $1.375 to $173.875. August feeder futures leapt $1.75 to $240.25.
• Hogs: August lean hog futures rose 5 cents to $91.10, near the middle of the day’s trading range. Nearby July futures rose 15 cents to $94.275.
  

Ag markets today: Corn, soybeans and wheat posted two-sided trade overnight as markets calmed from recent volatile price action. As of 7:30 a.m. ET, corn futures were trading a penny lower to 5 cents higher, soybeans were fractionally lower to a penny higher, winter wheat futures were a penny lower to fractionally higher and spring wheat was 1 to 3 cents higher. Front-month crude oil futures were modestly firmer, and the U.S. dollar index was trading just below unchanged.

Market quotes of note:

• China stepped in to support the yuan for a third time this week, but failed to prevent the currency from extending a seven-month low. “The PBOC still has tools to use, as it hasn’t resorted to some aggressive tools other than mainly tweaking the fixing,” said He Wei at Gavekal Dragonomics.
  
• Food suppliers and inventory drawdown. “In retrospect, perhaps it shouldn’t have been a surprise, but it certainly was an order of magnitude.” — General Mills CEO Jeff Harmening, on the inventory drawdown.
  
• Sevens Report on the Federal Reserve: “Markets remain skeptical about the Fed’s rate hike intentions and a ‘hawkish’ surprise remains a risk for markets as we start the second half of 2023, although for now that’s not enough to derail investor optimism, or the rally.”
  
• Exxon Mobil said that the chances of the world getting to net zero are low because of the drop in living standards it would cause. The company expects global oil demand to still be roughly 100 million barrels a day by 2050.
  

The leaders of four of the world’s most influential central banks conducted a joint public discussion on Wednesday in Sintra, Portugal. Though the news that the Federal Reserve and other institutions are likely to continue raising interest rates did not shock the stock market, Barron’s says there were concerning key takeaways from the discussion.

• Federal Reserve Chairman Jerome Powell and his counterparts more or less admitted uncertainty about the current situation with inflation. This was delicately phrased to highlight the positive — specifically, the resilience of economies in the face of tightening monetary policies and the surprisingly low unemployment rates. However, the implicit message is that these outcomes are unexpectedly positive, and the central banks are unclear on why the economy hasn’t buckled under the fastest and largest rate hikes in a generation.
• When referred to as “data-dependent,” their approach essentially means that the banks lack confidence in their forecasts and require more current, real-world data to guide their decisions.
• The principals attribute the current slowdown in inflation mainly to declining energy prices and the resolution of supply chain issues. Persistent high inflation is due to the ability of businesses to increase prices and workers to negotiate higher wages, effects that higher interest rates have not yet significantly impacted.
• Breaking from convention, Powell conceded that instead of statistical models, he’s increasingly relying on judgement. In a remarkable admission of policy failure, he stated that inflation is not expected to return to the 2% target until 2025, making it clear that higher interest rates will persist for a longer period.
  

Prices for genetically modified seeds have risen much faster than non-GM seeds. Between 1990 and 2020, according to USDA, the costs farmers were required to pay for crop seed rose at a much faster rate compared to the rise in prices they received for crop commodities.

Specifically, there was an average price increase of 270% for all types of seed, while the crop commodity price index only saw a rise of 56%.

For key crops that extensively use genetically modified (GM) seed such as corn, soybeans, and cotton, seed prices increased by an average of 463% during this period. In 2014, GM seed prices reached their highest point, costing farmers 639% more than the 1990 levels.

Despite the steep price increase, the usage of GM crops has provided some financial advantages for farmers. These genetically altered crops have not only been instrumental in lifting yield, but they have also helped to reduce farm production costs. For instance, insect-resistant GM traits reduce the need for insecticide applications, and herbicide-tolerant GM traits can act as a substitute for the manual labor of mechanical tillage, also reducing the costs of machinery and fuel previously used for controlling weeds.

The importance of robust regulatory measures and supervision in the banking system were highlighted Wednesday by Federal Reserve Chair Jerome Powell after the recent failures of Silicon Valley Bank and two other midsize financial institutions. He said such scenarios underlined the need for strong capital buffers to ensure the sector remains resilient during turbulent times. Powell has previously faced criticism for reducing supervision and regulation of midsize banks, a move that was made following bipartisan legislation introduced in 2018 under former President Donald Trump. According to Powell, the recent bank failures suggest a need to strengthen oversight practices, particularly for institutions comparable in size to Silicon Valley Bank.

In his remarks, Powell drew attention to the swift rise in inflation last year. In response, he sped up the process of increasing interest rates to prevent an inflationary mindset from setting in. However, this rapid hike led to a mismatch in some banks between low-rate assets like securities and loans, and higher-rate liabilities like deposits and bank borrowings. Such a discrepancy ultimately triggered a bank run on Silicon Valley Bank in March. The key vulnerability was not comprehensively assessed during the Fed’s annual stress test. This misjudgment was apparent in its failure to account for exposure to losses on securities whose value had depreciated due to swift interest rate increases.

