USDA official reveals limited approach of Trump tariff aid plan; Senators question trade policy
— Trump blames Stabenow for lack of farm bill. President Donald Trump took to Twitter Thursday to blame Senate Ag Committee Ranking Member Debbie Stabenow (D-Mich.) for preventing the farm bill from being completed. "Senator Debbie Stabenow and the Democrats are totally against approving the Farm Bill," Trump tweeted. "They are fighting tooth and nail to not allow our Great Farmers to get what they so richly deserve. Work requirements are imperative, and the Dems are a NO. Not good!"
Stabenow countered with a tweet of her own, pointing out, "In case you missed it, the Senate passed a bipartisan #FarmBill that got 86 votes (86-11) — the most ever. I'm not letting politics distract me from working across the aisle to finalize a good bill that will deliver certainty for farmers and families in Michigan and across the country."
House Ag Committee Chairman Mike Conaway (R-Tex.) welcomed Trump's comments, telling reporters that Stabenow has "got to come to the table and so far from my perspective, I'm not getting the kind of negotiating out of her that gets us to a deal."
Nutrition programs are not the only area where there is a lack of agreement as conservation and farmer safety net issues are also keeping a final agreement at bay.
Senate Ag Committee Chairman Pat Roberts (R-Kan.) has already signaled the potential for getting the bill done before the end of September is getting less likely.
Perspective: Just ask former House Ag Chairman Frank Lucas (R-Okla.) about his dealings with then Senate Ag Chairwoman Stabenow and her staff during the 2014 Farm Bill debate. Lucas, according to sources, continued to backdown when confronted on several issues when Stabenow insisted on her approach. This time it appears Conaway and now the president are taking a different approach.
— Trump dashes expectations for any quick resolution to U.S./China trade issues. President Trump downplayed on Thursday the likelihood of the U.S. and China reaching a breakthrough in the trade war amid reports that the two countries may hold talks later this month. “The Wall Street Journal has it wrong, we are under no pressure to make a deal with China, they are under pressure to make a deal with us. Our markets are surging, theirs are collapsing [The S&P 500 is up 4.5% over the past three months vs. a 12% decline for the iShares China Large Cap ETF]. We will soon be taking in Billions in Tariffs & making products at home. If we meet, we meet” Trump posted on Twitter.
The Chinese government said Thursday it received the invitation and welcomed Washington’s goodwill gesture. Gao Feng, a spokesman with China’s Ministry of Commerce, said “an escalating trade war is not beneficial to the two nations.”
— Senators from both parties ask Trump trade officials questions about policy, noting concerns. Witnesses at Thursday's Senate Ag Committee hearing were USDA chief economist Robert Johansson, Undersecretary for Trade and Foreign Agricultural Affairs Ted McKinney, and USTR’s chief agricultural negotiator Gregg Doud. Some highlights:
- Trade policy market impacts on farmers: “It seems like the light at the end of the tunnel is a train coming at my farmers, said Sen. Joe Donnelly (D-Ind.), who is in a tight re-election race. “They need to know that there’s an off-ramp, or an end to this.” Senate Ag Chairman Pat Roberts (R-Kan.) said, "We need to hold our trading partners accountable, but I am concerned that some of the trade actions we have seen in recent years are causing uncertainty and unpredictability for the agriculture industry. On top of already low prices, the agriculture sector has seen immediate negative impacts as a result of retaliatory trade actions. As time goes on without resolution, the concern of losing long-term market access only grows."
- Asked about Canada's dairy policy, Doud said ending Canada’s Class 7 milk pricing program is the primary focus of dairy discussions between the U.S. and Canada. U.S. officials contend Canada’s practices dried up demand for U.S. milk protein and encouraged Canada to dump its excess on the world market in violation of international trade rules.
Doud indicated U.S. Trade Representative (USTR) Robert Lighthizer has taken a keen interest in the topic as talks with Canada progress. "Lighthizer has spent an enormous amount of time working on this issue and in good faith both countries are trying to resolve this issue. The challenge is how disparate these two systems are between Canada and the U.S., their closed supply management system versus sour open system. We're working really hard to try to manage this and we're going to do our best," he told lawmakers.
