China Official Warns of Sharp Drop in Imports of U.S. Ag Goods

Posted on 08/10/2018 6:29 AM

USDA reports | NAFTA 2.0 talks continue | New farm bill update | USDA reorganization

Conjecture has surfaced whether China may also remove soybeans from its current list of tariffs, similar to the action it took in removing crude oil. No confirmation of any such possible move, with some China watchers giving it low odds. But the impacts if it were to happen are also being discussed.
     USDA issues key Crop Production and WASDE reports today. In light of USDA removing access for some members of the media to its market-sensitive data ahead of its release and instead requiring the media and the public to access the information via USDA's website, the National Ag Statistics Service (NASS) Thursday emailed direct links to those who subscribe to the agency's releases via email for the Crop Production and Cotton Ginnings reports that are to be released today at 11 a.m. CT. Meanwhile, some in the ag trade are predicting problems issuing the reports today, so we shall see if this conjecture is on the mark or just the usual industry fear talking.
     Analysis of Trump trade policy will not please the president. Dartmouth's Douglas A. Irwin writing in the Chicago Booth Review: "For all the Sturm und Drang of his trade policy, the president is likely to end up being terribly disappointed by the results of his efforts.”
     Europe is complying with President Trump's deal to import more U.S. natural gas.
     Back to the future...
USDA said it will realign the Economic Research Service (ERS) with chief economist, and relocate ERS and NIFA outside D.C. USDA in a statement provided three reasons for the changes.
     Any White House action on food stamps will not arrive in time to provide any new funding for new farm bill... it simply takes the process too long to be finalized.
     U.S. and Mexican negotiators are looking to reach deal on cars that would allow Canada to rejoin NAFTA talks. Mexico’s Economy Minister Ildefonso Guajardo said “we’re doing our best to do it as fast as possible,” to meet today’s deadline. The three nations want an agreement this month in order to allow sufficient time for Trump and Mexican President Enrique Pena Nieto to sign the pact before Lopez Obrador takes office Dec. 1. Guajardo will meet again today with U.S. Trade Representative Robert Lighthizer as part of their continued push to resolve remaining issues. The Canadian negotiating team is reportedly expected to be in Washington next week.
     Russian Prime Minister Dmitry Medvedev has reportedly warned the U.S. that sanctions it plans to impose against Moscow over the nerve agent attack of a former spy living in the U.K. could be treated as a declaration of an economic war. "And it would be necessary, it would be needed to react to this war economically, politically, or, if needed, by other means. And our American friends need to understand this."
     The Turkish lira has collapsed to an all-time record low versus the U.S. dollar. The country's economy is viewed as imbalanced due to rampant inflation.
     IEA: U.S. sanctions against Iran could make maintaining the world's oil supply “very challenging.”
     Globally, 2018 is shaping up to be the fourth-hottest year on record. (The hotter years were the three previous ones.) Link to New York Times article.


Will China remove soybeans from its current lists of tariffs? China recently removed U.S. crude from goods targeted by Chinese tariffs signaling America has become too big to ignore in the oil market. China's new tariffs will target U.S. automobiles, steel products, medical equipment, and some energy products, including coal, diesel, gasoline, and propane. But for now, China will not put tariffs on U.S. crude oil. An early draft of potential tariff targets published by China in June did include crude oil. U.S. crude oil exports to China went from nothing before 2016 to a record 15 million barrels in June. Analysts say China spared U.S. oil because it may struggle to get it elsewhere due to disruptions from other major suppliers.

Could the same happen regarding soybeans? While no word on any change regarding China's current tariffs on U.S. soybeans can be confirmed, there is industry and trade policy chatter about a potential move.

Impacts IF China were to remove soybeans from tariffs? Brazil soybean prices would drop as the premium would quickly vanish. Others wonder if China would then wash out bookings of Brazil beans and rebook U.S. product. Again, this is conjecture at this point.

Meanwhile, a China official warned of a sharp drop in imports of U.S. ag goods. Once trade measures are put in place, China's imports of U.S. agricultural products will fall "significantly," according to a broadcast on China National Radio, a situation which will have a strong impact on U.S. agriculture. However, the official said the trade frictions between the two sides will have a limited impact on China's agriculture sector and stated that China will be able to fully meet domestic demand for edible oils and protein-based animal feed.

Xinhua: China giving insurance subsidies to seed producers. China will provide insurance subsidies to farmers, rural cooperatives and companies that produce rice, corn and wheat seed, according to a Xinhua report citing a document released by the Ministry of Finance, Ministry of Agriculture and Rural Affairs, and China Banking and Insurance Regulatory Commission. The effort seeks to "promote long-term, sustainable development of the seed industry, ensure stable seed supply for major grain crops and safeguard national grain security," the report said. The insurance would cover possible yield or quality losses suffered via natural disasters, plant diseases and pests and other risks, according to the report.

