USDA Soybean Estimates Jolt Traders and Prices Surge; Core CPI Goes Up, Not Down

Striking a balance among rail industry stakeholders is proving difficult

Traders again were surprised about a USDA crop estimate. In this case, soybeans. Prices surged following the monthly info. USDA unexpectedly cut acreage by 580,000 acres. They overestimated Iowa, Illinois, N.D. and S.D. by a combined 1.3 mil. acres. That’s likely why yield came down so much as USDA took out acres from high-yielding states like Iowa and Illinois. November soybeans surged 76 cents to a three-month closing high after USDA made a larger than expected cut to its crop production estimate. USDA estimated the U.S. soybean crop at 4.378 billion bushels, with an average yield of 50.5 bu. per acre. Analysts expected production of about 4.496 billion bu. and an average yield of 51.5 bushels per acre.

USDA hiked the estimated U.S. cotton crop by 1.262 million bales from August to 13.832 million bales. Analysts expected an increase of about 200,000 bales. But cotton futures rose Monday as strength in crude oil and U.S. equities helped offset USDA’s higher than expected cotton production estimate.

Analysts and traders were also surprised by this morning’s Consumer Price Index number, notably core inflation. Reasons: food and electricity prices. Treasury yields are surging as the hot CPI is likely to keep the Fed aggressive in raising rates. Impact: 12% odds in Fed funds futures for a 1% hike in rates... 88% for a 75 bp boost and no longer any odds for 50 bp hike. Details below.

President Joe Biden and Cabinet officials on Monday were in touch with freight-rail companies and unions to avert a crippling strike by thousands of workers. His administration is pressuring labor unions and freight-rail operators to agree on a new contract before a Friday deadline to avoid a stoppage that risks disrupting the U.S. economy by up to $2 billion a day. Commodities groups are sounding the alarm as the potential railway strike threatens to cripple transportation of key products from food to fertilizer and lumber to coal. We have updates in a new Potential Rail Strike section.

It’s not just the U.S. Two of the U.K.’s largest ports are bracing for overlapping dockworker strikes later this month, threatening more disruptions to the nation’s trade flows as union members harden pay demands in the face of surging inflation. Dockworkers at the U.K.’s Port of Felixstowe overwhelmingly rejected a new contract offer, setting the stage for another walkout as soon as Sept. 27.

And… Asia’s largest container shipping hub is bracing for its second major storm of this month, with ports in Shanghai and Ningbo preparing to halt operations as Typhoon Muifa approaches.

Natural gas prices fell as the European Union started outlining details of its intervention into an unprecedented energy crisis, including a proposal for targets to reduce electricity demand.

Deposits at U.S. banks fell by a record $370 billion in the second quarter, the first decline since 2018.

Despite Ukraine’s recent rapid advances in retaking its own territory from Russia, Russia still controls about one-fifth of Ukrainian territory and much of how the Ukrainian success impacts on the war more widely will depend on Russia’s response. Ukraine took back territory from Russia all the way to its northeastern border in some areas, leading one former member of Russia’s parliament to call for peace talks on live TV. Ukraine’s recent battlefield successes are emboldening Vladimir Putin’s critics and sending his supporters in search of someone else to blame. Meanwhile, Ukraine offered a weapons wish list to continue its offensive.

Payments under the Emergency Relief Program (ERP) covering losses for 2020 and 2021 increased to $6.63 billion as of Sept. 11, up from $6.56 billion the prior week.

Crude in SPR plunges to lowest level since 1984. The combination of mandated sales of crude oil from the Strategic Petroleum Reserve (SPR) and Biden administration actions to tap the SPR to bring down gasoline prices have dropped supplies in the reserve to 434.1 million barrels, the smallest level since 1984

Final rule on EPA’s initial two-step process on WOTUS at OMB. EPA sent the final rule to the Office of Management and Budget (OMB) to replace the Navigable Waters Protection Rule (NWPR) with a “revised definition” of Waters of the U.S. (WOTUS). Details below.

Election Day 2022 is 56 days away. Election Day 2024 is 78 days away.

