Year-round E15 Waiver, Changes to RIN Credits Coming in Announcements Today

Posted on 10/09/2018 5:38 AM

Lengthy U.S./China trade, economic clashes may lead to pressure for more Trump tariff aid


Year-round E15 or Meh15? Depends on your viewpoint. Proponents like year-round E15, which is going to be proposed in a wavier announcement this afternoon ahead of President Donald Trump's campaign appearance in Iowa. Opponents simply say, Meh15.
    
U.S./China relations are souring fast. Last week's Cold War-like speech by U.S. Vice President Mike Pence certainly got China's attention and some sharp responses. As for the lingering U.S./China trade battles, most see them extending into 2019 and beyond unless Trump and China leader Xi Jinping can settle matters late this year at the G20 confab in Argentina. President Trump will not engage in trade talks with Xi Jinping at next month's G20 summit if China does not produce a detailed list of concessions, sources told the Financial Times. The Chinese say they have such a list but would not present it without some guarantee of it being received in a stable political climate in Washington, including a point person with a mandate to negotiate on behalf of the Trump administration. With most doubting that will occur, the latest parlor game in Washington is whether USDA will again have to tap the CCC ATM machine for impacted 2019 crops, or as most predict, leave it to Congress to deal with.
     The IMF downgraded forecasts for world GDP growth today, from 3.9% to 3.7%. It has already warned of the damaging effects of protectionism and trade disputes. The fund left its 2018 U.S. forecast unchanged (2.9%) but cut its expectation for next year (2.5%), down 0.2 percentage point from July, citing the impact of the trade conflict.

 

After several false starts, President Trump is moving to allow year-round sale of E15 ethanol. The announcement coming this afternoon in Washington will be followed by a presidential trip to and political rally in Council Bluffs, Iowa. The move satisfies a campaign promise Trump made to farmers and especially to Iowa, but a move that will be opposed by many in the oil industry. The Trump administration is also proposing changes to the RIN credit program. Link for details.

Impact. The waiver could give biofuel producers an opportunity to grow their share of the 143-billion-gallon gasoline market, now about 10%. Some analysts note the shift may unleash an additional 14 million gallons of additional ethanol in the first year but add there is more potential ahead. Only about 1,430 of the nation’s 122,000 filling stations sell E15 now and there appears to be no funding mechanism to be announced in Trump's decision.

There will be a rule-making process and court challenges could impact the timeline. The rule, which will have a public comment period, will be fast-tracked in order to be finalized before next summer’s driving season, a White House official said.

Trump also is proposing changes to a RIN credit program which allows oil refiners to buy and sell credits for using ethanol, the White House official said. Refiners purchase RINs — renewable identification numbers (RINs) — to show they are blending the required level of ethanol. Smaller refiners, which may not have blending capability, have complained about the cost of buying the credits. The White House said it will push for more transparency in the system and look to offset market speculators by limiting RINs to obligated parties — the move could block Wall Street banks from trading in credits. Various options are expected to be included in the call for public comments. For example, refiners will now have to prove compliance with the program quarterly rather than annually, and EPA is expected to limit how long companies other than refiners and importers can hold credits. Some independent refiners have complained that market speculation and manipulation drive wild swings in the value of those credits, with some traders abandoning sales after negotiating them and others placing fraudulent bids with the goal of inducing higher prices. The U.S. government has obtained more than 30 criminal convictions for biofuel fraud.

USDA Sec. Perdue's contention that Trump tariff aid for farmers is one crop year program may be tested. U.S./China relations are echoing elements of the former U.S./Soviet Union Cold War, especially after comments last Thursday from Vice President Mike Pence and Chinese officials' response to what they say are deteriorating conditions between the two countries, largely caused by President Trump's economic and trade policies. Foreign Minister Wang Yi on Monday clashed in Beijing with visiting Secretary of State Mike Pompeo, accusing the U.S. of “constantly escalating trade friction toward China.”

Pence denounced China’s suppression of the Tibetans and Uighurs, its “Made in China 2025” plan for tech dominance, and its “debt diplomacy” through the Belt and Road initiative. Pence also detailed an intra-agency government strategy to counter what the administration considers Chinese military, economic, political and ideological aggression. Meanwhile, the Pentagon said it intends to invest in domestic manufacturing to reduce its over-reliance on Chinese and other foreign-made parts in American weapons, top defense officials said. A report said China is the only producer of various chemicals needed in missiles and bombs.