Powell indicated that despite a prompt response from regulators to the initial crisis, lessons had to be learned about the speed at which bank runs could unfold. He emphasized the unexpected swiftness with which Silicon Valley Bank failed, contrasting it with long-standing assumptions that bank runs usually occur over days or weeks.

Moving forward, Powell said the Fed, along with other regulators, remains prepared for future challenges, emphasizing vigilance about the financial system’s resilience. He even hinted at possible rate increases at the July 25-26 meeting. Banking system strains seem to have dwindled over the past few weeks, with deposit levels regaining stability.

Banks pass U.S. Fed stress test. All of Wall Street’s largest banks, including JPMorgan, Morgan Stanley, Goldman Sachs, and Wells Fargo, have passed the Federal Reserve’s annual stress test. This success demonstrates the banks’ resilience and ability to withstand a severe global recession and potential real estate market turmoil. This clearance opens the way for the banks to return billions of dollars to their investors. However, some of these institutions might delay the announcement of their payouts until there’s more clarity on new capital requirements. Link/pdf to test results.

Impact: Following the announcement of the stress test results, the share prices of JPMorgan, Morgan Stanley, Goldman Sachs, and Wells Fargo increased by at least 1% in after-hours trading.

Fed Bank of St. Louis report: Stubborn Inflation, economic resilience major themes in U.S. outlook. The article (link), authored by Kevin L. Kliesen, focuses on key economic factors in the United States such as stubborn inflation, economic resilience, and the Federal Open Market Committee’s (FOMC) ongoing commitment to returning inflation to a 2% target. Despite a tightened monetary policy and subsequent decrease in headline inflation, core inflation remains high.

Key takeaways include:

1. The FOMC maintained the target range for federal funds rate at 5% to 5.25% during its June 2023 meeting. Some further rate increases are anticipated this year to bring inflation down to a 2% target over time.
2. Inflation has slowed due to the Fed’s actions, coupled with lower energy prices and moderating food price inflation. Despite these efforts, concerns are raised regarding the possibility of a recession, with the higher real federal funds rate not causing widespread economic slowdown thus far.
3. Job growth continues to exhibit strength. From March 2022 through May 2023, payroll employment increased by 4.7 million, which translates to an average of 334,000 jobs per month. Unemployment remained relatively low.
4. On the downside, interest rate rises have had a negative impact on the housing industry with a decline in home sales and construction.
5. The Fed anticipates that core inflation will exceed their 2% target well into 2024 —dropping from 4.8% in 2022 to an expected 3.9% in 2023 and 2.6% in 2024.
6. Both external factors like the war in Ukraine, weakness in China’s economy, and internal factors like potential for higher commodity prices continue to pose a challenge in bringing inflation back to its 2% target.
   

Bottom line: The author concludes by describing the current macroeconomic environment as resilient, in terms of overall performance of the economy and trend measures of inflation. However, he also acknowledges the potential for unexpected developments that could alter the economic landscape.

The U.S. economy grew by an annualized 2% on quarter in Q1 2023, well above 1.3% in the second estimate, and forecasts of 1.4%. The updated estimates primarily reflected upward revisions to exports and consumer spending that were partly offset by downward revisions to nonresidential fixed investment and federal government spending. Imports were revised down.

The number of Americans filing for unemployment benefits was at 239,000 on the week ending June 24, below market estimates of 265,000 and easing from the upwardly revised, 20-month high of 265,000 from the previous week. The results somewhat extended the period of labor-market resilience to higher borrowing costs from the Federal Reserve, slightly easing recent concerns of labor market softening.

The merchandise-trade deficit in the U.S. reduced significantly in May, more than the initial predictions, due to a notable decline in the value of imports, which haven’t been this low since November. According to data from the Commerce Department, the deficit in goods trade lessened by 6.1% to $91.1 billion. The decrease is primarily due to a reduction in consumer goods, with imports falling by 2.7% to approximately $254 billion. Furthermore, exports also contracted by 0.6% to reach $162.8 billion, resulting from a drop in international deliveries of food and industrial supplies.

Market perspectives:

• Outside markets: The U.S. dollar index was. The euro and British pound were both slightly higher against the greenback. The yield on the 10-year U.S. Treasury note was firmer, trading around 3.75%, with a mostly higher tone in global government bond yields. Crude oil futures were nearly flat, with U.S. crude around $69.55 per barrel and Brent around $74.22 per barrel. Gold and silver futures were seeing mild pressure, with gold around $1,918 per troy ounce and silver around $23.07 per troy ounce.