- Retaliatory tariffs on U.S. pork, other products by Mexico. Responding to a question from Sen. Stabenow on what USTR was doing with regards to Mexico levying retaliatory tariffs on U.S. pork and other ag products in response to U.S. tariffs on steel and aluminum, Doud told her, "The Section 232 tariffs are administered by the Department of Commerce not by USTR, so that’s not really something thats in our job jar." Stabenow expressed frustration: "Really? Because unfortunately all of this is coming together from a producer standpoint. It doesn’t matter which Department or which agency or which effort it lands on them, so they are deeply concerned.”
- Senators expressed concern that hard-fought market access gains for U.S. ag products like beef in China were being lost due to the continued trade war, and that new market opportunities like those presented by TPP were being forsaken. Market access gains for U.S. beef in China were highlighted by Sen. Steve Daines (R-Mont.). "One of the areas we made some great progress on recently was removing the ban on U.S. beef imports" by China, he observed, adding that with new tariffs, "We may have a significant setback here." He asked Doud what the long-term prospects were at this point for beef exports to China, with Doud responding, "It took us 15-16 years to get in there, we still have some significant issues with regard to their requirements on hormones and ractopamine. There is still a tremendous amount of work" to be done on that front.
- NAFTA 2.0 timeline. Doud said he couldn't give the panel a timetable for wrapping up talks between the U.S. and Canada. The U.S. announced in August an agreement in principle with Mexico as part of revising the current NAFTA and is now negotiating with Canada to bring it into that preliminary accord. "Being a state where we can see Canada from our porch, Canada trade is very important," said Sen. Amy Klobuchar (D-Minn.) "As I've told the ambassador we would like to see Canada as part of any NAFTA agreement." Doud said the Trump administration pressed Canada to finish negotiations by the end of August but talks spilled over into September with reports that Canada’s dairy supply management system is a sticking point. “We’re working day and night to bring Canada into the agreement,” he said.
- Trans-Pacific Partnership (TPP) pullout and push for bilaterals. President Trump on only his third day in office yanked the U.S. out of the TPP. Top Republicans asked about rejoining the 11-member trade pact. Doud said Trump is correct to prefer a bilateral approach. “I’ve heard that now for the last couple of years, since we decided to pull out of TPP, that we’re working on bilateral trade agreements,” Sen. John Thune (R-S.D.) said. “But I don’t see any evidence that we are.” Thune then said if there is no possibility of rejoining TPP, “When can we expect negotiations to begin on a bilateral FTA with Japan, which is a substantial market for U.S. beef, among other things?” Sens. Roberts and Daines also pressed Doud on rejoining TPP. “It seems to me that instead of going bilateral, bilateral, bilateral times 11, that to get back into TPP would really send a message to China” from both an economic and national security perspective, Roberts said. Sen. Daines said he thought the U.S. “should take into consideration a blend of bilateral and multilateral trade agreements as a good strategy going forward here because knocking these pins over one at a time in a series fashion is going to take a lot of time, and we’re running out of time in farm and ranch country.” Doud said the Trump administration could soon begin talks on several bilateral deals, including with Japan. He also mentioned Vietnam and the Philippines as possibilities. “Other countries have beat us to the punch. We’ve got to get busy,” Doud said.
- On U.S./EU trade matters, Doud said U.S. Trade Representative Robert Lighthizer stressed to his counterpart this week that trade talks between the U.S. and EU must include agricultural issues, even if it is tough for the bloc’s member nations to yield on the issue.
- Several senators asked how USDA decided on calculating the farmer aid payouts going to soybean, corn, wheat, cotton, sorghum, dairy and hog farmers, with soybeans getting by far the higher per bushel rate of $1.65. USDA released a six-page paper (see next item) outlining its methodology behind the payment rates. The report also said USDA is planning to announce a second round of trade aid in December, if needed, but that the methodology could change. Johansson said USDA is examining how it can help growers of perishable crops like almonds and cherries.
Some senators questioned the method used to calculate the payouts. Committee members said they and their constituents appreciated the USDA trade aid package, which is scheduled to provide $4.7 billion in direct payments to farmers affected by retaliatory tariffs. But Sens. Debbie Stabenow (D-Mich.) and Joni Ernst (R-Iowa) questioned the method used to calculate the rate of payments for affected commodities. Soybean growers will get $3.63 billion of the payments. Stabenow said cotton growers will receive just over $200 million in payments although crop market prices have risen.
