Impacts of Bigger Than Expected U.S. Corn, Soybean Crops

Posted on 09/13/2018 6:14 AM

U.S. requests trade policy talks with China, but lingering questions prevail


U.S. grain industry analysts again missed the size of the U.S. corn and soybean crops, with most even missing the direction (higher) for corn. The soybean carryover estimate for 2018-19 at 845 mil. bu. looks more like Washington Nationals' 19-year-old Juan Soto's slugging percentage.
     USDA also surprised wheat traders with a higher estimate for Russia's wheat crop... taking the wind out of the bulls' thoughts the country in the coming months could halt wheat exports. Wheat futures crashed.
     Trump administration officials are seeking another confab with China relative to complex trading policy issues. But as usual when it comes to U.S./China policy, there are more questions than answers, even when talking about what the U.S. trade policy stance will be. Some say any successful outcome would be part of Trump's wish to have a major October surprise going into November mid-term elections, taking away some of the under of Democrats like Sen. Heidi Heitkamp (D-N.D.) who yesterday said, “We have a self-inflicted farm crisis on the way because someone took away our markets.” Wonder who that “someone” is? Heitkamp is in a very close re-election race.
     Trump trade policy hearing takes place today via the Senate Ag Committee. Panel members will focus on latest U.S./China trade policy developments, including the possible coming meeting, and the Trump administration's tariff relief plan and how it was calculated.
     Where is the year-round E15 announcement? Recall that USDA Sec. Sonny Perdue chatted about the topic during his trip to the Farm Progress Show... and said the news would be unveiled LAST week. It wasn't. Biofuel proponents, who are very good at writing letters, sent another one yesterday... details below.
     Florence has been downgraded to Category 2, meaning it is no longer classified as a major hurricane. It can and will impact large parts of the Carolinas coastline, where the hurricane is expected to dump heavy rain when it makes landfall early on Friday. As many as three million homes and businesses may lose power, with some places likely to take weeks to reconnect. Warnings from the National Hurricane Center still proclaim the storm surge and rainfall pose a grave threat to life and property. On watch are insurers, power providers, hospitals, livestock and crop producers, generator manufacturers and building stocks.
     USDA releases Hurricane Florence response. The department released a rundown of the recovery programs available to farmers if the Category 4 storm hits the Carolinas later this week as expected. Link to USDA’s disaster-assistance recovery tool.

 

Perspective on USDA supply and demand estimates. Regarding U.S. corn and soybeans, it's easy to recap: BIG production, BIG yields and BIG carryover. Another key word is RECORD... record corn ear counts... record corn ear weights... record corn yield... record implied soybean pod weights... and record soybean yield and production if realized (soybean production is forecast at a record 4.69 bil. bu., up 2% from August and up 7% from last year).

With respect to the U.S. corn yield: You don’t have five years above trend-line yields without questioning the trend used by most (too low). Analysts are now upping their trend-line yields for 2019 and are most likely still too low. Seed company execs inform that traits and seed treatment will continue to boost yields in the years ahead, adding that soybean traits are now at the juncture where yields can rise faster than they have over the past decade or so on an annual basis.

And what about the too-low yield estimates by the Congressional Budget Office (CBO), FAPRI and USDA when it puts out the Outlook Forum projections next February? They all have been too low for years. These misses have implications for policy decisions. (CBO late in the year has an invite-only meeting where some selected industry analysts are asked to give their opinions on crops yields, production for the next year, etc. So these low-yield assumptions have a way of repeating themselves.) The Senate Budget panel has a hearing today on the transparency at the CBO, with director Keith Hall. That could prove interesting if lawmakers ask the right questions, which they probably will not.

Regarding USDA wheat estimates, the most important was a 3 million ton boost in Russia's wheat crop (apparently due to a better than expected spring wheat crop). That sucked the bullish air out of thoughts that Russia may “soon” halt its wheat exports.