China's central bank, the People’s Bank of China, on Sunday reduced the amount of money that banks must hold in reserve for the fourth time in 2018, freeing up $174 billion for new loans. Along with tax cuts Beijing announced earlier this year, the move is designed to shield the Chinese economy from tariff pain. The Chinese yuan already has lost nearly 10% of its value against the dollar since mid-April. China's economic growth is slowing but China watchers say the country is really worried about debt. Chinese authorities since 2016 have cut the rate of growth in credit by half, but the stockpile of outstanding debt continues to swell.

After borrowing heavily to rescue the economy during the 2008 crisis, China confronts a debt bill topping 240% of its economic output. Under President Xi Jinping, banks have funneled a lot of new credit to inefficient state-owned enterprises rather than to the private sector, meaning China is getting less bang for every buck of new lending, according to a Washington Post article. It now takes more than three times as much new debt to produce a given amount of output as it did a decade ago, according to a January study from the IMF. “International experience suggests that such rapid credit growth is not sustainable and is typically associated with a financial crisis and/or a sharp growth slowdown,” the IMF warned after examining 43 historical examples of countries that had binged on credit.

When the Trump administration unveiled its up to $12 billion tariff aid package for selected crops, which significantly favored soybean producers, USDA Sec. Sonny Perdue said it would be just for the 2018 crops impacted via USDA's assessment. But U.S./China trade issues are expected to linger well into 2019 and perhaps beyond.

Perdue has suggested in the past that anything beyond aid for 2018 crop production would have to come from Congress. But as the skirmishes over the new farm bill show, finding new money is impossible and in fact allocating existing funding is a difficult task.

For the $12 billion funding, USDA tapped the Commodity Credit Program (CCC). That could be a new version of an ATM machine if some groups and lawmakers have their wish.

As for U.S./China relations, they are heading in the wrong direction and keep getting worse. For example, the recently-entered trilateral U.S.-Mexico-Canada trade agreement (USMCA) was revealed to have a clause discouraging trade agreements between member countries and China. The administration indicated it would seek similar clauses in other trade agreements. Also, Congress last week approved the Build Act, a $60 billion development-financing program designed to counter China’s Belt and Road strategy in Africa and Asia. The White House also issued a report highlighting the danger that foreign-based supply chains pose to U.S. military capabilities in the event they are cut off during a conflict.

Also last week, Perdue said U.S. agriculture likely made a mistake in the past in focusing on one country, like China, being so important an export market for U.S. soybeans. Some industry analysts saw this as another factor in what appears to be a multiyear restructuring of the world's soybean export market.

China watchers say the best chance for improved U.S./China relations may only be possible when the two leaders (Trump and China's Xi Jinping) meet at the G20 confab in late Nov., early December in Argentina. But U.S. officials have said the Trump administration wants to see a list of concessions from Beijing before Trump-Xi negotiations. President Trump in recent weeks has brushed off Chinese calls for negotiations over several trade disputes, labeling Beijing’s offers as inadequate and saying the time is not yet right to deal.

Indiana holds debate for Senate post. Democratic Indiana Sen. Joe Donnelly and Republican challenger and businessman Mike Braun both conceded one point Monday night, during their first debate: they support President Donald Trump. "I go against my party all the time," Donnelly said from the debate stage in Westville. "I've been with president 62 percent of the time. That's what we're supposed to do." Link to Associated Press report about the debate.

But Donnelly has cast several high-profile votes against Trump and in line with Democrats, including his "no" vote this weekend on Trump's Supreme Court pick Brett Kavanaugh and the GOP led tax cut bill. "He never sticks his neck out," Braun said. "He blows with the wind." Donnelly countered that Braun would try to repeal the Affordable Care Act, which is sometimes referred to as "ObamaCare."

Other items of note:

  • China's Ministry of Agriculture and Rural Affairs has lifted lockdowns on swine movements in three districts where African Swine Fever was discovered in early August, but new cases have appeared elsewhere. About a dozen local officials, traders and farm managers have been arrested or investigated for knowingly selling infected animals and falsifying health certificates. New incidents reveal that pigs are routinely shipped long distances, increasing the chances that the virus may be spreading far and wide. (Source: Dim Sums: Rural China Economics and Policy)

  • China says ASF situation in key phase. China's efforts to combat African swine fever (ASF) are in a "pivotal" period as the situation remains complex and severe, according to a statement from China's Ministry of Agriculture. The country has reported 28 cases of ASF in eight provinces so far, and the risks of the disease spreading are still high, the agency said. The country will also take steps to stabilize hog production and trade, and make sure that Hong Kong, Macau, Beijing, Shanghai and other major cities have supplies of pork. The country also said there were six new cases in Liaoning province in the city of Yingkou.