Analysis of Trump trade policy will not please the president. Dartmouth's Douglas A. Irwin writing in the Chicago Booth Review: "For all the Sturm und Drang of his trade policy, the president is likely to end up being terribly disappointed by the results of his efforts. He wants to reduce the trade deficit, create new manufacturing jobs, enhance national economic security, and force China to change its policies. He is unlikely to achieve any of these objectives. In the end, his policies will likely be an exercise in frustration. Unfortunately, there could be a lot of collateral damage done along the way." Link for details.

U.S. efforts to force China into trade concessions have been complicated by the falling yuan, which has lost more than 8% of its value against the dollar since April. By making Chinese products less expensive for American buyers, the weaker yuan partially counteracts the effects of Trump’s trade measures.

Meanwhile, the Washington Post reports that inside the Trump administration, “there is growing unease over where the U.S.-China tussle is headed. Initial diplomatic talks [failed to reach agreement and] have left both sides irritated and confused … Two senior administration officials, frustrated by what they say is [President Xi’s] refusal to negotiate, have become increasingly certain that the standoff is only going to worsen.”

Europe is complying with President Trump's deal to import more U.S. natural gas. The European Commission said Thursday that it has already been increasing its imports of U.S. liquefied natural gas since 2016, and will continue to do so as long as the U.S. honors its side of the bargain on cutting “red tape.”

Facts and figures. “Since the arrival of the first U.S. LNG carrier in the Portuguese port of Sines April 2016 and today, EU imports of liquefied natural gas from the U.S. have increased from zero to 2.8 billion cubic meters,” a Thursday statement read. By comparison, Russia exported about 194 billion cubic meters of natural gas to Europe by pipeline last year. Analysts note that the shift to American gas is happening at a time when European natural gas production is “declining more rapidly than foreseen and there is an accelerated phase-out of coal power plants in the EU.

USDA to realign ERS with chief economist, relocate ERS and NIFA outside D.C. USDA Secretary Sonny Perdue on Thursday today announced further reorganization of his department. The Economic Research Service (ERS), currently under USDA’s Research, Education, and Economics mission area, will realign once again with the Office of the Chief Economist (OCE) under the Office of the Secretary. Additionally, most employees of ERS and the National Institute of Food and Agriculture (NIFA) will be relocated outside of the D.C. region. The movement of the employees outside of Washington, DC is expected to be completed by the end of 2019.

Moving ERS back together with OCE under the Office of the Secretary “simply makes sense because the two have similar missions,” a statement noted. ERS studies and anticipates trends and emerging issues, while OCE advises the Secretary and Congress on the economic implications of policies and programs. “These two agencies were aligned once before and bringing them back together will enhance the effectiveness of economic analysis at USDA,” the statement continued.

New locations have yet to be determined, and it is possible that ERS and NIFA may be co-located when their new homes are found.

USDA said it is undertaking the relocations for three main reasons:

  • To improve USDA’s ability to attract and retain highly qualified staff with training and interests in agriculture, many of whom come from land-grant universities. USDA has experienced significant turnover in these positions, and it has been difficult to recruit employees to the Washington, DC area, particularly given the high cost of living and long commutes.
  • To place these important USDA resources closer to many of stakeholders, most of whom live and work far from the Washington, DC area.
  • To benefit the American taxpayers. There will be significant savings on employment costs and rent, which will allow more employees to be retained in the long run, even in the face of tightening budgets.

No ERS or NIFA employees will be involuntarily separated. Every employee who wants to continue working will have an opportunity to do so, although that will mean moving to a new location for most. Employees will be offered relocation assistance and will receive the same base pay as before, and the locality pay for the new location. For those who are interested, USDA is seeking approval from the Office of Personnel Management and the Office of Management and Budget for both Voluntary Early Retirement Authority and Voluntary Separation Incentive Payments.

White House action on food stamps will not arrive in time to provide any new funding for new farm bill: sources. The White House Office of Management and Budget (OMB) is reviewing a proposed rule (link) from USDA to modify the regulations for waiving SNAP work requirements for able-bodied adults. Governors can get waivers from USDA for their states when jobs are scarce, or unemployment exceeds 10%. The Federal Register posting for the advanced notice came back in February (link).

Comments: President Trump's earlier executive order made it clear that he wants the agencies making progress on these fronts, but SNAP/food stamps has been a bit unique because of the farm bill moving through Congress. Contacts say USDA is just continuing to advance the ball and this could get wiped out depending on the farm bill. Veteran farm bill contacts say this will not lead to more farm bill funding in conference. Said one contact, “This rule process will take a long time to play out. Besides, OMB would claim administrative savings, but it wouldn’t benefit the farm bill — just like former President Barack Obama cutting crop insurance during the SRA renegotiation did nothing to help the farm bill. So, this has zero bearing on farm bill funding.”

