House to Vote Friday on Senate-Passed Reconciliation Measure
Some discussion about the SAF language and whether that includes soybean oil
In Today’s Digital Newspaper
The House on Friday will vote on the Senate-passed reconciliation measure dubbed Inflation Reduction Act (IRA). We have a summary of the measure in the Policy section, but on Sunday filed a major update on the bill.
China isn’t done with its aggressive drills near Taiwan. The Chinese military said Monday it would conduct new actions in the air and sea near the self-ruled island, which China claims as its own.
China on Sunday released some upbeat trade figures.
President Joe Biden and the First Lady today travel to flooded-damaged eastern Kentucky.
Time to take a look at the Fed’s balance sheet.
The Fed recently raised interest rates, but expect more to come, according to Fed Governor Michelle Bowman.
More grain ships depart Ukrainian ports but the amounts are meager
A Monmouth University poll shows Democrats gaining ground on the generic congressional ballot.
Equities today: Global stock markets were mixed to slightly up overnight. U.S. stock indexes are pointed toward slightly higher openings. In Asia, Japan +0.3%. Hong Kong -0.7%. China +0.3%. India +0.8%. In Europe, at midday, London +0.5%. Paris +0.9%. Frankfurt +0.6%.
U.S. equities Friday: The Dow finished up 76.65 points, 0.23%, at 32,803.47. The Nasdaq fell 63.03 points, 0.50%, at 12,657.55. The S&P 500 was down 6.75 points, 0.16%, at 4,145.19.
For the week, the Dow lost 0.1% while the Nasdaq gained 2.2% and the S&P 500 was up 0.4%.
Agriculture markets Friday:
- Corn: December corn futures closed up 3 3/4 cents at $6.10 and for the week lost 10 cents.
- Soy complex: November soybeans closed down 9 cents at $14.08 3/4 Friday, and down 59 3/4 cents from a week ago. September soyoil futures closed up 2.55 cents at 65.00 cents per pound, but down 1.5 cents from last week. September meal futures fell $16.00 to $437.50, down $5.00 on the week.
- Wheat: September SRW futures closed down 6 3/4 cents at $7.75 3/4, and down 32 cents from last week. September HRW finished 12 cents lower at 8.48 1/4, down 26 1/4 on the week. December spring wheat fell 8 1/4 cents, closing at $9.00 1/2, down 18 cents from a week ago.
- Cotton: December cotton futures closed up 151 points at 96.13 cents, at a technically bullish weekly high close, and for the week lost 61 points.
- Cattle: Expiring August hog futures rose 17.5 cents to $120.825. Most-active October futures rallied 80 cents to end the week at $98.40; that represented a weekly gain of $1.175.
- Hogs: Expiring August hog futures rose 17.5 cents to $120.825. Most-active October futures rallied 80 cents to end the week at $98.40; that represented a weekly gain of $1.175.
Ag markets today: Wheat futures led losses in the grain markets overnight, while corn and soybeans posted lesser declines. As of 730 a.m. ET, corn futures were trading around 6 cents lower, soybeans are around a penny lower and wheat futures were 8 to 12 cents lower. Front-month crude oil futures were nearly $1.50 lower and the U.S. dollar index is down about 225 points.
Technical viewpoints from Jim Wyckoff:
On tap today:
• USDA Grain Export Inspections report, 11:00 a.m. ET.
• USDA Crop Progress report, 4:00 p.m. ET.
• The Bidens travel to flooded-damaged eastern Kentucky.
A look at the Federal Reserve’s balance sheet tightening. When the central bank began quantitative tightening, or QT, in June, it set out to partially unwind roughly $4.5 trillion in quantitative easing, or QE, that was conducted in response to the pandemic. The Fed started by letting up to $30 billion in Treasuries and $17.5 billion in mortgage-backed securities, or MBS, roll off its balance sheet, as opposed to reinvesting the proceeds. Barron’s notes that starting next month, those caps will rise to $60 billion and $35 billion, respectively, meaning the pace of balance-sheet runoff is about to double. Fed Chairman Jerome Powell has suggested that QT would go on for two to 2½ years, implying that the Fed’s $9 trillion balance sheet would shrink by roughly $2.5 trillion.
Ed Yardeni, president of Yardeni Research, says QT will represent the equivalent of at least a half-point rate hike, and probably closer to a full-point increase. That’s not to mention the impact of a 10% run in the U.S. dollar this year, which Yardeni says is equal to another hike of at least 0.5%.
Concludes Barron’s: “The Fed is entering the unknown, and so are markets.”