From a policy perspective, the bulging carryover estimates, especially for soybeans, have several trade and farm program implications. Trade policy is so volatile that some are upping the odds that unless coming U.S./China trade talks can settle major trade policy differences, the Trump administration will have to follow up with another Trump tariff aid payout this December, and if those differences linger into 2019, some are not ruling out pressure to extend the taxpayer payouts for the 2019 crops. As for farm program implications: unless changed in farm bill conference, the safety net programs (ARC, PLC) have a lot of holes in the net to serve as an effective backstop for times of continued low prices, especially if they go below the cost of production for many.

Here we go again... U.S. calls for talks with China. Will they succeed this time? Is this part of the rumored “October surprise” that President Trump wants going into November mid-year elections?

Senior Trump administration officials led by U.S. Treasury Secretary Steven Mnuchin recently extended an invitation to their counterparts in China headed by Vice Premier Liu He for another round of trade talks to avoid further escalation in a trade war with China. White House economic adviser Larry Kudlow confirmed to Fox Business that the U.S. has extended an “invitation” to Chinese officials for new trade talks but that he did not offer many details. The Wall Street Journal on Wednesday was the first to report the request (Link). "There's some information that we received... the top of the Chinese government wished to pursue talks," Kudlow said. Mid-level U.S. and Chinese officials held inconclusive discussions on Aug. 22 and 23.

What does China say? Chinese commerce ministry spokesman Gao Feng confirmed his country had received an invitation and is working on the details of a new round of trade talks.

Questions regarding the possible U.S./China talks.

  • Will U.S. trade officials agree on a unified approach with China? The last time Mnuchin was involved in direct talks, more aggressive trade officials in the Trump administration helped nix the outcome. The offers China made during previous rounds of negotiations were primarily limited to increased purchases of U.S. products and gradual opening of financial-services sectors. Key will be comments on the matter from U.S. Trade Representative Robert Lighthizer, which is in charge of tariffs, because reports note he wants to hold off on negotiations, arguing that additional levies would give the U.S. more bargaining power in the dispute. Lighthizer was in Brussels on Monday to discuss the framework for averting an economic fight with the European Union and is scheduled to meet his Japanese counterpart in New York later this month to discuss prospects for a new bilateral deal with Tokyo. Also, Trump trade policy adviser Peter Navarro has been quite aggressive when it comes to China.
  • Will announced and additionally threatened U.S. tariffs on China be postponed, pending the outcome of any talks? The Trump administration is gearing up to impose tariffs on an additional $200 billion of Chinese goods and threatened yet another round of tariffs on $267 billion of its imports. Those levies would be on top of the 25% penalties on $50 billion of Chinese exports already in force.
  • What will U.S. officials, and even more important President Trump, accept from China as enough to satisfy their wants? How much can China “give” — Beijing has shown concerns about deeper structural changes to China’s economy proposed by Trump and his team, such as removals of subsidies to state-owned firms to give U.S. companies a fair playing field in Chinese markets.

— Key lawmaker speaks out about Trump trade policy. While many believe you can't trust what a politician says, you can at least up the truth odds when a lawmaker is no longer seeking political office. Outgoing House Speaker Paul Ryan (R-Wis.) on Wednesday backed the Trump administration’s stance on tariffs as a tool to broker a “better deal with our allies” — that is a clear break from his earlier criticism of the duties. Speaking at a Q&A with WisPolitics, Ryan said he’s "not a fan of tariffs" but added that companies and farmers should be patient and “bear with the fact that there is a plan in the strategy with a good landing point... I think the idea and the strategy — it’s hardball, it’s tariffs, it’s tough talk,” he said. “But if it results in good agreements with our allies and a unified developed world front to go get China to play by the rules then that’s a pretty darn good outcome.” Ryan earlier this summer said tariffs risked hurting the economy. Some observers note Ryan simply could be trying to help his fellow Republicans up for re-election this November. Link for details.

EPA approves emergency fuel waivers tied to Hurricane Florence. EPA has waived the federal Reid vapor pressure requirements for fuel sold in designated areas in Virginia and Georgia to minimize problems with gasoline supply; the waiver will continue through September 15. EPA has also waived the requirement to use reformulated gasoline in the southern part of Virginia and the prohibition on the blending of reformulated gasoline blendstock for oxygenated blending with other gasoline, blendstock or oxygenate in Virginia and Georgia; these waivers are effective through Sept. 30.

