Washington Insider -- Friday

Inflation Worries Continue to Build

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

NPPC Takes Aim At Line Speed Issue At Pork Plants

The National Pork Producers Council (NPPC) is focusing major attention on the March 31 ruling by U.S. District Judge Joan Ericksen vacating portions of USDA's New Swine Inspection System (NSIS) rule that allow qualified pork processing plants to run at line speeds above 1,106 head per hour.

NPPC officials told reporters Wednesday if the ruling is not appealed and takes effect at month's end, line speeds at the six affected plants would slow by as much as 25% and reduce overall U.S. pork harvest capacity by 2.5%. The group cited data from Iowa State University Ag Economist Dermott Hayes that found the reduced line speeds will cost hog farmers over $80 million in lost revenue during 2021 alone.

USDA Secretary Tom Vilsack this week suggested the call for appeal lies with the U.S. Solicitor General and said the case has put the department in an uncomfortable position.

NPPC Vice President and Counsel of Global Government Affairs Nick Giordano said the administration's push to bolster supply chains -- including efforts to boost processing capacity at meat plants and support small producers -- is at odds with any decision not to appeal the ruling. “If this thing is unchecked, it is going to disproportionately hurt small producers,” he stressed. “Didn't we just this week have a supply chain initiative announcement? The point: to add capacity.” If allowed to take effect, he said, the ruling will give more market power to meatpackers and hurt producers. Giordano also stressed that the ruling would upend nearly 25 years of operation at higher line speeds for five of the affected plants, which have been enrolled in a pilot program allowing them to operate at current levels since the 1990s.

He also pushed back on the assertion by labor unions, who brought the line speed challenge, that removing the limits negatively impacts worker safety. “The data, in fact, don't suggest higher levels of worker injury,” he said. “They suggest lower level of worker injuries at these plants.” The industry is clearly pushing the administration to challenge the court decision, but Vilsack's comments Tuesday gave no indication that would be the case.

Dairy Donation Program Getting Closer

USDA has sent an interim final rule for the Dairy Donation Program (DDP) to the Office of Management and Budget (OMB) for review.

USDA offered up general guidelines for the program in April based on provisions in the Consolidated Appropriations Act of 2021 that created the DDP. The program will require that a donation and distribution plan must be submitted to and approved by USDA and the reimbursement will be at least equivalent to the minimum classified value of milk used to make the donated product on the date of manufacturing. The program will also require records related to donating and receiving products must be maintained and available for review and/or audit.

Eligibility for the program is open to dairy farmer cooperatives and processors who “account to” a Federal milk marketing order (FMMO) and donate dairy products to any private or public nonprofit food distribution entity.

The program will also allow for retroactive reimbursements back to December 27, 2020, when the legislation was signed into law. The rule at OMB will contain more details on that reimbursement rate.

The dairy industry has been awaiting the DDP effort, particularly in the wake of the Biden administration ending the popular Food Box program which included dairy products provided to recipients and fostered additional demand for U.S. dairy products.

Washington Insider: Inflation Worries Continue to Build

U.S. consumers saw the highest rate of inflation on an annualized basis was up 5% from year-ago levels in May, according to the Consumer Price Index (CPI) released by the U.S. Labor Department, the biggest rise in prices in 13 years -- since 2008.

Taking food and energy out of the mix as those typically are two of the most volatile price components, the “core” rate was up 3.8% from this point in 2020, the biggest jump since 1992.

On a monthly basis, inflation rose 0.6%. One component of the price rise? Used cars and trucks. Those prices were up a whopping 7.3% from April and were one-third of the increase that was registered. A shortage of new vehicles due to a lack of computer chips has consumers turning to the used car market in a big way, prompting car dealers to urge consumers to upgrade their ride.

But part of the big increases from year-ago levels is that we're still seeing some of the pressures from the pandemic as bars and restaurants shut down or had very limited operations. The Wall Street Journal notes that situation from May and June last year is called the “base effect.”

But the figures immediately rekindled or reawakened the debate over inflation. That has been going on for the past few months and some have declared that this month's data is more evidence that inflationary pressures are building. That is prompting more analysts to think this will result in Fed officials needing to move quicker than they have signaled on monetary policy.

The food portion of the component is starting to also manifest itself in higher prices at the grocery store. Indeed, data has been showing prices are rising, but USDA is still not raising its forecasts for overall food prices, grocery store or restaurant prices this year. They still see food price inflation running at or below the 20-year average.

But market participants have become more and more convinced that the data on inflation is going to have the Fed start talking about tapering its bond purchases which have been going off at a clip of $120 billion per month.

Fed Chairman Jerome Powell has dismissed the concerns, saying the Fed believes inflation pressures are “transitory” and that it is “not time to start talking about talking about tapering” those bond purchases. That is a question he has been asked after every Fed rate setting meeting since early this year.

Markets mostly took the inflation data in stride. And that is likely due in part to the fact that there are no Fed officials offering comments this week. Last Saturday (June 5) marked the start of the so-called “blackout” period ahead of the Federal Open Market Committee (FOMC) meeting that concludes June 16. While no Fed officials were scheduled to speak this week, their comments could not go into the current state of the economy or monetary policy.

So markets have been left to their own devices this week and will again be on their own when wholesale inflation data comes out next week. As if there were Fed officials commenting or sounding alarm, that might have spooked markets into expecting higher rates coming sooner than expected. But this will still be the focal point when the Fed meeting wraps up on June 16 and Powell again meets with reporters. If he admits that now is the time for the U.S. central bank to start talking about trimming those bond buys, that will be taken as a sign the move could come very quickly.

Not everyone is convinced as of yet. Julia Coronado, a former Fed economist and president of MacroPolicy Perspectives LLC, told the Journal she doesn't think recent inflation data call for the Fed to change course.

“These price pressures are very narrowly focused on things that seem like they will be obviously transitory,” Coronado said. “Think about this: We are at the most intense moment. It will not get more intense than this. We are reopening. We are blasting stimulus into the economy with a fire hose. We've got monetary policy at maximum stimulation.”

She does have a point. And Fed officials have repeatedly signaled they are willing to let inflation run above their 2% target “for some time,” a period of time they have not and will not define.

So we will see. If the Fed next week indicates it is time to start talking about tapering those bond purchases, that will start building expectations that interest rates too will be on the rise, and that will be a situation that will need to be watched closely as it means the cost of borrowing money will be on the rise too, Washington Insider believes.

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