Equities today: Global stock markets were mixed but mostly firmer overnight. U.S. stock indexes plunged following the surprising U.S. CPI report. In Asia, Japan +0.3%. Hong Kong -0.2%. China +0.1%. India +0.7%. In Europe, at midday, London +0.2%. Paris +0.4%. Frankfurt +0.4%.

U.S. equities yesterday: The Dow gained 229.63 points, 0.71%, at 32,381.34. The Nasdaq rose 154.10 points, 1.27%, at 12,266.41. The S&P 500 was up 43.05 points, 1.06%, at 4,110.41.

Analysts have lowered their estimates for third-quarter earnings growth by 5.5 percentage points since June 30, according to FactSet, marking the biggest cut since the second quarter of 2020.

Agriculture markets yesterday:

• Corn: December corn rose 11 cents to $6.96, the contract’s highest close since June 21.
• Soy complex: November soybeans soared 76 cents to $14.88 1/4, the contract’s highest closing price since $15.10 1/2 on June 10. October soymeal surged $25 to $439.80, a lifetime-high close for the contract. October soyoil rose 166 points to 68.34 cents.
• Wheat: December SRW wheat fell 10 3/4 cents at $8.58 3/4. December HRW wheat dropped 2 1/4 cents at $9.27. December spring wheat futures fell 1 cent to $9.26 1/2.
• Cotton: December cotton rose 87 points to 105.71 cents, the contract’s highest settlement since Sept. 1.
• Cattle: October live cattle rose 7.5 cents to $145.75, the contract’s highest closing price since Aug. 17. October feeder cattle fell $2.45 to $183.125. Live cattle futures ended mixed.
• Hogs: October lean hogs fell $1.30 to $91.875. The CME lean hog index fell 69 cents to $99.57, a four-month low, and today’s expected quote (for Sept. 9) is down another $1.28 to $98.29.
  

Ag markets today: Soybean futures built on Monday’s strong gains overnight, while wheat rebounded from yesterday’s losses and corn favored the upside is light, two-sided trade. As of 7:30 a.m. ET, soybeans were trading 15 to 18 cents higher, corn was around a penny higher and wheat futures were mostly 8 to 13 cents higher. Front-month crude oil futures were around $1.25 higher and the U.S. dollar index was nearly 600 points lower this morning.

Technical viewpoints from Jim Wyckoff:

On tap today:

• U.S. consumer price index is expected to decline 0.1% in August from the previous month. (8:30 a.m. ET) UPDATE: See details next item.
• Treasury Department will release its August statement of receipts and outlays of the U.S. government (2 p.m. ET)
• Celebration at the White House for the Inflation Reduction Act. President Joe Biden and Vice President Kamala Harris will headline an event with lawmakers, advocates and guests on the South Lawn of the White House.

Inflation surprises: Core inflation goes up, not down and CPI did not go down as much as analysts predicted. Food, energy and shelter costs are going up, not down and that was reflected in today’s Consumer Price Index (CPI), which rose 8.3% in August from a year earlier (vs 8.1% estimates), down from an annual increase of 9.1% in June and 8.5% in July. Core inflation, which excludes often volatile energy and food prices, increased 6.3% in August from a year earlier, up sharply from the 5.9% rate in both June and July — a signal that broad price pressures strengthened. Financial traders and analysts should review Monday’s USDA crop estimates which signal continued high ag-related/food prices ahead.

On a monthly basis, the CPI increased 0.1% in August from July, despite a sharp decline in gasoline prices. The core CPI rose 0.6% in August – double July’s pace.

Food prices continued to climb this past month and prices for a range of goods and services remained much higher than a year earlier, the figures show. A jump in grocery prices is pinching consumers. Some food items: Prices for cereals and bakery products rose 1.2% in August and are up 16.4% over the past 12 months. Dairy products rose 0.3% but are still up 16.2% over the past year. Dairy costs had risen 1.7% in both June and July. Beef prices increased 0.8% in August, while the price of eggs rose 2.9% and are up 39.8% over the past year (see charts). Fruits and vegetables rose 0.5%.

Energy prices fell 5% for the month, led by a 10.6% slide in the gasoline index. However, those declines were offset by increases elsewhere.