Other items of note:

  • USDA sends 'direct links' to today's reports on shift in lockup procedures. In light of USDA removing access for some members of the media to its market-sensitive data ahead of its release and instead requiring the media and the public to access the information via USDA's website, the National Ag Statistics Service (NASS) Thursday emailed direct links to those who subscribe to the agency's releases via email for the Crop Production and Cotton Ginnings reports that are to be released today at 11 a.m. CT. USDA in July announced it was ending the practice of allowing media outlets early access to USDA data ahead of key reports, allowing them to prepare stories and then transmit the data via high-speed lines once the report has been released. The change took effect Aug. 1 and the Crop Production and Cotton Ginnings reports are the first under the new procedures.

  • A detailed look at the farm bill differences between the House and Senate was put together by Congressional Research Service (CRS) analyst Mark A. McMinimy. Link to report.

  • A dip in the U.S. farm economy. The farm economy in the Federal Reserve’s Tenth District dipped in the second quarter of 2018 alongside a sharp drop in the prices of key agricultural commodities, according to Federal Reserve Bank of Kansas City. Agricultural credit conditions also deteriorated and bankers continued to report a modest increase in problems with loan repayment. Meanwhile, elevated demand for farm loans continued to place pressure on liquidity at some agricultural banks. Despite these challenges in the District’s farm economy and additional increases in interest rates, farmland values have remained relatively steady and provided ongoing support to agricultural credit markets. Link to latest issue of the Agricultural Credit Survey.

  • Treasury Secretary Steve Mnuchin has managed to stay in Trump’s good graces as he avoids the spotlight and pushes back against some of the president’s more protectionist advisers. Bloomberg Businessweek’s Devin Leonard and Saleha Mohsin report: Mnuchin “remains a voice of prudence, if not reason, amid the turbulence stirred up by his volatile master. … An ongoing battle in the White House over trade policy had pitted economic moderates such as Mnuchin and [former White House economic adviser Gary Cohn] against pro-tariff nationalists like U.S. Trade Representative Robert Lighthizer and Trump’s special trade adviser Peter Navarro … Career Treasury staff members were stunned early last year when the administration nearly pulled out of the North American Free Trade Agreement, a move Navarro had championed. According to one source, Cohn blocked the effort.” Link to article.

  • Sen. Johnson calls for Commerce to detail tariff exclusion process. An explanation of the administration's actions on exclusions from tariffs and the number of exclusions sought and approved is being requested by Senate Homeland Security Chairman Ron Johnson (R-Wis.). In a letter to Commerce Secretary Wilbur Ross, Johnson said Wisconsin businesses are complaining there are several hurdles in applying for exclusions from the steel and aluminum import duties put in place by the Trade administration earlier this year, saying the tariffs are hurting companies in his state. "The Department's denial of the exclusion request has resulted in [one] Wisconsin business incurring an additional $2.6 million tariff cost that can not be used to expand production or to pay salaries of new employees," Johnson said in the letter obtained by Politico. "Across the country, many businesses share the same frustration about the difficult and time-consuming process." He further requested Ross provide the panel with an accounting of how many exclusion requests have been made and denied and what the decision process involves.

  • Dredging permits clarification issued. For more traditional transportation routes, waterways such as the Mississippi River that are used to transport goods and people remain under federal authority, the U.S. Army Corps of Engineers said, clarifying where states and tribes have the power to approve dredging permits. The new Corps guidance is intended to resolve a disagreement over where the federal government and states can take the lead.

  • It’s getting ugly for companies trying to find truckers to haul goods, the Wall Street Journal reports (link to article). More retailers, and manufacturers are warning that strains in the transport sector are holding back their ability to grow, the article noted, as distribution channels struggle to keep up with the fast-growing U.S. economy. Shippers are trying to recast their supply chains but many say they haven’t moved fast enough. Milk supplier Dean Foods Co. says third-party hauling rates have risen 26% from last year, and Tyson Foods Inc. said it expects freight costs to rise by $270 million this year. Trucking providers say they tried to warn customers that prices would rise, with one executive saying, “If you have a supply chain that was built heavily on taking advantage of transactional interactions with your carrier base… you’re paying a pretty penny right now."

  • In a setback for the pesticide industry, a federal appeals court ordered the Environmental Protection Agency on Thursday to ban a widely used pesticide, Chlorpyrifos, associated with health problems especially in children. The product is used in more than 50 fruit, nut, cereal and vegetable crops including apples, almonds, oranges and broccoli, with more than 640,000 acres treated in California alone in 2016, the most recent year data is available. The 9th U.S. Circuit Court of Appeals in San Francisco ordered the EPA to remove chlorpyrifos from sale in the U.S. within 60 days. EPA said it’s reviewing the decision, but it has the opportunity to delay its impact. The agency has the option to request a rehearing by the same panel of judges or by all of the 9th Circuit judges. It could also seek a Supreme Court review of the case, and request a stay.