Fed governor sees more big rate hikes. The Fed is relatively fresh off its second consecutive three-quarter point rate hike, but expect more to come, according to Fed Governor Michelle Bowman. “My view is that similarly sized increases should be on the table until we see inflation declining in a consistent, meaningful, and lasting way,” She said in remarks over the weekend. Bowman, a voting member of the central bank’s rate-setting Federal Open Market Committee, said high inflation is a bigger threat to the economy than slowing growth. If prices continue to surge like they’ve been doing over the past few months, she said, it “could lead to a further economic softening, risking a prolonged period of economic weakness coupled with high inflation, like we experienced in the 1970s.”
• Outside markets: The U.S. dollar index is slightly lower in early U.S. trading. The yield on the 10-year U.S. Treasury note is fetching around 2.818%. The 2-year U.S. T-note yield is 3.209, which has the yield curve still inverted and is one clue the U.S. is in or headed toward economic recession. West Texas Intermediate crude fell 1.1% to $88.06 a barrel. Gold futures rose 0.2% to $1,794.50 an ounce.
• NWS weather: There is a Slight Risk of excessive rainfall over parts of the Southwest, Midwest, eastern Tennessee/Ohio Valley and Northern New England through midweek... ...Dangerous heat across parts of the Pacific Northwest, Middle Mississippi Valley, Central Plains, and Northeast Coast... ...Critical fire weather danger across portions of northern California and the Pacific Northwest due to hot and dry conditions.
Items in Pro Farmer's First Thing Today include:
• Weaker prices to start the week
• Rains to continue before heat, dryness returns
• More grain ships depart Ukrainian ports (details in Russia/Ukraine section)
• Firm raises Russian wheat crop forecast
• Cautiously optimistic toward cash cattle trade
• Cash hog index nearing last year’s peak
— Summary: Volodymyr Zelenskyy, Ukraine’s president, accused Russia of engaging in “nuclear terror” by shelling the Zaporizhzhia nuclear power plant in southern Ukraine. Russian forces said the artillery fire had in fact come from Ukrainian soldiers. The shelling damaged three radiation sensors and wounded one worker, according to Ukraine’s nuclear-power operator. The U.N.’s nuclear watchdog implored both sides to give international monitors access to the site.
- Ukraine’s grain export operations are gaining traction even as the war on land is taking troubling turns. Two multi-ship convoys carrying food products have left Ukrainian ports in recent days, the Wall Street Journal reports (link), while the arrival of the first inbound commercial cargo vessel at the Port of Odessa signaled authorities may be able to continue the grain-shipping operation. Food in the shipments is considered vital to efforts to avert a global food crisis, while the export revenue is crucial for Ukraine’s struggling economy. Russia still faces plummeting export revenues due to sanctions and restrictions on its currency. Ukraine says its next step under a shipping agreement is to ensure Ukraine’s ports can handle more than 100 ships a month. In the meantime, explosions at the Zaporizhzhia nuclear power plant in the Russian-controlled city of Enerhodar are raising fears of a nuclear catastrophe.
- More grain ships depart Ukrainian ports. Two more ships, carrying corn and soybeans, departed Ukrainian Black Sea ports on Monday, Turkey and Ukraine said, taking the total to 10 that have sailed under the new grain export deal. Ukraine’s infrastructure minister said Pivdennyi, the third Ukrainian port included in the deal, was finally up and running. So far, around 243,000 MT of corn has been exported from Ukraine on seven ships since the first departure on Aug. 1, according to a Reuters tally of data from Turkey’s defense ministry. The other ships carried 11,000 MT of soybeans, 6,000 MT of sunflower oil and 45,000 MT of sunflower meal.
— Senate Democrats voted to pass, 51 to 50, the $740 billion, 755-page tax, climate and health care reconciliation package that most say will not or barely live up to its name: Inflation Reduction Act. The nonpartisan Congressional Budget Office said the bill would have a “negligible” effect on inflation this year and into 2023. Democrats successfully blocked most GOP amendments. In the vote-a-rama that began Saturday and stretched late into Sunday afternoon. We released a special report (link) Sunday on the details of the package. Next step is a House vote Friday and it is expected to pass and be sent to the White House where President Joe Biden will sign it into law.
To finance much of the plan, the measure would raise over $700 billion in gov’t revenue over 10 years. It would institute a new 15% corporate minimum tax that would apply to the profits that companies report on their financial statements to shareholders, known as book income. It would impose a new 1% tax on corporate stock buybacks beginning in 2023. The measure also would pour $80 billion into the IRS to hire 87,000 new employees to boost the agency’s enforcement arm and crack down on wealthy corporations and tax evaders. That provision is estimated to raise $124 billion over a decade.