The food index increased 0.8% in August and shelter costs, which make up about one-third of the weighting in the CPI, jumped 0.7% and are up 6.2% from a year ago.

Medical care services also showed a big increase, rising 0.8% on the month and up 5.6% from August 2021.

New vehicle prices also rose, increasing 0.8% though used vehicles fell 0.1%.

Treasury yields surged. The yield on the benchmark 10-year Treasury note surged 7 basis points, trading at 3.43%. The yield on the 30-year Treasury bond was up about 4 basis points at 3.55%. Yield on the 2-year Treasury soared 14 basis points to 3.70%, hitting its highest level since November 2007.

Soft landing more likely than recession: JPMorgan, A soft landing is becoming a more likely scenario for the global economy than a recession, which should help boost risky assets, according to strategists at JPMorgan Chase. The avoidance of a global recession, along with moderating inflation and wage pressures among other factors, should continue to provide tailwinds for risky assets, the bank’s global strategy team added in a note Monday. Within equities, the firm favors cyclical stocks, which it said should benefit from the gradual easing of inflation. They also like small-cap stocks and remain bullish on China and emerging-market stocks.

“The data appear to be increasingly supportive of a soft landing (rather than global recession), given moderating inflation and wage pressures, rebounding growth indicators, and stabilizing consumer confidence,” they said.

Deposits at U.S. banks fell by a record $370 billion in the second quarter as Federal Reserve rate increases are prompting investors to move money out of banks and into higher-yielding investments. Some analysts say the decline in deposits will spur banks to hold less in reserve at the Fed, which could affect the pace of the central bank’s efforts to unwind its balance sheet.

Market perspectives:

• Outside markets: The U.S. dollar index is lower again in early U.S. trading. The yield on the 10-year U.S. Treasury note is fetching 3.41%. U.S. crude around $88 per barrel and Brent is around $94 per barrel, losing most of the gains prior to the CPI report. Gold prices plummeted after the U.S. CPI report, with gold at $1,720 and silver $19.61.

• Rules coming for digital assets. Sam Bankman-Fried, the billionaire founder of the FTX cryptocurrency exchange, told attendees at this year’s SALT-New York event that he thinks U.S. lawmakers will draft a bill or other framework setting new rules for digital assets within a year. He’s been regularly traveling to Washington on lobbying trips and is “surprisingly optimistic” about the outlook for a more clearly defined regulatory framework.

• Soybean prices had one of the best days of the past decade after U.S. agricultural forecasters trimmed their harvest estimate for the country’s top cash crop, the WSJ reports (link). The main culprit is the drought that has desiccated the Southern Plains.

• Ag trade: Taiwan tendered to buy up to 65,000 MT of corn to be sourced from the U.S., Brazil, Argentina or South Africa. Japan is seeking 97,373 MT of wheat in its weekly tender. Jordan passed on a tender to buy 120,000 MT of optional origin milling wheat but issued a similar tender with a later closing date.

• NWS weather: There is a Moderate Risk of Excessive Rainfall from portions of south-central/eastern Nevada into southwestern Utah and northwestern Arizona today... ...A Slight Risk of Severe Thunderstorms is in effect for portions of the interior Northeast today... ...Great Plains warm up while West cools down.

Items in Pro Farmer’s First Thing Today include:

• Firmer price tone this morning
• Consultant lowers U.S. corn, soybean production forecasts
• Corn, soybean CCI ratings continue to fall
• China maintains corn crop, soybean import forecasts (details in China section)
• Cattle slaughter remains strong
• More declines in cash hog index

— Summary and updates: Stakeholders failed to reach a contract agreement with two unions representing much of the work force, and a federally mandated 30-day “cooling off” period ends on Friday, opening a door to strikes and lockouts. Some freight companies have started to limit services, and Amtrak, which carries many travelers on lines operated by freight railroads, said it would cancel some passenger service starting today.

• A strike could impact all major U.S. railroads, including BNSF, Union Pacific and CSX Transportation. Ten of 12 railroad workers’ unions have struck new labor deals, there are two holdouts — the Brotherhood of Locomotive Engineers and Trainmen and the International Association of Sheet Metal Air, Rail, and Transportation Workers.
  