EPA previously approved emergency fuel waivers for N.C. and S.C.

Farm bill conference talks called “challenging. A farm bill conference agreement is not likely this week unless planned talks by phone on Friday settle major policy and funding differences. If not, conference leaders will meet next week even though the House will not be in session — the House won’t return until Sept. 25. The Senate adjourned Wednesday night until Monday.

Everybody knew going in about the differences of opinion. We were able to have a candid conservation about those differences,” Senate Ag Chairman Pat Roberts (R-Kan.) told reporters. Roberts said the negotiators need to agree on cost caps for each of the bill’s 12 titles before working out lingering policy differences. House Ag Chairman Mike Conaway (R-Tex.) said setting those caps now would limit policy changes that he wants.

Budget numbers up in air. “I think the biggest thing to do is agree to an overall budget number title by title," Roberts said. "That drives the discussion on what you can or cannot do. ”Without budget agreement, you "just bounce from topic to topic and then you realize you’re applying dollars that we don’t have,” he concluded. Conaway said before Wednesday's session that he is "not going to get boxed in a number that precludes me to get the policies I want as well." Remember when former USDA Secretary Tom Vilsack said the farm bill should be written from a policy standpoint first? Hmmm.

Bottom line: It will be interesting to see the “funding caps” and/or how funding levels and policy changes the always creative farm bill conferees and their staffs have in store. It's not an overstatement to say some very important farm bill provisions are written in conference rather than open farm bill debate. As for the eventual timeline, Roberts gave the best update when he said, “"We're running out of time,” adding that lawmakers could still get it done later in the fall. “It might have to be after the election. I don’t know." Roberts then added, “I have a feeling that next week might be the final time that we have to reach some kind of agreement.” Recall that ag leaders previously said an agreement would have to be reached by the end of THIS week for a vote yet this month.

Groups keep pushing for year-round E15. While welcoming the recent statements by USDA Secretary Sonny Perdue that word on year-round sales of E15 was coming soon (he actually said it was coming last week, but no announcement yet), a coalition of U.S. farm and biofuel groups cautioned that such a move without changes to how EPA has operated the Renewable Fuel Standard (RFS) would end up negating benefits from E15. Some analysts note relatively minor impacts even if year-round E15 is unveiled, citing infrastructure and consumer resistance concerns. Link to letter.

"With ethanol prices hitting a 13-year low and net farm income plummeting to half of the record $123 billion achieved in 2013, such an announcement could not come at a more critical juncture for rural America," the groups said. "However, we remain concerned that any benefit from year-round E15 sales and proper implementation of the RFS could be nullified if refiners are given further regulatory bailouts that undercut the spirit and intent of the law."

Year-round sales of E15 and "other mid-level blends in conventional gasoline markets" and ensuring that "RFS blending requirements erased by small refinery exemptions are prospectively reallocated to larger refiners, as required by law," the groups said in the letter to President Donald Trump.

The groups said that both biofuel producers and farmers are suffering, and that "thousands of manufacturing and farming jobs in America’s Heartland are now at risk due to the EPA’s recent mismanagement of the RFS and inexplicable delay in removing the de facto summertime ban on E15."

While refiners have complained about prices for Renewable Identification Numbers (RINs), the groups pointed out that those have traded "in a narrow range between 20-30 cents since May, a decrease of nearly 80% since last fall, because of EPA’s actions this year. In response to weakening demand and mounting supplies, ethanol prices, RIN credit prices, and ethanol profit margins are plunging."

Citing the 2.25 billion gallons of "biofuels demand destruction" created by the small refiner waivers, the groups said, "it is rural America’s turn to get its end of the deal."

Groups signing the letter included the National Corn Growers Association, American Farm Bureau Federation, Renewable Fuels Association, National Farmers Union, the American Coalition for Ethanol, the National Sorghum Producers and Growth Energy.

