News Worth Knowing – December 1, 2023

Each month, Terrain analysts dissect news topics important to agriculture and weigh their significance for the sectors relevant to our Farm Credit customers.

In this issue, our analysts discuss electric and hybrid vehicle sales, the impact to U.S. trade from rising interest rates, and how pork is faring in California since Prop 12 took effect.

Hybrid vehicles and PHEVs will still likely use gasoline for significant amounts of driving, curbing the loss in demand for gasoline and, therefore, ethanol.

Plug-In Hybrid Electric Vehicle Sales Accelerate

Matt Roberts, Ph.D., Senior Grain & Oilseed Analyst

Overview: Battery-electric vehicle (BEV) sales are softening in spite of wider availability and price cuts, while plug-in hybrid electric vehicle (PHEV) sales are climbing. Consumers can reap most of the benefits of electrification with PHEVs without the worries of range anxiety or battery life.

Notable Quotes:

“Ford aims to quadruple hybrid sales over the next five years and offer the technology across its lineup, even as it throttles back ambitious production plans for its fully electric models.”

“Environmental groups have assailed Toyota for sticking with hybrid technology that still relies on pollution-emitting fossil fuel, but former Chairman Akio Toyoda insists many buyers aren’t ready to fully embrace EVs.”

– “America’s High EV Costs Are Driving Buyers to Hybrids,” an October 4, 2023, Bloomberg article

Takeaway: The motivation behind my report “Ethanol vs. Electrons: The Future of Fuel” was to better understand the threat that growing mandates for electric vehicles present to ethanol demand and, therefore, corn demand. While purchases of BEVs have grown rapidly over the past few years, BEV users must have ready access to charging infrastructure and travel needs that align with BEV limitations — trailers greatly reduce range, and longer trips require frequent, longer stops for recharging. Further, BEVs are considerably more expensive than their hybrid or internal combustion engine counterparts.

Reports of hybrid sales accelerating more quickly than BEV sales underscore the point that BEVs remain unsuitable for most drivers in the U.S. Hybrid vehicles and PHEVs fit much better with American habits and provide most of the same benefits at much lower costs. Further, hybrid vehicles and PHEVs will still likely use gasoline for significant amounts of driving, curbing the loss in demand for gasoline and, therefore, ethanol.

Sector Impacts:

• Grain: Reports of softening BEV sales are coming at the right time. Farmers are facing tighter margins in 2024 due to lower commodity prices combined with some expenses that remain elevated such as labor, machinery, seed and interest costs. There are also demand challenges ahead with lower corn exports and feed usage. Slower BEV sales, and the implication that ethanol demand won’t evaporate, offer some encouragement against this backdrop.

The ramp-up of U.S. interest rates has tightened the ability of emerging markets to import goods (like grain) from the U.S.

Higher Interest Rates Hurt Competitiveness of U.S. Goods

Matt Clark, Senior Rural Economy Analyst

Overview: The implication of “higher for longer” interest rates for business profits and household finances has been well covered and certainly felt by most farms and ag businesses (see my Q3 2023 Quarterly Outlook, “The Interest Rate Dilemma”). However, for farmers particularly, the impacts are far-reaching because of the financial spillover to emerging markets.

Notable Quotes:

“Driven by the spillovers of increases in U.S. interest rates that predominantly reflected reaction shocks, [emerging market and developing economy] yields have risen, currencies have depreciated, credit spreads have widened, and capital inflows have tailed off.”

– “Financial Spillovers of Rising U.S. Interest Rates,” a June 2023 analysis from the World Bank

“Higher interest rates also are challenging governments. Frontier and low-income countries are having a harder time borrowing in hard currencies like the euro, yen, US dollar and UK pound as foreign investors demand greater returns. This year, hard currency bond issuances have occurred at much higher coupon—or interest—rates.”

– “Higher-for-Longer Interest Rate Environment is Squeezing More Borrowers,” an October 10, 2023, International Monetary Fund article

Takeaway: In short, the ramp-up of U.S. interest rates has tightened the ability of emerging markets to import goods (like grain) from the U.S., and at the same time made other emerging market countries stronger competitors in the global trade economy.

Sector Impacts:

• Fruit, Nut & Vegetable: If interest rates are to remain high, the almond, pistachio and walnut markets will feel it going forward. Not only does this increase the cost of borrowing to produce these crops, but it also contributes to appreciation of the dollar, making it harder to export.
• Grain: As Brazil continues to increase acreage and exports of staple U.S. field crops such as corn and soybeans, the strengthening U.S. dollar is one more hurdle that U.S. exporters have to clear. Weaker export demand and lower prices are a double whammy for Farm Credit customers here in the U.S. who are also managing higher interest costs.
• Grapes & Wine: Higher interest rates are likely to curb consumer spending and confidence, as households will have to devote more of their income to servicing debt. This represents a headwind for wine demand in the near term.
• Dairy: Exports have become an important outlet for U.S. dairy products over the past several years, with the last two years being particularly strong. Higher interest rates make U.S. dairy products relatively more expensive, particularly in emerging markets where demand for commodities such as nonfat dry milk and skim milk powder has grown. These headwinds mean either export prices will need to fall, or product that would have been headed for export markets will stay in the U.S., weighing down domestic markets and milk prices.

Further price spikes and another decline in volume are likely.

Prop 12 Leads to Higher Pork Prices, Lower Sales Volumes

Dave Weaber, Senior Animal Protein Analyst

Overview: Much higher prices for pork purchased in California, driven by the cost of producers becoming compliant with California’s Proposition 12, substantially reduced the volume of pork sold in the state during the first two months of Prop 12’s existence.

Notable Quotes:

“The average sales price of pork ribs and loins were 25% and 43% higher, respectively, in California, in August, compared to June.”

“The total volume of fresh pork purchased in California decreased by 23% from June 2023 to August 2023.”

– “Proposition 12 Preliminary Price Impacts,” an October 11, 2023, Swineweb article

Takeaway: Full implementation of Prop 12 is due on January 1, when the balance of noncompliant pork must be cleared through the market. Further price spikes and another decline in volume are likely. This will reduce wholesale pork and slaughter hog prices outside California and extend financial losses for producers. Sow herd liquidation is expected to continue through the first half of 2024. Proponents of laws like Prop 12 are watching the same data on sales and consumption impacts and are likely to view the outcome as a success emboldening their actions to move similar legislation into other states. For more expectations for pork production and prices in late 2023 and the first half of 2024, check out my Q3 2023 Quarterly Outlook, “Sow Herd Liquidation Underway.”