• Joint statement. The Brotherhood of Locomotive Engineers and Trainmen and the SMART Transportation Division, which represent engineers and conductors, say workers must often stay on call for several days at a time, working 12-hour shifts with little notice, and are penalized for calling in sick. “Our unions remain at the bargaining table and have given the rail carriers a proposal that we would be willing to submit to our members for ratification, but it is the rail carriers that refuse to reach an acceptable agreement,” they said in a joint statement (link). “In fact, it was abundantly clear from our negotiations over the past few days that the railroads show no intentions of reaching an agreement with our unions.” Together, the two unions represent nearly half the 115,000 freight rail workers covered by the negotiations.

  The unions had just advanced a proposal that included an allowance that workers can take unpaid time off for a doctor’s appointment without being disciplined, according to Dennis Pierce, national president of the 57,000-member Brotherhood of Locomotive Engineers and Trainmen, a Division of the Teamsters Rail Conference. “It’s no longer about money — it’s about unpaid time off to go to the doctor without getting fired,” Pierce told the New York Times. He added that if the railroad carriers agreed to the proposal, the unions would put it to a vote, which would avert a labor stoppage for at least a few weeks as the count unfolded.
  

• President Joe Biden and cabinet officials were in touch with freight-rail companies and unions on Monday in an effort to avert a strike, according to a White House official.
  
• Sen. Chuck Grassley (R-Iowa) said in a tweet that Biden needs to step in and tell those holding out to keep negotiating or take the deal, and “if he can’t Congress must.”

Grassley’s two tweets on rail:

• “On Fri railroad unions set 2 strike Would B catastrophic 4 economy/supply chain Pres Biden needs 2 step in & tell hold outs 2 keep negotiating or take deal! Presidents Johnson Carter Clinton stepped in 2 stop railroad strikes bc of impact on Americans If he can’t Congress must”

• “Fertilizer is already being pulled off tracks +farmers depend on rail during harvest 2move grain If Biden cant keep trains running on time impacts wld b even worse than baby formula shortage on his watch We shld adopt recommendations by neutral arbiters asap 2avoid disaster”

• Another call for Congress to step in. Steve Bobb, the chief marketing officer of one of the rail carriers, BNSF, encouraged customers to ask Congress to intervene (link). His counterpart at Norfolk Southern echoed that request to its customers over the weekend, too.
  
• Congressional action promised: Congress would act to avert a national freight railway strike, House Majority Leader Steny Hoyer (D-Md.) said. “There is a role for Congress if in fact they fail to reach an agreement,” Hoyer said on Bloomberg Television. “We can pass legislation if needed.” Unions, a key constituency for Democrats, have been urging lawmakers to stay out of the matter.
  
• Lumber prices are soaring to levels not seen in a month. Futures contracts rose 9.6% on Monday in Chicago to the exchange limit of $559.80 per 1,000 board feet, the highest price since Aug. 18.
  

• Fertilizer shippers are already preparing for the worst. “Rail networks are complicated, and carriers must make preparations ahead of a potential stoppage to keep certain types of cargo safe and secure,” Fertilizer Institute CEO Corey Rosenbusch said in a statement. “Fertilizer falls into that category and is being taken off the rails. That is bad news for farmers and food security.”
  
• More than 460,000 additional trucks would be needed each day to carry the goods otherwise delivered by rail, the American Trucking Associations, another industry group, said in a letter (link) last week asking lawmakers to be prepared to intervene. The trucking industry faces a shortage of 80,000 drivers, so a rail disruption would “create havoc in the supply chain and fuel inflationary pressures across the board,” it said.
  

• U.S. ag sector continues to be in high anxiety mode over potential rail strike. Some potential impacts:

  Cotton: “There is a lot of old crop that needs to ship via rail,” said Jordan Lea, senior trader at Deca Global LLC, a textile supplier and former president of the American Cotton Shippers Association. “The whole logistical system is still too fragile from backlogs and Covid. We do not need this hiccup right now.”

  Livestock and poultry: “A shutdown would quickly cause additional problems and force producers to make difficult decisions regarding the viability of their animals,” the National Grain and Feed Association (NGFA) said in a Monday letter (link).