• Russia is facing significant challenges in its gas industry following its invasion of Ukraine, which led to a decrease in sales to Europe, its primary gas buyer. In the aftermath, Russia has been unsuccessful in finding replacement buyers for approximately 90 billion cubic meters of pipeline gas, the estimated loss in flow to Europe last year. This absence of buyers is exerting further pressure on Russia’s already sanctioned economy.

Compounding these difficulties is a slump in gas prices this year, which has further decreased earnings. According to the Finance Ministry, revenue from the gas industry for the period between January and May plummeted nearly 45% compared to the previous year, resulting in takings of just 710 billion rubles ($8.2 billion).

• The International Brotherhood of Teamsters is pressing for a proposed agreement with UPS on a new national contract within the next week. If this isn’t achieved, the union will request a final offer from the company. The current national contract involving around 330,000 UPS employees is set to expire on July 31. As negotiations on economic aspects like pay and benefits are ongoing, the Teamsters are demanding an agreement soon to allow for its proper distribution and voting by members before the expiry of the current contract. The union is ready to go on strike if a new contractual agreement isn’t in place by the expiration date of the current contract. Union spokesperson Kara Deniz has made it clear that they want the new contract to be effective from August 1, without any delays. On the other hand, UPS states they are negotiating in good faith and are ready to work incessantly to secure a new contract beneficial to all parties, including their employees, the union, the company itself and most importantly, their customers. Negotiations supposedly began last week on economic issues after agreement was reached on non-economic matters like technology implementation and SurePost deliveries. However, according to the Teamsters, the progress of the negotiations has been rather slow due to the lack of respectable counteroffers from UPS on economic elements. The union is stern with their demands and has disapproved of any dilution of the agreement or dragging out the process.

• 14,647: Grain carloads carried by U.S. railroads last week, down 29% from the same week last year and about 33% below the level in the first week of May, according to the Association of American Railroads.

• The union representing dockworkers at British Columbia ports issued a notice that their members are prepared to strike on Saturday. Link to more via Bloomberg.

• The Panama Canal is expected to maintain restrictions on shipping companies throughout this year due to a sustained drought causing water levels to fall to a four-year low in its main lake. This situation has led to cargo carriers experiencing bottlenecks as they queue to pass through the canal. The authority plans to limit how deep a vessel can be submersed in the water — no less than 44 feet (13.4 meters) — especially for large, Neopanamax ships. Currently, the number of ships making daily trips through the canal has decreased from 36-37 under normal circumstances to 30-31. Drought conditions impacting Europe are also leading to transportation disturbances. For instance, water levels in the Rhine River, Germany, are quite low, disrupting diesel deliveries inland from Europe’s main oil-trading center. In Panama, these restrictions have led to longer waiting periods for vessels, with 59 currently waiting to transit. The canal authority is primarily focusing on ships that have secured transit slots, and managing other, unbooked vessels on a standby basis. Panama is also grappling with long-term concerns over water sourcing. To address these, the canal authority’s board of directors are planning to convene on July 6, followed by discussions with government officials over the next month. According to Lee Klaskow from Bloomberg Intelligence, the constraints on the canal could help maintain a bottom limit on rates for key container shipping routes. There are expectations of limits on daily shipments in the coming weeks, which could favor transpacific rates as cargo is diverted to the West Coast.

• NWS weather outlook: There is a Slight Risk of excessive rainfall over parts of the Ohio Valley and Central High Plains... ...There is an Enhanced Risk of severe thunderstorms over parts of the Middle Mississippi and Ohio Valleys on Thursday; a Slight Risk of severe thunderstorms over parts of the Middle Mississippi/Ohio Valleys on Thursday... ...Excessive Heat Warnings and Advisories over parts of the Southern Rockies, Southern High Plains, Central/Southern Plains, Middle/Lower Mississippi Valley, Central Gulf Coast... ...Air Quality alerts over parts of the Upper/Middle Mississippi Valley, Great Lakes, Western Ohio Valley, Central Appalachians, Northeast, and Mid-Atlantic.

Items in Pro Farmer’s First Thing Today include:

• Light and choppy grain trade overnight
• H&P Report out this afternoon
• Cash cattle trade lower
• Cash hog index continues steady climb

— High-ranking Russian General Sergei Surovikin has reportedly been detained as part of the Kremlin’s crackdown on Wagner sympathizers in the wake of the militia’s unsuccessful mutiny last week, the Financial Times reports. Known for his close relationship with Wagner’s leader Yevgeny Prigozhin, Surovikin’s recent lack of communication and alleged detainment have been confirmed by several reports. It is yet unclear whether Surovikin, the leader of Russia’s air force, is accused of participating in the Prigozhin-led rebellion on Saturday, or if he’s simply being held for questioning.