Ernst noted that ethanol producers face a 70% tariff on exports to China because of retaliation. Johansson said USDA had decided that the best method for setting payment rates was to identify crops with the highest level of exports to countries striking back at U.S. agriculture. He noted that China is a top export market for U.S. cotton. He said ethanol did not qualify because the model USDA used did not look at such products. Given ethanol is primarily made from corn, Ernst asked Johansson again why that was not considered in the one-cent-per-bushel MFP payment for corn. Johansson explained the China actions were prior to the Section 232 and Section 301 trade actions taken by the U.S. which is what triggered the U.S. aid plan. The MFP effort, he explained, "was to primarily to address primary commodities, and not those on the processed side." But Ernst simply replied that since ethanol is made from corn, "that does have an effect."
Sen Amy Klobuchar (D-Wis.) questioned whether USDA took regional effects, such as freight prices, into account when determining MFP payments. “The 25% duty placed on soybeans to China has caused significant disruptions given that 57% of all U.S. soybeans went to China last year. These duties have hit my state hard because about 60% of our states' soybeans are shipped to the West Coast by rail, she remarked. "Dr. Johansson, when determining payments under (MFP) was any consideration given to regional shipping disparities between each commodity," she asked. Johansson responded, "When we put the current methodology together we did not do regional effects, there were a number of factors to consider there — transportation being one of them, availability of storage, storage capacity being another." He added, "Those are all factors we are actively examining and looking at and we'll be continuing to provide the Secretary (Sonny Perdue) with that type of information." Klobuchar followed up, asking if a next round of MFP payments might take those regional differences into account. Johansson replied, "We'll certainly we're continuing to consider that,” but stressed he “can't speak for the Secretary or the interagency process but imagine we will bring that information to bear if a second phase is required.”
- Duplication of trade, market promotion efforts a concern. How the Agricultural Trade Promotion (ATP) program part of the aid package fits in with existing efforts was one concern cited by some lawmakers. "What I want to know is this program, does it complement existing export programs," said Roberts, referring to the Market Access Program (MAP) and the Foreign Market Development Program (FMD). "How do we ensure resources are not duplicated?" he asked. McKinney responded they "they are highly complementary.” He added, “There's a lot of discussion going with all the commodity organizations as you might imagine. We're working with them, and we encourage creativity, new markets, some mitigation and products or programs that will work full time, so certainly this is very much like [MAP or FMD]."
— USDA provides details on trade damage estimate for aid payments, food purchases. USDA on Thursday revealed a white paper (link) that utilized a three-step process to determine damages caused by unfair trade practices deployed by U.S. trading partners against U.S. agriculture, setting the stage for efforts USDA has announced — the Market Facilitation Program (MFP) and Food Purchase and Distribution Program. Link to USDA press release and link to methodology document.
The three steps USDA used are like those used in other trade disputes, with a "white paper" issued by the Office of the Chief Economist (OCE), noting this was the same process used in the U.S. Country of Origin Labeling dispute case. The WTO "awarded trade damages of approximately $1 billion to Canada and Mexico based on the gross trade value of their lost livestock exports to the United States due to the COOL measure," the white paper said (link).
The Trump administration's effort focused on countries putting retaliatory tariffs in place on U.S. ag products, including Canada, China, the European Union (EU), Mexico and Turkey.
The three steps:
Step 1: Trade value without the retaliatory tariff from a particular country.
Step 2: Trade value with the retaliatory tariff from a particular country.
Step 3: Take the difference of the two as the “trade damage” due to the tariff.
OCE used actual 2017 trade data "as a proxy for the expected value of trade without the retaliatory tariff using import data from Canada, China, the EU, Mexico, and Turkey."
Global trade model a key component. While a WTO case unfolds over time, allowing for several years of trade data to be used, the effort USDA pursued used "a global trade model to estimate what the value of trade is expected to be after the imposition of the tariffs." The model used by USDA "estimates bilateral trade flows for each of the commodities with assessed tariffs," the white paper detailed. "As a general rule, a given tariff will increase the cost of that commodity in the importing country, leading to lower demand for the commodity from the exporting country. This method reflects the level of the tariffs and the sensitivity of the retaliatory partner’s import demand to the higher prices caused by the additional tariff. Availability of substitute suppliers on the one hand (for the retaliating importer) and substitute demanders on the other hand (for the U.S. exporter) are also reflected in this approach."