  Biofuels: “Processing and biofuels plants may have to scale back production due to an inability to both move in commodities for processing and move out finished products for consumption,” the NGFA noted.

  Food industry: “Failure to finalize an agreement before the Sept. 16 deadline will hurt U.S. consumers and imperil the availability, affordability and accessibility of everyday essential products,” the Consumer Brands Association, which represents manufacturers of food, beverage, household and personal care products, said in a letter (link) to President Biden last week.

— Summary: Over the past week, Ukrainian troops have retaken almost 3,400 square miles of land, an area equal to about half the size of the New York metropolitan area. The gains include Izium, a city that Russia had been using as a rail hub to supply its forces elsewhere. Ukraine now controls nearly all of the province of Kharkiv. U.S. Secretary of State Antony Blinken hailed progress though cautioned that it was “too early to tell exactly where this is going.” (Source for chart below: NYT based on data as of Sept. 11. | Source: Institute for the Study of War)

• Ukraine can only go so far. According to the New York Times: “Ukraine also faces a disadvantage that its allies have imposed on it, my colleague Helene Cooper points out. The U.S. and the EU have told Ukrainian officials that they cannot use Western military equipment to strike inside Russia — out of a fear that such attacks might cause Putin to expand the war or use nuclear weapons. From a tactical standpoint, that restriction hurts Ukraine’s ability to win the war, because it means that Russia does not have to worry about defending its own territory. Yet it’s a restriction that seems unlikely to change anytime soon.”
  
• Deputies from 18 municipal districts in Moscow, St. Petersburg and Kolpino called for Russian President Vladimir Putin’s resignation, according to a petition with a list of signatures shared on Twitter Monday. “We, the municipal deputies of Russia, believe that the actions of its president Vladimir Putin are detrimental to Russia’s and its citizens’ future,” the petition said.

— ERP payments on the rise. Payments under the Emergency Relief Program (ERP) covering losses for 2020 and 2021 increased to $6.63 billion as of Sept. 11, up from $6.56 billion the prior week. Amounts for non-specialty crops are at $5.71 billion ($5.68 billion prior) while specialty crop payments are at $918 million ($904 million prior).

USDA is now working on ERP payouts to producers who were not covered already. Program workers are planning to address several issues, including prevented planting.

— Nominees: President Biden on Monday sent to the Senate the nominations of Joel Matthew Szabat to join the Amtrak Board of Directors, and Robert G. Taub to join the Postal Regulatory Commission.

— China is willing to work with Russia to take the global order “in a more just and reasonable direction,” Beijing’s top diplomat said, underscoring the depth of the two nations’ ties. President Xi Jinping Xi plans to travel to Kazakhstan and Uzbekistan this week for his first trip abroad since the start of the pandemic, giving him a chance to meet President Vladimir Putin in person for the first time since Moscow began its invasion of Ukraine on Feb. 24.

Xi this week is traveling outside of China for the first time since the pandemic, to meet Vladimir Putin at a meeting of the Shanghai Cooperation Organization. The gathering will take place on Thursday in Samarkand, Uzbekistan, and comes at a time that the two are becoming increasingly reliant on each other for goods and services. China has been buying record imports of low-priced Russian crude, and in Q2, 81% of Russia’s new car imports were Chinese and Xiaomi was its top-selling smartphone maker. Link to South China Morning Post article about the potential Xi/Putin meeting.

— China to release additional pork from reserves. China will release a second batch of pork from state-owned reserves, the National Development and Reform Commission (NDRC) said, hoping to temper or stabilize pork prices ahead of holidays. Chinese pork prices were up 0.4% in August compared with July. The agency sold 37,700 tonnes of pork from state reserves on Sept. 8, but there was no tonnage given in media reports about the latest release.

— President Joe Biden signed an executive order laying out a strategy to bolster domestic biomanufacturing and reduce reliance on China for new medicines, chemicals and other products. Link for details.