President Putin has initiated a sweep of the upper echelons of the security services in an effort to suppress opposition, maintain order, and reassert his influence after the first coup attempt in 30 years in Russia. Advocates of hardline approaches, known for showing support for Wagner and criticizing the regular armed forces, have recently been missing from public view. Meanwhile, loyalists, like Defense Minister Sergei Shoigu, who was targeted for removal in Prigozhin’s coup, have made public appearances in high-stakes meetings and events.

A Western government official stated that Putin had known about Prigozhin’s plans beforehand, which allowed him to assess the actions of key individuals on the day, and is now “cleaning house.”

Surovikin, who earned his alias, “General Armageddon,” for his intense bombing tactics in Syria, was upgraded last fall to lead Russia’s invasion of Ukraine. Despite a quick demotion, Surovikin remained popular amongst Russia’s hardline pro-war faction and acted as the intermediary between Prigozhin and the military establishment in Moscow as their conflict escalated. Surovikin’s sudden disappearance came on the heels of an armed rebellion against the defense elite in Moscow, during which he asked Wagner fighters to surrender their weapons.

The Kremlin refused to answer any inquiries relating to Surovikin’s status, directing journalists to the defense ministry for information. Kremlin spokesperson, Dmitry Peskov, dismissed a New York Times report suggesting that the general had prior knowledge of the coup attempt, noting the expected speculation around these events.

— Sanctioned Russian cargo ships regularly call at Turkish ports. Sanctioned Russian cargo ships, which have been penalized by the U.S for transporting weapons and other supplies, have reportedly made over 100 visits to Turkish ports since May of the previous year. Documents reviewed by the Wall Street Journal reveal that some of these vessels have gone through repair services or have availed other services that are forbidden under U.S regulations, potentially risking sanctions on Turkish businesses. This situation could escalate the already tense relationship between the U.S. and Turkey. Interestingly, Turkey is the only NATO member that has not implemented any sanctions against Russia, the Kremlin.

— With Congress out for the July 4^th recess, time to bottom line where the farm bill process is going.

• Chairs of both Ag panels want a bill this year, but odds of at least a short-term extension are growing.
• Farm groups and some farm-state lawmakers prefer a farm bill extension versus a baseline farm bill that offers no extra funding to improve the Title I safety net.
• Senate Ag Chair Debbie Stabenow (D-Mich.) said she is committed to protecting the critical investments in the IRA for their intended purposes. If she can maximize those investments, she is open to conversations. During a Bloomberg event last week Stabenow said: “From my perspective, we’re talking about how we could move that in some form into a long-term baseline so farmers can benefit from that and keep all of the opportunities in terms of addressing the climate which our farmers want to do, they’re anxious to do.”
• House Ag Chair G.T. Thompson (R-Pa.) told AgriTalk that he and his staff are looking at farm bill “efficiencies” that could garner more funding for Title 1 and other priority needs. But Dr. Bart Fischer of Texas A&M Univ. said farm bills in the past have done the same worthwhile review, “but not nearly enough funding can be found to truly improve the Title I safety net.”
• Thompson has signaled he is working with House Budget Chair Jodey Arrington (R-Texas) regarding ag disaster funding and the crop insurance program.
• The farm bill’s fate will be known by late August, early September as to whether sufficient funding for critical needs can be found to draft a new farm bill.

Bottom line: There is also a question of whether waiting will truly give farm bill writers a bigger baseline to write the bill with than they have now. And Fischer’s observations are correct in that prior efforts to shift funds within the bill to other priorities has not yielded the hoped-for results, a surprising development in what is widely expected to be a measure that carries a price tag upwards of $1.5 trillion. Also, farm bill writers are behind the eight ball but not totally their own fault. Other events dominated the focus in Washington this year at a time when the details of the legislation should have been written if an on-time bill was going to be the most-likely outcome. Budget uncertainty on a farm bill is never a positive. It can lead to policy decisions that become muted or minimally effective as lawmakers seek to pair programs with available dollars.

— EPA releases more info on WOTUS rule. Earlier this week we reported that EPA plans to revise the “waters of the United States” (WOTUS) regulation, which determines the extent to which anti-pollution laws apply upstream, by Sept. 1. EPA has not released a statement (link) about the matter. This move follows a Supreme Court ruling that limits federal protection of wetlands.

In its May 25 decision, the SCOTUS said that the 1972 Clean Water Act (CWA) only applies to marsh-like areas with a direct connection to bodies of water such as streams, oceans, rivers, or lakes. This deviates from the previous standard set by a 2006 ruling, which talked about a “significant nexus” between a land tract and a waterway.

EPA comments: “EPA (and) the Army Corps of Engineers remain fully committed to ensuring that all people have access to clean, safe water. We will never waver from that responsibility,” said the EPA statement about the upcoming revisions. “The agencies are interpreting ‘waters of the United States’ consistent with the Supreme Court’s decision.” Both the EPA and the Corps of Engineers have regulatory duties for federal waterways.