USDA subtracted the first step in the process from "step 2" to arrive at a "measure of gross trade damage," the white paper said. "Note, the gross trade damage only reflects direct export losses due to the retaliatory tariff imposed on the U.S. commodity. Indirect or secondary effects from the tariff, such as cross-commodity effects are not reflected in the gross trade damage estimate."
The Food Purchase and Distribution Program’s announced purchase values were set at the same level of gross trade damage to each affected commodity," the white paper said, using their described trade model and the commodity surplus from the gross trade losses.
For the MFP, USDA said that they "divided that estimated trade damage level by 2017 crop year production to calculate a per unit rate." USDA utilized 2017 trade and production data as 2018 figures are not finalized and that 2018 will show "a biased impact because of the tariffs."
The interim payment. Since the retaliatory tariffs could be removed via trade negotiations and other factors to mitigate the trade damages, USDA said that created a "need for an interim step to calculate payments." USDA determined that interim step as being to split a producer's 2018 production into two parts. "The first part was announced on Sept. 4 and payment calculation follow the steps above," the white paper said. "The second part will be announced, if necessary, in December and may account for other factors, such as new tariff levels, regional basis effects, or other market conditions that may have mitigated some of the trade damages" calculated by USDA.
USDA did not act alone. USDA determined this approach in consultation with the Office of Management and Budget (OMB) and "other White House offices."
Examples for corn, sorghum. The white paper outlined the following relative to how they determined a one cent per bushel payment for corn and an 86 cent per bushel payment for sorghum:
MFP example 1: Sorghum
Step 1: In 2017, China imported $956 million of sorghum from the United States.
Step 2: With additional 25% tariff, China is estimated to import $642 million from the United States.
Step 3: Estimated gross trade damage = $642 million - $956 million = -$314 million Initial MFP rate = $314 million/364 million bushels = $0.86/bu.
MFP example 2: Corn
Step 1: In 2017, China and EU combined imported $309 million of corn from the United States.
Step 2: With additional 25% tariff from both countries, the combined imports from the United States is estimated to be $117 million.
Step 3: Estimated gross trade damage = $117 million - $309 million = -$192 million Initial MFP rate = $192 million/14.6 billion bushels = $0.01/bu.
Perspective. About the best you can say about the white paper is that it was released and at least the process is more transparent. But several commodity group officials don't agree with the methodology, transparent or not. And if another payout is coming, as most expect, there are no guarantees that the “process” will be exactly the same. Lawmakers eventually got USDA's Johansson to acknowledge that more than just trade impacts would be figured in the next round of aid payments, should they be made. USDA did stick to just the trade component in the first installment under MFP, but Johansson acknowledged more will be taken into account if there is a second round of payments. He initially indicated that the second phase "may include consideration of other factors." But after repeated questions from lawmakers who drilled down to issues like basis levels, transportation, how much farmers have forwarded contracted and regional differences, Johansson said, "I imagine we will be considering those."
Bottom line: When the government is involved in any program, they frequently get complex and messy. As an example, just look at the ongoing issues relative to the Renewable Fuel Standard (RFS) program. Simply put, mandates and taxpayer paid aid programs are not simple to execute. Another example: farmer safety-net programs.
— Other items of note:
House clears Energy-Water spending bill sans WOTUS repeal. A three-bill minibus appropriations package including funds for energy programs and water projects was approved after the House cleared the measure on a 377-20 vote and it is now on its way to President Trump’s desk. The conference report does not include a House provision repealing the Obama administration’s Waters of the United States (WOTUS) rule.
U.S. reports low-path bird flu at California farm. The U.S. has reported a the presence of H7N3 low pathogenic avian influenza (LAPI) at a turkey farm in Stanisslaus County, California, according to the World Organization for Animal Health (OIE). All 26,258 birds at the flock were euthanized.