— China maintains corn crop, soybean import forecasts. Despite recent heat and drought stress in southern China, the country’s ag ministry kept its production estimate at 272.56 MMT, as yields in northeastern areas are expected to be strong. USDA raised its 2022-23 China corn production forecast by 3 MMT to 274 MMT. China’s ag ministry kept its 2022-23 soybean import forecast at 95.2 MMT. USDA cut its 2022-23 China soybean import forecast by 1 MMT to 97 MMT.

— Crude in SPR plunges to lowest level since 1984. The combination of mandated sales of crude oil from the Strategic Petroleum Reserve (SPR) and Biden administration actions to tap the SPR to bring down gasoline prices have dropped supplies in the reserve to 434.1 million barrels, the smallest level since 1984, according to Department of Energy (DOE) data. DOE reported that 6.3 million barrels of sweet crude and around 2 million barrels of sour crude were released in the week ended Sept. 9, the biggest draw since May. The effort to release up to 1 million barrels per day (bpd) from the SPR is set to end in October, with Energy Secretary Jennifer Granholm telling Reuters last week they are considering whether there needs to be further releases when that effort ends.

— Summary:

• Global Covid-19 cases at 609,235,567 with 6,516,141 deaths.
• U.S. case count is at 95,320,110 with 1,050,767 deaths.
• Johns Hopkins University Coronavirus Resource Center says there have been 610,686,563 doses administered, 224,367,691 have been fully vaccinated, or 68.10% of the U.S. population.

— Senate is planning to vote first on the stopgap spending bill, and Senate Majority Leader Chuck Schumer (D-N.Y.) intends to honor a deal he struck with sometimes centrist Sen. Joe Manchin (D-W.Va.) to attach a bill speeding energy infrastructure permitting. But Republicans have balked at the Manchin/Schumer plan, which hasn’t been introduced yet. They’ve instead backed a new permitting proposal by Sen. Shelley Moore Capito (R-W.Va.). “Since our calls for action and offers to see legislative text from the permitting ‘deal’ remain unheeded, Republicans are introducing this legislation today to deliver solutions to the roadblocks, delays, and postponements of key infrastructure projects across the country,” Capito said on releasing her plan.

Democrats are concerned that a separate GOP permitting-reform bill could strip needed Republican support for Manchin’s version.

Capito’s legislation would codify Trump-era executive actions that expedited permitting for projects under the National Environmental Policy Act and Clean Water Act. Capito’s measure also would specifically expedite the approval of the Mountain Valley Pipeline to within 21 days of the legislation’s enactment.

— Opposition to freight shipping bill. The Freight Rail Shipping Fair Market Act will cause “significant harm” to freight railroads, according to a letter signed by a coalition of individuals and organizations — including economist Douglas Holtz-Eakin and the American Consumer Institute. Opponents say the bill will allow the Surface Transportation Board to micromanage railroads — causing more disruptions to supply chains — and raising prices for American households. Democrats have compiled a list of supporters for the bill, which will be considered during a House Transportation and Infrastructure subcommittee hearing Thursday.

— Stock trading ban movement. House Administration Committee’s aides have been briefed on the Democrats’ plan to ban stock trading by members of Congress and their spouses.

— Final rule on EPA’s initial two-step process on WOTUS at OMB. EPA sent the final rule to the Office of Management and Budget (OMB) to replace the Navigable Waters Protection Rule (NWPR) with a “revised definition” of Waters of the U.S. (WOTUS). The revised definition would reinstate the rules in place prior to the Obama administration’s WOTUS rule, but updated to reflect Supreme Court decisions issued in 2001 and 2006. EPA published the proposed rule in April 2020. The agency said it continues to work on a new definition of WOTUS in a second rule that will consider “additional stakeholder engagement and implementation considerations, scientific developments, and environmental justice.”

The Supreme Court is currently considering a case on WOTUS, and EPA Administrator Michael Regan has repeatedly pledged the agency’s new definition will reflect that decision.

WASDE | Crop Production | USDA weekly reports | Crop Progress | Food prices | Farm income | Export Sales weekly | ERP dashboard | California phase-out of gas-powered vehicles | RFS | IRA: Biofuels | IRA: Ag | Student loan forgiveness | Russia/Ukraine war, lessons learned | Election predictions: Split-ticket | Congress to-do list |