— Jens Stoltenberg will stay on as NATO secretary-general for another year and an announcement could come as soon as next week, the Times reported. It added that the U.S. is lining up Ursula von der Leyen to succeed him. Her spokesman said that was “unfounded speculation.”

— The Brookings Institution named Cecilia Rouse its next president. Rouse is joining Brookings from Princeton University, where she is a professor of economics and public affairs. She served from 2021 to 2023 as Chair of the Council of Economic Advisers.

— The Chinese balloon shot down in the U.S. earlier this year was loaded with commercially available American gear, interspersed with more specialized Chinese sensors to help collect photos, video and other information to transmit to China, the WSJ said (link). It supports a conclusion that the craft was intended for spying, not weather monitoring as Beijing has said. Preliminary U.S. findings show the craft collected photos and videos but didn’t appear to transmit them, officials say. The Pentagon has said the U.S. military employed countermeasures to prevent information collection by the balloon.

— Why Treasury Secretary Janet Yellen wants to go to China. Yellen said one reason she hopes to visit China is to meet “a new group of leaders” as she reiterated calls for cooperation on crucial global challenges. “We need to get to know one another,” Yellen told MSNBC. “We need to discuss our disagreements with one another so that we don’t have misunderstandings, don’t misunderstand one another’s intentions,” she said in the interview broadcast on the network Wednesday night. Yellen reiterated that the US is taking, and would continue to take, actions that protect national security interests from threats posed by China even if they carry economic costs, while she appealed again to Beijing to cooperate on shared global concerns.

— Nvidia warns against further U.S. curbs on AI chip exports. The semiconductor giant’s CFO said that additional steps to limit sales to China of chips meant for artificial intelligence systems could “result in a permanent loss of opportunities” for U.S. companies in a major market. Shares of Nvidia fell yesterday after the Wall Street Journal reported on White House deliberations about new export rules.

— China is considering the introduction of a broad-based food security law in response to burgeoning threats to the nation’s food supply. These threats stem from various factors such as trade disputes, climate change impacts, and disease outbreaks.

A key intention of the proposed law is to centralize and strengthen the country’s scattered agricultural and national security laws, specifically those concerning food security. Core issues this law aims to address are grain production, processing, preservation, and the protection of agricultural land. These areas have been considered critical to maintaining the country’s food supply amidst concerns of an inability to sustain the current consumption habits and lifestyle changes.

The draft envisions the creation of a national agriculture germplasm bank, an enclosed space for preserving living plant tissue, to support grain production. The proposed law also seeks to enhance grain storage, distribution, and emergency food supply mechanisms. To curb food wastage, this draft law includes measures to outrightly ban the illegal destruction of immature grain crops often caused by early harvest for land earmarked for construction projects.

Once enacted, this law aims to solidify the legal framework underpinning food security. According to state media China Daily, this move will actualize the Chinese citizens’ vision for better and more stable food supply.

— China demands that the U.S. lift sanctions as a prerequisite for high-level military talks, according to a Chinese diplomat. This assertion is linked to the strained U.S./China military relations, as the Biden administration imposed unilateral sanctions on China. Liu Pengyu, the spokesperson for China’s Embassy in Washington, underlined the importance of lifting the sanctions barriers for diplomacy and cooperation between the two nations.

The sanctions in question likely involve Chinese Defense Minister Li Shangfu, who received sanctions from the U.S. in 2018 due to a Russian arms purchase. China has signaled that Minister Li will not meet with Defense Secretary Lloyd Austin unless these restrictions are lifted. This issue came to a head in June at a security conference in Singapore when China denied the Pentagon’s request for a meeting between Defense Minister Li and Secretary Austin. The Biden administration’s argument is that meetings in a third country are permitted under the sanctions, however, there have been conflicting indications about whether the U.S. plans to lift the sanctions.

The strained relationship between the two nations was on display during Secretary of State Antony Blinken’s recent visit to Beijing. Blinken voiced frustration that China was uncooperative in establishing closer military communication channels, a crucial step to prevent incidents from escalating into conflicts.

Liu Pengyu was also critical of the U.S. over their freedom of navigation and overflight operations around China. He accused the U.S. of being the instigator in recent close encounters between U.S. and Chinese vessels and aircraft, branding it military provocation. Liu asserted that China’s response was professional, lawful, and justified, opposing actions which threaten China’s sovereignty in the guise of freedom of navigation or overflight.

— The European Union (EU) rejected a proposed solution by the United States to end tariffs on steel and aluminum. The two parties had previously halted a tariff war, originally initiated by former President Donald Trump in 2021, but need to agree on a new “green steel” accord by October. However, the EU considers the U.S.’ proposed solution to be in violation of World Trade Organization (WTO) rules, arguing it seemingly favors U.S. domestic producers.