  • China reports new bird flu find. China has reported a new case of H5N6 avian influenza on a poultry farm in southern Hunan province, with 1,029 birds culled following the discovery, China's Ministry of Agriculture and Rural Affairs said. China in late September reported another N5H6 bird flu case on a poultry farm in Guizhou province.

  • Brett Kavanaugh will hear his first arguments today as a Supreme Court justice after Trump apologized to him and his family for the bitter battle over his confirmation and declared him “innocent” of the sexual assault allegations that nearly derailed his nomination.

  • Logistics operations for U.S. food banks are bracing for a flood of goods thanks to tariffs. The U.S. government has agreed to buy $1.2 billion worth of pork, apples, cheese and other goods from farmers to ease the pain of the new levies flying amid U.S. trade battles. The Wall Street Journal reports that the food will more than double the volumes of donated goods flowing to food banks over the next year, raising worries about the costs and logistical challenges of handling the unexpected bounty. “Food bank executives stress they welcome the food, and note the demand for help remains strong despite a strong national economy and low unemployment. They say the inbound volume far exceeds what they are used to handling, however, and that national distribution centers likely will refrigerate much of the food and deliver it to local charities on a ‘just in time’ basis.” Link for details.

  • Senate continues work on WRDA/water projects bill. The Senate today continues work on a measure that would authorize water projects around the country. On Saturday, Majority Leader Mitch McConnell (R-Ky.) set up a procedural vote for this evening on the latest Water Resources Development Act, known as WRDA, which would give the Army Corps of Engineers the go ahead to begin 15 navigation, flood control, storm damage and other infrastructure projects. The bill also could begin a major reorganization of the Army Corps, with the legislation calling on a National Academies of Sciences study to recommend whether it should continue to be a part of the Department of Defense.

  • Australia agency raises El Niño odds in 2018 to 70%. Odds are now put at 70% for El Niño to form in 2018, according to the Australian Bureau of Meteorology. The agency raised its El Niño/Southern Oscillation (ENSO) outlook to an El Niño Alert. "The tropical Pacific Ocean has warmed in recent weeks due to weakening of the trade winds, while the Southern Oscillation Index has fallen to typical El Niño levels," the agency said. "Models suggest further warming of the Pacific is likely. Four of eight models predict El Niño thresholds will likely be exceeded in the coming months, with another two falling just short." Further, the agency said that there are signs in the Indian Ocean that a positive Indian Ocean Dipole (IOD) has started. "When combined, these two events in spring increase the possibility of a dry and warm end to the year" in Australia, the agency stated.

Markets. The Dow on Monday finished up 39.73 points, 0.15%, at 26,486.78. The Nasdaq fell 52.50 points, 0.67%, at 7,735.95. The S&P 500 eased 1.14 points, 0.04%, at 2,884.43.

Yield on the 10-year benchmark hit a fresh seven-year high, advancing past 3.26%, marking an increase of about 80 basis points from the start of 2018, the highest since May 2011. The move comes as the market braces for $74 billion in new supply this week with sales of three-, 10- and 30-year bonds due.

The International Monetary Fund said the world economy is plateauing as it cut its growth forecast for the first time in more than two years, blaming escalating trade tensions and stresses in emerging markets. Risks to the global outlook have risen in the last three months and tilt to the downside, the IMF said. Threats include a worsening of tensions between the U.S and China, and a sharper-than-expected rise in interest rates. The IMF today projected a global expansion of 3.7% this year and next, down from the 3.9% projected three months ago. It was the first downgrade since July 2016. The fund left its 2018 U.S. forecast unchanged (2.9%) but cut its expectation for next year (2.5%), down 0.2 percentage point from July, citing the impact of the trade conflict.The policy lender warned of a recession in Argentina and slower growth in Brazil, while calling for sweeping reforms to shield Turkey’s economy following the recent drop in the lira. Pakistan, meanwhile, has said that it will seek the country’s 13th IMF bailout since the late 1980s. Link for details.

IMF economic forecasts Oct. 2018


 

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