Climate change provisions: The bill allows roughly $374 billion in climate and energy spending such as expanded tax credits for renewable energy projects. It has several provisions to boost electric vehicles, but some observers note the constraints on EVs: income thresholds to the EV credits and limits on where the vehicles can be manufactured, another demand meant to make sure these vehicles are largely produced in the U.S., but one that means the credits might not be available for a few years. Rhodium Group, an independent research firm, estimated that the bill would cut greenhouse-gas emissions 31% to 44% below 2005 levels in 2030, compared with 24% to 35% under current policy. To maximize the benefit of some incentives, clean energy projects would have to pay the going rate for similar jobs in the local area and hire apprentices from government-run programs. Subsidies for building facilities and buying equipment or other technology would have to source U.S.-made steel and iron. As part of Democrats' concessions to Sen. Joe Manchin (D-W.Va.), the bill contains provisions calling for offshore oil lease sales in the Gulf of Mexico and off the coast of Alaska, and a commitment to take up a separate measure to ease the permitting of new energy projects.
Ag and biofuel climate change provisions include:
* The $1-a-gallon tax credit for biomass-based diesel would be extended through 2024 and then replaced by the clean fuels tax credit that would vary according to the biofuel’s carbon rating. A temporary $1.25 per gallon tax credit would be created for sustainable aviation fuel (SAF) to serve as a bridge to the implementation of the clean fuels credit in 2025. The new clean fuels credit would be in effect through 2027. There is some discussion about the SAF language and whether that includes soybean oil.
* Infrastructure: Funding for blender pumps and other biofuel infrastructure.
* Roughly $2 billion for USDA's Rural Energy for America Program, which funds renewable energy and energy efficiency projects.
* $9.7 billion in assistance to rural electric cooperatives for renewable energy and energy efficiency projects and another $1 billion in loans for renewable energy projects in rural areas.
* Rural electric cooperatives would get direct payments for the benefit of renewable energy tax credits. Electric co-ops now have to work with third parties to get such benefits.
* Forests: Over $5 billion for wildfire prevention and climate resiliency projects in public and private forests.
Democrats garnered major health care provisions which aim to lower the cost of prescription drugs but negotiations to aid Medicare recipients will not start for several years and face a limited number of drugs in a phase-in plan. Beginning in 2025, it would cap out-of-pocket drug costs for seniors enrolled in Part D at $2,000 per year, a policy that could help the approximately 1.4 million enrollees who hit that amount each year, according to the Kaiser Family Foundation. The measure would also impose a cap on drugmakers’ price increases, though Democrats had to scale back the inflationary cap when the Senate parliamentarian ruled that it didn’t adhere to Senate rules. The Senate parliamentarian spared drugmakers any penalties for increasing prices in the commercial market. Starting next year, the measure would mandate free vaccines for Medicare enrollees. Republicans succeeded in killing one provision that violated Senate budget rules. It would have capped the price of insulin at $35 a month in the private insurance market. The $35 insulin cap for Medicare beneficiaries remains in place., and the $35 insulin cost cap for commercial health plans was removed.
Other ag sector provisions include:
- Drought aid: Provides $4 billion for the Bureau of Reclamation to combat drought in the West — a last-minute addition.
- Farm debt relief: Democrats added $5.3 billion in farm debt relief to the package. $3.1 billion in assistance to "distressed" borrowers who hold direct or guaranteed farm loans and $2.2 billion in payments to farmers who had experienced discrimination in USDA loan programs. Payments would be capped at $500,000 per producer. The debt relief provisions would be paid for by repealing a debt relief program authorized by the American Rescue Plan in 2021 and later blocked by the courts.
- Contains around $18 billion for four conservation programs, starting in fiscal year 2023.
— Republicans’ comments on the reconciliation measure were sum med up by Sen. Marco Rubio (R-Fla.), who’s running for re-election in November: “There isn’t a single thing in this bill that helps working people lower the prices of groceries, or the price of gasoline, or the price of housing, or the price of clothing. There isn’t a single thing in this bill that’s gonna keep criminals in jail. There isn’t a single thing in this bill that’s going to secure our border. Those happen to be things that working people in this country care about.”