  • The Pentagon has released a 15-page report outlining a framework for the establishment of the U.S. Space Force, which would become the sixth military branch. Efforts include an "acceleration" of space technology, the creation of a space-development agency, and a pool of "space experts" and "space warfighting professionals." The division would be responsible for protecting against hypersonic weapons, as well as attacks on communications satellites and the Pentagon's missile-warning systems.

  • The Cook Political Report writes that Democrats have overperformed by 8 points in nine special elections this cycle. If that trend holds nationwide on Nov. 6, Democrats would pick up 81 seats — well more than the 23 needed to flip the House.

  • House Minority Leader Nancy Pelosi (D-Calif.) is causing jitters in her party as at least 27 Democratic House candidates have declined to say whether they would support her as their leader next year, reports the Washington Post (link).

  • First lady Melania Trump’s parents were sworn in as U.S. citizens on Thursday, completing a legal path to citizenship that their son-in-law has suggested eliminating.

Markets. The Dow on Thursday was down 74.52 points, 0.29%, at 25,509.23. The Nasdaq added 3.46 points, 0.04%, at 7,891.78. The S&P 500 moved down 4.12 points, 0.14%, at 2,853.58.

Low odds for U.S. recession next 12 months. Via S&P's latest business cycle report: "S&P Global Economics continues to place a low probability (10-15%) on recession in the U.S. over the next 12 months. While the growing debt trajectory may be increasing risks to growth down the road via macro-financial linkages, the current macroeconomic conditions support a sanguine view of risks to U.S. growth in the near term (12-month horizon)."

Headline U.S. inflation is expected to hold at 2.9% in July when the data are released at 7:30 a.m. CT with core inflation likely to repeat June’s 2.3% reading. While the Federal Reserve will keep an eye on the data, its preferred inflation gauge, the core PCE deflator, has been holding near 1.9% recently.

WSJ economists' survey: Two more rate hikes in 2018 expected. U.S. economic growth is seen at 3% for all of 2018 relative to GDP, according to the Wall Street Journal's monthly survey of economists, up from 2.9% in July. Their outlook for 2019 is 2.4%, little changed from prior expectations, with flagging impacts from fiscal stimulus and trade tensions two keys that they expect to keep a lid on U.S. economic performance. As for Fed activity, 88% of the 57 economists expect two more rate increases in 2018 (a total of two in 2019). As for 2019, economists had a more mixed view and a more-subdued view on US GDP, with nearly 60% saying there was a "heightened chance" of having to revise growth forecasts lower in the next 12 months while only 31% said they might need to raise their expectations. As for Fed policy, the survey indicated a median view that the Fed funds rate would be at 3% by the end of 2019, with 2020 expectations mixed — some expect little change, others think the Fed may have to raise rates while another group signaled an expectation the Fed may have to lower rates.

Turkey’s currency the lira plunged as much as 13.5% to reach a new all-time low of 6.3005 to the dollar. Contagion spread to euro-area lenders after the Financial Times reported that the European Central Bank is becoming concerned about the exposure of some of the region’s banks to Turkey. The lira rout comes after talks in Washington, designed to ease U.S.-Turkey tensions, halted. For now, Turkish President Recep Erdogan said he will stand up to the pressure, stating "don't forget, if they have their dollars, we have our people, our God." Investors moved into the dollar amid fears that ongoing financial instability in Turkey will impact other markets.

Japan's economy beat expectations in the second quarter. The Japanese economy expanded at an annualized rate of 1.9% in the second quarter, above expectations for a 1.3% level and a marked turnaround from the 0.9% contraction in the first quarter of 2018. Private consumption increased 0.7%, a key factor as that contributes nearly 60% of GDP. Economists expect the trend to continue on the back of higher wages and consumer spending, unless trade conflicts with the U.S. worsen.

"As oil sanctions against Iran take effect... maintaining global supply might be very challenging and would come at the expense of maintaining an adequate spare capacity cushion," the IEA said in latest monthly report. "Thus, the market outlook could be far less calm at that point than it is today." Trade tensions and expectations of reduced growth are still weighing on crude prices, however, with Brent on course to register a near 2% fall this week and WTI set for a drop of almost 3%.

China Dalian Commodity Exchange to cut corn, soyoil, palm oil futures margin requirements, trading limits. China's Dalian Commodity Exchange announced it will be cutting trading limits for corn, corn starch, soyoil and palm oil futures from Aug. 13 to 4% from a current 5% level. The exchange also said the margin requirements would fall to f5% for corn and corn starch from the current 7% level, and for soyoil and palm oil they would decline to 6% from a current 7% level.


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