The dispute centers around a proposed “club” of sustainable steel producers prioritizing low-carbon production. The U.S. solution allows club members to establish emissions standards and impose tariffs on those not meeting them. Membership would require governments to avoid overproduction of steel and aluminum and limit the role of state-owned businesses.

The EU instead believes its carbon border adjustment mechanism (CBAM), which imposes tariffs based on imports’ carbon intensity, is a more befitting solution. The EU proposal also aims to address overproduction via conventional trade defense measures to form the basis of the Global Arrangement on Sustainable Steel and Aluminum (GSA).

If an agreement cannot be reached, both U.S. tariffs and EU retaliatory measures are due to automatically resume in October. These tariffs currently stand at 25% on steel and 10% on aluminum from Europe with EU retaliation targeting products like bourbon whiskey and Harley-Davidson motorcycles.

EU Trade Chief Valdis Dombrovskis is set to visit Washington next week to move negations forward. He will also seek better treatment for the EU under the U.S.’ electric vehicle support plan, called the Inflation Reduction Act.

The goal is to sign a deal possibly around the time of a proposed EU/U.S. summit in October. The European Commission reiterated the EU’s commitment to achieving an ambitious GSA outcome by October and emphasized the importance of a “permanent solution” to re-establish normal trade in the sector. The Biden administration has yet to respond officially.

— Ag trade issues to surface next week at USMCA confab. The annual USMCA Free Trade Commission meeting next week in Mexico will witness key discussions between U.S. Trade Representative Katherine Tai and Canadian Trade Minister Mary Ng. The dairy disagreement and other bilateral matters will form the core of their conversation. Raquel Buenrostro, Mexican Economy Minister, and this year’s host, will engage in both bilateral meetings with Tai and Ng and a trilateral meeting involving all three.

The U.S. has several lingering ag trade issues, including a dairy policy skirmish with Canada, and GMO corn trade with Mexico.

— EPA announced a $7 billion competitive grant program, titled “Solar For All,” aimed at bolstering solar projects in low-income communities throughout the United States. This program is part of the administration’s ongoing efforts toward environmental justice.

Funding for Solar For All comes from the Greenhouse Gas Reduction Fund, which received $27 billion from the Inflation Reduction Act. The program plans to award up to 60 projects that serve states, territories, tribes, regions, and eligible nonprofits. Applications for the grants will be open until September 26, and the program assures that households involved will save at least 20% on their electricity bills.

Jahi Wise, acting director of the Greenhouse Gas Reduction Fund program, emphasized the benefits of this initiative during a press conference. He revealed that the main intention of the new program is to improve access to affordable, resilient, and clean solar energy for millions of low-income households and communities, particularly those that have lacked access to the cost-saving potentials of home-generated clean energy.

The program was announced by EPA Administrator Michael Regan and Senator Bernie Sanders (I-Vt.) while visiting a residential solar project in Vermont. However, the Greenhouse Gas Reduction Fund has faced opposition from House Republicans, who, in March, passed an energy package that attempted to repeal the fund’s unspent resources.

— Mountain Valley Pipeline construction gets FERC green light. The Federal Energy Regulatory Commission (FERC) has given the green light for the resumption of the Mountain Valley Pipeline construction. This came in a five-page order on Wednesday, backing the Fiscal Responsibility Act of 2023 that validated all federal authorizations needed for the project. Surprisingly, the decision was unanimous despite the current split within the commission — two Democrats and two Republicans. The FERC stated, “Mountain Valley has all necessary authorizations for the Mountain Valley Pipeline Project. Mountain Valley is therefore authorized to proceed with all remaining construction associated with the project.”

However, the decision is being contested by environmentalists who have filed court challenges against the pipeline provisions in the debt limit package. They are arguing before the U.S. Court of Appeals for the Fourth Circuit that the go-ahead for the pipeline’s construction is unconstitutional.

— McKinsey & Company report: Ag transition: Building a sustainable future. A report (link) from McKinsey & Company proposes key strategies required to achieve the decarbonization level necessary for keeping global warming within 1.5 degrees Celsius above pre-industrial levels. This goal was set in the 2016 Paris Climate Agreement. The report draws attention to the top contributors to food and agriculture sector emissions, namely changes in land use, energy utilization, and methane emissions from livestock.

Three areas outlined to address these issues include reducing food waste, altering the types of food consumed, and examining land use issues. The report notes that approximately 30% of global food is wasted yearly, contributing to 8-10% of human-made greenhouse gas emissions. McKinsey estimates that by 2050, these emissions could be reduced by 0.7 Gt of CO2 equivalent if food waste was reduced by 23%.