— Taiwan issues warning over China's attack drills. Taiwan said Saturday that China’s military drills appear to simulate an attack on the self-ruled island after multiple Chinese warships and aircraft crossed the median line of the Taiwan Strait. Taiwan’s armed forces issued an alert, dispatched air and naval patrols around the island, and activated land-based missile systems in response to the Chinese exercises, Taiwan’s Ministry of National Defense said. On Friday, China’s military deployed fighter jets, bombers, destroyers and escort ships to waters near the island,
Meanwhile, talks with the U.S. on several topics (climate change, military/defense and anti-drug efforts) were halted following the visit of House Speaker Nancy Pelosi (D-Calif.). China acted because Pelosi visited Taiwan “in disregard of China’s strong opposition and serious representations,” the foreign ministry said in a statement. China has claimed that Pelosi’s visit to Taiwan amounts to an attack by the Biden administration on Chinese sovereignty. The White House has stressed that Pelosi is the head of the legislative branch of government and that it could not stop her visit. The White House also has said Pelosi’s visit does not signal a shift in its one-China policy, which acknowledges that Taiwan is part of China. “China has chosen to overreact and use the speaker’s visit as a pretext to increase provocative military activity in and around the Taiwan Strait,” National Security Council spokesman John Kirby told reporters at the White House on Thursday.
— The China maneuvers, experts said, suggested a plan to blockade Taiwan, which is “quite a bit more than we’ve seen before,” said Andrew Mertha, director of the China Global Research Center at the Johns Hopkins School of Advanced International Studies. “We’re seeing what China is capable of doing in a war context.”
Bottom line: China touted its military exercises around Taiwan as proof it can blockade the self-ruled island in the event of a war.
— China announced new military drills around Taiwan on Monday, contrary to its previous statement that live-fire exercises would conclude on Sunday. China also announced fresh drills, to last until August 15, in the Yellow Sea, which separates it from the Korean peninsula.
— A RAND Corporation report (pdf) estimated that a one-year war between the U.S. and China would cut 5-10% off U.S. GDP and 25-35% off Chinese GDP. Foreign demand makes up around 15% of China’s GDP; if other economies have to stop buying from China in the midst of a war, its citizens would face a long and difficult depression.
— Strong China July exports. China’s General Administration of Customs released monthly trade data for July on Sunday. Key numbers:
- Exports rose 18.0% y/y in dollar terms in July, up from 17.9% y/y growth in June.
- Imports increased by 2.3% y/y last month, versus 1.0% y/y growth in June.
- The trade surplus was $101 billion in July, compared with a surplus of $98 billion in June.
— Chinese soy imports slowed in July. China imported 7.9 MMT of soybeans in July, down 4.5% from June and 9.1% less than last year, as weak crush margins reduced demand from importers. Through the first seven months of this year, China imports 54.2 MMT of soybeans, down 5.9% from the same period last year.
— Chinese meat imports inch up but still down from year-ago. China imported 643,000 MT of meat during July, up 40,000 MT (6.7%) from June but 207,000 MT (24.7%) below year-ago. China doesn’t break down the categories of meat imports in its preliminary data, but the sharp year-over-year reduction was due to slower pork demand. Through the first seven months of this year, China imported 4.1 MMT of meat, down 30.9% from the same period last year.
- Global Covid-19 cases at 584,652,751 with 6,418,232 deaths.
- U.S. case count is at 92,113,114 with 1,033,557 deaths.
- Johns Hopkins University Coronavirus Resource Center says there have been 604,235,972 doses administered, 223,035,566 have been fully vaccinated, or 67.69% of the U.S. population.
POLITICS & ELECTIONS
— A Monmouth University poll shows Democrats gaining ground on the generic congressional ballot — another signal the party's fortunes may have improved over the last month. The poll finds Democrats with a 7-point lead on the generic ballot (50%-43%), up from a tie in the pollster's June survey. More Democrats (74%) said it was "very important" for them to vote than Republicans (69%). But President Joe Biden still holds an anemic 38% approval rating, largely unchanged since the June survey. Only 33% of independents approve of his performance.
OTHER ITEMS OF NOTE
— Indiana became the first state to pass a law restricting abortion since the Supreme Court ruling that rescinded Americans’ constitutional right to the practice in June. The near-total ban will allow termination only in cases of rape or incest, to protect the mother’s health or if the fetus has a fatal abnormality. It will go into effect from September 15.
— Judge gives preliminary approval of settlement to forgive $6 billion in student loans. A settlement agreement that would grant loan forgiveness to over 200,000 federal student loan borrowers has been granted preliminary approval. Judge William Alsup of California’s Northern District ruled that the settlement was “fair, reasonable and adequate to the members of the class.” The case, Sweet v Cardona, centers on allegations that over 150 colleges and universities defrauded students by promising earning and employment outcomes they knew they could not deliver. The settlement will forgive over $6 billion in federal student loans if given final approval. Now that preliminary approval has been granted, the Department of Education will begin notifying the class members of the settlement. Members of the class will have until Sept. 8, 2022, to submit comments on the settlement to the court.