It Never Grains But It Pours

By Bas van Geffen, CFA, senior macro strategist at Rabobank

After cancelling the Black Sea Grain Initiative deal, Russia has attacked the port of Odesa. Ukraine said the drone and missile strike specifically targeted its capacity to export grain out of Odesa, damaging a warehouse and a grain and oil terminal. Adding insult to injury, Russia warned that any ships sailing to Ukraine’s Black Sea ports would be seen as “potentially carrying military cargoes,” to further stifle Ukrainian exports. Russia did not say what it would do if any ships were found sailing to Ukrainian ports, but the US issued a warning that Russia’s attacks may expand to civilian ships.

Meanwhile, EU officials were quick to react: The Minister of Agriculture of Hungary stated that five Central and Eastern European EU members will ask the EU on Wednesday to extend a ban on Ukrainian grain imports beyond a Sept. 15 deadline. So more and more pressure will be placed on the ports on the Danube, at a more expensive transport cost and with the rail infrastructure exposed to Russian attacks. In any case, our agri commodities strategists expect Ukraine to still manage to export most of its exportable surplus of wheat, corn, barley and sunflower seeds this season. But the higher transport cost means that Ukrainian farmers may, quite possibly, reduce planted area in the future. Chicago Wheat futures soared after the news.

These are not the only logistics issues. In the US, Yellow, a company specializing in low-cost less-than-truckload services, is reported to be in a liquidity crunch, and it has failed to make its pension contributions for June. There are fears that the company could go into bankruptcy, and even it if doesn’t, concerns that a union strike could hinder capacity are leading shippers to look for alternatives.

If Yellow liquidates, it will be the biggest bankruptcy in trucking history. Twice as big on nearly every metric as Consolidated Freightways (CF). https://t.co/ktno1VpVg1

— Craig Fuller 🛩🚛🚂⚓️ (@FreightAlley) July 20, 2023

That will not be a cheaper solution, though, as other less-than-truckload carrier executives have said they are “not chasing the freight, it’s coming to us regardless. We won’t do it at Yellow’s rates.” Some of them are already increasing their rates. So, if anything, these two developments highlight the ubiquitous risk of flare-ups of price pressures from the supply side.

And, although labor markets in both Europe and the US appear to be slowly going off the boil, the story of worker shortages isn’t over yet either. What’s more, these shortages are slowing down the West’s intentions to make its key industries less reliant on global trade flows. TSMC said it is postponing chip production at its planned Arizona facility from late 2024 to 2025, citing labor shortages. That same problem will undoubtedly also surface in Europe, where Intel amongst others is planning to build a fab. Whether this will extend or worsen the competition over skilled labor and, hence, wage pressures, remains to be seen. TSMC plans to bring over skilled workers from Taiwan to alleviate the shortages.

Meanwhile, the American plans to curb sensitive chip exports to China and screen inbound investments are invoking a response. Xie Feng, China’s ambassador to the US, said that China “will not make provocations, but will not flinch from provocations. So China definitely will make our response.” China certainly has some cards to play, as it is the key player in several sectors that are crucial to the semiconductor industry and, in the case of Europe, for its energy transition. The country controls a large share of key inputs needed for the fabrication of chips, for example. Earlier this month, the Chinese government already imposed export restrictions on gallium and germanium.

Yet, China also has something to lose from a further decoupling, as the country’s growth is slowing. The Q2 GDP figures that were released earlier this week are putting additional pressure on the government to boost the economy, but so far they have refrained from broad-based stimulus, favouring targeted measures instead. The PBOC left both the 1 year and 5 year loan prime rate on hold, as expected. However, the Chinese central bank did ease restrictions on companies’ oversees borrowing somewhat. The ‘parameter for cross-border funding’ was raised to 1.5 from 1.25, in an attempt to improve business conditions and growth, as well as to bolster the renminbi with more capital inflows. In addition to the borrowing tweak, the PBOC set the USD/CNY fixing at 7.1466, which is significantly stronger than anticipated.

To further boost economic growth, China is also mulling easing rules that curbed housing demand. According to Bloomberg’s sources, the government is considering scrapping rules that make it harder for people who ever had a mortgage –even if it has been fully repaid, and even if they no longer own a property– to buy a house. Currently, any buyer with a mortgage record has to make a bigger down payment and faces more restrictive borrowing limits. The plans have not yet been approved, and would follow a 16-point plan that was rolled out last year in support of the property sector – albeit with limited effects.