Regarding dietary changes, the report suggests a considerable decrease in emissions could be facilitated by integrating more alternative protein sources into people’s diets. These sources include plant-based and lab-grown proteins, which emit considerably fewer greenhouse gases compared to proteins derived from livestock.

The report also highlights the immense footprint of land use for agriculture, accounting for about 38% of the world’s terrestrial space. The researchers propose nature-based solutions, like conservation and restoration practices, which could potentially abate 6.7 Gt (CO2 equivalent) in 2050, and account for 80% of possible land-related emission reductions.

Moreover, the document identifies a list of 28 measures that could support onsite farm decarbonization while also offering financial benefits to farmers. However, these strategies face potential hindrances including financial access, grower education, and regulatory incentives.

Financial incentives will be key to attain widespread acceptance of sustainable food and agriculture sector transitions that can reduce greenhouse gas emissions. Additionally, the practices identified are likely only feasible once carbon credit prices average around $150 per metric ton, particularly in less developed areas or on smaller farms which are more sensitive to costs.

Lastly, the report indicates the importance of green bona fides traceability in ag and food products throughout the supply chain. Consumers and retailers should be able to track environmental-friendly practices, effectively increasing transparency and promoting the sale of such products.

— Study: Plans for controlling an ASF outbreak did not halt its progress. A study (link) by North Carolina State University suggests that the current U.S. control measures may not be sufficient to completely halt the progress of an outbreak of African swine fever (ASF) within 140 days. While the measures taken, such as limiting animal movement and depopulation, managed to reduce the ASF spread by nearly 80% in computer simulations, only 20% of the virtual models had the virus completely under control by the end of this period.

What results mean. These results, as pointed out by Gustavo Machado, an assistant professor of population health and pathobiology at the university, indicate that while containment of ASF is possible, it could take longer than initially projected. The university is currently revising its simulation model with updated data and parameters to explore possibilities of controlling the virus within various timeframes.

The initial simulation, which was funded by USDA and based on data from over 2,000 real-world farms and records of past diseases, showed that close contact between pigs accounted for 71.1% of theoretical ASF cases. Other causes included the indirect spread through contaminated transportation (14.4%), and local transmission factors (14.6%).

The study also emphasized the role of pre-outbreak testing and screening measures. Although the cost of testing every animal may be high, the U.S. should continue to enhance existing surveillance measures and train more personnel in sample collection and analysis. The study particularly advised stricter controls for high-risk farms where animals comingle extensively, which could help detect and manage outbreaks earlier.

— USDA Secretary Tom Vilsack to announce another tranche of spending on meat processing. Whenever Vilsack travels, millions of taxpayer dollars are announced and that is the case today when he will announce that $115 million will be distributed across 17 states in the form of 15 awards to augment meat and poultry processing capacity. This announcement will be made in Des Moines, Iowa. Link to USDA release.

The National Institute of Food and Agriculture managed by USDA will also grant seven awards totaling $4.5 million to community and technical colleges for the training of meat processing workers. The industry has been facing labor supply issues.

The funding will be allocated as follows: the Meat and Poultry Processing Expansion Program will distribute five awards totaling $38 million to support smaller, independent processing firms. The Meat and Poultry Intermediary Lending Program will dispense ten awards cumulating in $77 million. The funding for the educational grants will be channeled through the Meat and Poultry Processing — Agricultural Workforce Training program.

— The Senate is investigating whether two dozen companies, including Burger King, Pizza Hut, H&R Block and Jimmy John’s, avoided giving employees overtime pay by doling out inappropriate job titles. A report found the companies are exploiting a federal law that allows them to avoid paying overtime wages for employees coined “managers,” saving them roughly $4 billion in overtime payments per year.

— Big retail inventory drawdown is starting to impact food suppliers. General Mills, a large food supplier known for products like Cheerios and Bisquick pancake mix, has seen sales suffer in the recent quarter due to a significant inventory drawdown in the retail sector. Sales volumes have decreased by 6%, with the most significant losses recorded in international and North American markets. However, General Mills did manage to expand its top line, or revenue, by 3% during the period, an increase attributed to higher pricing. This illustrates the broad effects of the pandemic, which not only led to stockpiling of goods by retailers but now appears to have resulted in these retailers reducing their inventories as the initial disruptions started to fade. Link for more via the Wall Street Journal.

Other issues. Even though supermarket chains, among General Mills’ biggest customers, are reducing their stocks, government data suggests inventory at food and beverage stores has been more stable compared to other retail sectors. Nevertheless, the materialization of higher interest rates is negatively impacting the sector by increasing inventory carrying costs. This comes because of the reduction in supply chain disruptions and growing expenses associated with holding goods.

— Japan halts some Brazilian poultry imports. Japan suspended purchases of poultry from the Brazilian state of Espirito Santo after an outbreak of highly pathogenic avian influenza (HPAI) on a non-commercial farm. The Brazilian Association of Animal Protein said the decision “is not in line with the guidelines of the World Organization for Animal Health” and noted Japan doesn’t currently import poultry from Espirito Santo.