Russia to boost phytosanitary checks on grain exported but says extra checks will not curb grain exports. Russia's state agriculture watchdog agency has asked exporters in the Rostov-on-Don region to undertake certain phytosanitary checks that will take five to 10 days, according to a letter from the agency viewed by Reuters. The checks apply to grain from the region destined for Ecuador, Vietnam, Sudan, Egypt, Venezuela and Israel. However, an agency spokeswoman told the news service the action was not new. "We have always been doing these checks, Rostov simply decided to inform everyone once again," spokeswoman Yulia Melano told Reuters. The agency told regional offices to boost its exams of wheat in September, Melano said, after Indonesia and Vietnam had complained of substances found in wheat from Russia. She further said the action was not aimed at curbing exports. Interfax also reported the agency indicated the extra checks were not aimed at restricting exports but to minimize the potential for importing countries to complain about grain quality.
Kroger Co. said it may need to forego profits in the short term in order to invest in online ordering and delivery services to keep it competitive with rivals Walmart and Amazon.com Inc., the Wall Street Journal reports (link). The largest supermarket chain in the U.S. by stores has invested in online offerings as well as popular store brands and natural goods, lowering prices and overhauling the layout of its stores. Kroger’s digital sales grew by more 50% in the second quarter, but investors remain skeptical as Walmart and Target Corp. reported strong quarterly sales, with grocery purchases driving much of the revenue growth.
Cuomo beats Nixon. New York Governor Andrew Cuomo won the state’s Democratic gubernatorial nomination, beating actress Cynthia Nixon. Cuomo bested Nixon 66% to 34%.
Illinois governor’s race poll: Democratic challenger Pritzker leading Rauner 44%-27%. On its website, WMAQ-TV reported that an Illinois Broadcasters Association poll of 1,024 Illinois voters, taken Sept. 5-13, shows billionaire businessman J.B. Pritzker (D) leading Gov. Bruce Rauner (R) 44%-27%; third-party candidates draw 11%, and 12% are undecided.
Minnesota governor’s race poll: Democrat Walz leading 47%-40%. On its website, KSTP-TV reported that a KSTP/Survey USA Poll of 587 Minnesota likely voters shows Rep. Tim Walz (D) leading Hennepin County Commissioner Jeff Johnson (R) 47%-40% in the race to succeed retiring Gov. Mark Dayton (D); 10% were undecided.
Cotton AWP edges up slightly. The Cotton Adjusted World Price (AWP) will be 73.79 cents per pound, effective today, up slightly from 73.77 cents per pound the prior week. The AWP has been in a tight range the past four weeks of 73.77 to 74.26 cents per pound. Meanwhile, USDA also announced that Special Import Quota #21 for upland cotton will be established Sept. 20 for 61,069 bales of upland cotton purchased not later than Dec. 18 and entered into the U.S. not later than March 18.
— Markets. The Dow on Thursday gained 147.07 points, 0.57%, at 26,145.99. The Nasdaq moved up 59.48 points, 0.75%, at 8,013.71. The S&P 500 added 15.26 points, 0.53%, at 2,904.18.
Capital Economics is anticipating that global oil production will ultimately outpace demand next year, predicting that OPEC's output will rise despite a projected drop at member Iran. The firm also sees U.S. production picking up further as infrastructure constraints are resolved. Meanwhile, it anticipates an economic slowdown in the likes of China and the U.S., resulting in a marked slowdown in oil-demand growth.
China hits record-low investment growth as Beijing battles a slowdown. Investment in factories, railways and other projects in China so far this year grew at its slowest pace in more than a quarter-century, pointing to challenges in government efforts to arrest an economic slowdown.
The lira leapt after Turkey’s central bank raised its benchmark interest rate by 6.25 percentage points, to 24%, more than markets had expected. Hours before the decision the country’s president, Recep Tayyip Erdogan, urged the bank to cut rates. Turkey’s annual inflation has climbed to almost 18% as the lira has fallen by 40% against the dollar this year.
The European Central Bank confirmed it will wind down its €2.5 trillion ($2.9 trillion) bond-buying program by the end of the year, a sign that inflation is on the right path. It will also maintain ultra-low interest rates. However, after a strong 2017, the bank revised down growth forecasts amid worries over Brexit, a looming trade war and Turkey’s vulnerability.