How will USDA purchase up to $1.2 billion worth of farm products as part of President Trumps plan to offset the ag industry negative impacts from his trade tariffs? Pork heads the list, with USDA intending purchases of nearly $559 million worth of the commodity, besides the $290 million in direct payments hog farmers ($8/head) are earmarked to receive under the direct payment portion of the aid package.

Other purchases coming include but are not limited to:

  • $93.4 million of apples
  • $85.2 million in pistachios
  • $84.9 million in dairy products
  • $55.6 million of fresh oranges.

Other items of note:

  • Senate Ag hearing today on Trump trade policy. Key administration officials are slated to testify, including USDA top economist Dr. Robert Johansson, who will be asked to explain how he and others came up with the payment rates for crops eligible for taxpayer funded Trump tariff aid payouts. Other witnesses: Ted McKinney, USDA undersecretary for trade and foreign agricultural affairs; and Gregg Doud, chief agricultural negotiator in the Office of the U.S. Trade Representative. Doud spokes to NFU members on Wednesday and was confronted about the low-price impacts of the Trump tariffs, especially on China. Doud, according to press reports, said the Trump administration is working on opening markets that are closed to U.S. products. He said Beijing has erected barriers to U.S. farm exports like rice, poultry, ethanol, apples and cherries. China also hasn’t reported its farm subsidies to the WTO since 2010, he noted. And the country’s “Made in China 2025” plan to become a tech superpower means that now is the time to address America’s long-standing complaints about Beijing’s tactics like forced technology transfers and IP theft, he added. “Is it going to be pleasant? No,” Doud said. “We didn’t make the decision to retaliate against agricultural products. They did. We have to work as quickly as we can to address those issues, and get things going in other markets. But this is the situation we’re in. It gives me no pleasure to tell you this. But it has to be done.”

  • U.S. Trade Representative Robert Lighthizer will not attend G20 trade meeting in Argentina, his office said Wednesday. Dennis Shea, ambassador to the WTO, will lead the U.S. delegation. Though no reason was given for Lighthizer's no-show, he is deep in meetings with Canadian trade officials and they are hoping to announce an agreement “soon.” Meanwhile, Lighthizer is expected to brief House Ways and Means members Friday morning on the status of trade talks with Canada and other pending issues, but events related to Hurricane Florence could stymie the session.

  • Bioengineered labeling regulations coming in early December... this year. USDA plans to issue the final rule for labeling bioengineered foods by early December, according to Greg Ibach, the undersecretary for marketing and regulatory programs. The rule was sent to the White House budget office on Aug. 31 for review. Ibach informed members of the National Farmers Union that USDA will sync the new disclosure requirements with the changes in nutrition labeling that FDA mandated earlier. He said USDA will allow the use of multiple technologies and will rely on state veterinarians and state agriculture agencies to find the best ways of meeting requirements for timely tracking of animals in disease outbreaks.

  • Energy Secretary Rick Perry visits Russia to meet with Energy Minister Alexander Novak and industry representatives.

  • Court halts WOTUS in three more states. A federal judge in Texas on Wednesday froze the Obama administration’s Waters of the U.S. (WOTUS) rule in the state, as well as in Louisiana and Mississippi. A coalition led by the American Farm Bureau Federation has sought a nationwide injunction on the rule. The Trump administration's final rule to repeal WOTUS is expected out before the end of the year and a proposed rule for replacing it is due to be released “soon”.

Markets. The Dow on Wednesday added 27.86 points, 0.11%, at 25,998.92. The Nasdaq declined 18.24 points, 0.23%, at 7,954.23. The S&P 500 edged up 1.03 point, 0.04%, at 2,888.92.

The Labor Department this morning releases August Consumer Price Index data. In July, consumer prices rose 2.9% from a year earlier, a rate last exceeded in late 2011. Economists estimate consumer prices grew 2.8% on the year in August.

A clearer picture of the effects of trade tensions between the U.S. and EU is expected today, when economists for the European Central Bank publish their latest forecasts.


 

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