— U.K. Chancellor Jeremy Hunt has collaborated with U.K. regulators to address the issue of high food inflation, which reached 14.6% in June according to the British Retail Consortium. The newly agreed upon “action plan” involves scrutiny of the food industry supply chain, specifically profits. Bank of England (BoE) Governor Andrew Bailey is tasked with this project and is also working with the Competition and Markets Authority to identify and address any indications of profiteering.

Any suggestions of dire measures, such as imposing price caps or a ‘margin cap’ on food companies have been ruled out by the government. BoE’s plan is to determine the driving forces behind food pricing, monitor the sector, and produce an analysis for their August monetary policy report. Other issues that regulators are looking into as part of this plan include interest rates, fuel prices, grocery bills, and assistance for households facing hardships in paying for water, energy, broadband, and mobile services.

Chancellor Hunt has been accused of not doing enough for consumers, with calls for more government aid growing. However, he maintains that the government cannot give more support due to economic and political constraints. His current plan leans on regulators and companies to aid consumers rather than imposing regulations or caps. Critics, however, question whether this approach will significantly impact the inflation problem.

— Reuters: WHO IARC to declare Aspartame a possible carcinogen. The World Health Organization’s International Agency for Research on Cancer (IARC) is reportedly planning to classify Aspartame, an artificial sweetener, as a possible carcinogen. According to two unnamed sources quoted in a Reuters article, this decision was finalized in a meeting of the IARC’s external experts using an aggregation of published evidence. However, it’s noteworthy that this determination does not account for the consumption level of the product. The report further states that the WHO and the Food and Agriculture Organization’s Expert Committee on Food Additives (JECFA) has been conducting a review of Aspartame within this year, and a specific announcement is expected on July 14, coinciding with the anticipated IARC decision.

Historically, IARC rulings have often led to significant reactions, including lawsuits, unrest among consumers, and actions by manufacturers to change product formulations or seek alternatives, especially when products have been flagged as potential carcinogens.

— President Joe Biden has started using a CPAP machine to treat sleep apnea, adding to the growing concerns around the president’s health as he enters his reelection bid. The statement from the White House explains marks from straps that were seen on both sides of his face earlier this week.

— Sabato’s Crystal Ball is out with its first Electoral College rankings of the 2024 cycle (link). Key predictions:

• They identify just four true “toss-up” states: Arizona (11 electoral votes), Georgia (16), Nevada (6) and Wisconsin (10).
• Leans Republican: North Carolina (16) and Maine’s 2nd congressional district (1).
• Leans Democratic: Michigan (15), Pennsylvania (19) and New Hampshire (4).
  

Upshot: If you combine the safe, likely and lean states for each respective party, Crystal Ball projects the Democrats have 260 electoral votes and the Republicans have 235. This campaign is wide open. Sabato Crystal Ball concludes: “Democrats start closer to the magic number of 270 electoral votes in our initial Electoral College ratings than Republicans. But with few truly competitive states and a relatively high floor for both parties, our best guess is yet another close and competitive presidential election next year — which, if it happened, would be the sixth such instance in seven elections (with 2008 as the only real outlier).”

— Brazil’s supreme electoral court is expected to decide today whether Jair Bolsonaro, the country’s former president, abused his powers while a candidate for re-election last year. He is accused of misusing a meeting with foreign diplomats to publicly discredit Brazil’s electronic voting system. Judges will also consider evidence that Bolsonaro’s allies had a plan for a military takeover should he lose. In January, supporters rioted and stormed official buildings after his left-wing rival, Luiz Inácio Lula da Silva, took office.

— The two frontrunners to represent the party of Mexican President AMLO in the 2024 ballot are in a statistical tie, a local poll showed. Former Mexico City Mayor Claudia Sheinbaum and ex-Foreign Minister Marcelo Ebrard are within one percentage point of difference.

— The Supreme Court is expected to decide soon on the Biden administration’s proposal to erase up to $20,000 in federal student loan debt per borrower. This proposed forgiveness plan could potentially erase about $430 billion off the government’s books. Around 43 million people owe a cumulative amount of $1.6 trillion in federal student loan debt as of the end of March, reports the Education Department. Importantly, half of these borrowers owe less than $20,000, meaning the proposed plan could completely clear their existing debts. Link to more via the Wall Street Journal.

The share of households with student-loan debt more than doubled from 1989 to 2019, according to a Federal Reserve report. About 30% of Black households had student-loan debt in 2019, the most recent year available, compared with about 20% of white households and 14% of Hispanic households.

Among households whose net worth is in the bottom 25%, more than one-third hold student debt, compared with 6% of those in the top 10%, according to the Federal Reserve.

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