China to Exempt U.S. Pork and Soybeans from Further Tariffs

Posted on 09/13/2019 7:01 AM

RFS meetings | USMCA | U.S./Japan ag accord | NPPC's agenda

In today's updates:

* China to exempt U.S. pork and soybeans from further tariffs
* China pushing multi-step trade resolution... Trump 'would consider' interim deal
* China welcomes Trump's recent postponement of additional tarrifs
* Meager shifts in corn, soybean FSA acres
* Trump meets with biofuel-backing senators; oil-state lawmakers on today's agenda
* Pelosi upbeat on USMCA... but says enforceability is the key
* Lawmaker wants fresh potatoes added to any U.S./Japan ag accord
* Dairy program signup
* NPPC details their priority agenda
* Reaction to EPA's repeal-and-replace WOTUS rule
* S. Korea's Moon & Trump expected to meet at the United Nations this month
* Twitter blocked several accounts linked to the Cuban government
* U.S. govt's red ink for fiscal 2019 swelled past the $1 trillion mark in August
* Europe's central bank announced more stimulus measures
* OPEC agreed to cut oil output by asking Nigeria and Iraq to lower production
* U.S. has evidence that Iran sold oil to Syria

Markets: Middle class tax cut? During a speech before House Republicans in Baltimore, President Trump said his administration would unveil a tax overhaul plan aimed at middle-income households in 2020. "It will be a very, very substantial tax cut for middle-income folks, who work so hard," he declared, adding that it's going to be something that "everyone's really looking for." Other tax reform proposals, including indexing capital gains and a payroll tax cut, have recently been ruled out by the administration.

Lab-grown meat in China moon cakes. China’s Mid-Autumn Festival is today and eating moon cakes is a tradition. Traditional flavors are mixed nuts and bean paste, but Xinhua reports there is a new flavor this year — synthetic meat. One week ago, moon cakes stuffed with what was described as mock meat made from plant protein went on sale via the Taobao e-commerce platform. Over half of the 3,000 boxes offered were sold in less than three days. The Zhen Meat (Beijing) Food Technology Company offered the products made from lab-grown meat made from plant protein. There are made by a factory in the eastern city of Yantai. "The flavor of the lab-grown meat is modeled on that of fresh meat in Shanghai's traditional moon cakes. Our assessment showed that the two flavors are 70% similar," said Lu Zhongming, the company’s CEO and founder.


U.S./China trade policy update:

  • U.S. soybeans, pork to be exempted from additional punitive tariffs imposed in trade war. China's State Council will exclude some agricultural products, including soybeans and pork, from additional tariffs on U.S. goods, China's official Xinhua News Agency reported today, citing official sources. This backs up a Xinhua report Thursday which said the list of 16 US products that would be exempt from additional tariffs was the "first set of U.S. goods to be excluded," with Ministry of Commerce spokesman Gao Feng saying the commission would "continue to work on the exemption process and release subsequent lists in due course," Xinhua said. Xinhua News Agency reported the exemption is in response to the U.S.’ decision to postpone planned tariff increase from Oct. 1 to Oct. 15. It comes after President Donald Trump spoke on Thursday of the possibility of an ‘interim trade deal’ over the coming weeks. “China’s market is big enough and there’s great potential to import high-quality U.S. farm products,” Xinhua said. It added that Chinese authorities hoped that “the U.S. will honor its word and fulfill its promises to create favorable conditions for cooperation for the two countries in the agriculture sector.” Additional details are difficult to garner as today is a holiday in China.
  • Background. China has levied three rounds of additional tariffs on U.S. frozen pork, including 25% in April 2018, 25% in June 2019 and another 10% in September 2019, bringing the final tariff to 72%. If all the trade war tariffs were removed, the rate would return to 12%, the “most favored nations” duty paid by China’s other trading partners. China has also imposed 30% in tariffs on soybeans, including 25% in June and 5% on Sept. 1, bringing the current tariff level to 33%. If the additional tariffs are removed, tariffs on U.S. soybeans would return to 3% — the same rate paid by importers of Brazilian soybeans, which have largely filled the gap left by the U.S.
  • China apparently wants a multi-step resolution... President Trump says would consider interim trade deal. A graduated resolution is being pushed by China, according to several reports. China is looking to narrow the scope of its negotiations with the U.S. to only trade matters, putting thornier national security issues on a separate track in a bid to break deadlocked talks, as the Wall Street Journal reported (link). Trump said on Thursday he preferred a broad deal, though he left open the possibility of a limited version when asked whether he would agree to an interim deal. “A lot of people are talking about, and I see a lot of analysts are saying: an interim deal, meaning we’ll do pieces of it, the easy ones first,” Trump told reporters. “But there’s no easy or hard. There’s a deal or there’s not a deal. But it’s something we would consider, I guess.”
  • U.S. officials are seriously considering clawing back some or all of the tariffs that took effect on Sept. 1, hitting $112 billion of additional Chinese goods, and possibly holding off on higher tariffs planned for October and December, the Financial Times reports. FT said “the idea being discussed within the administration was to return to the status quo earlier this year, when tariffs were in place on $250bn of Chinese goods but no more than that. In return, China would agree to resume purchases of U.S. agricultural goods and possibly even make some new commitments on intellectual property protection.”
  • Bloomberg reports the proposal would be an interim deal rather than a final resolution, “aimed at avoiding tariffs due to hit China in December that would affect consumer products in the U.S., ranging from smartphones to toys and laptop computers. The plan reflects White House concerns over the economic impact of tariffs going into an election year, with polls showing the trade war is not popular with many voters.”
  • China welcomes Trump's recent postponement of additional tariffs. Liu He, China’s lead trade negotiator and the top economic aide to President Xi Jinping, welcomed Trump’s postponement in a Thursday meeting with Evan Greenberg, president of the U.S.-China Business Council, a lobby group. Liu said working level trade meetings would take place next week to pave the way for the October meeting of top trade officials, who will focus on issues of “trade balance, market entry and investor protection.” This suggests the negotiations would be mainly about trade and investment issues instead of structural changes in Chinese economy or security. “The whole world is expecting to see progress in China/U.S. negotiations,” Liu said.
  • Bottom line: Relations appear to be thawing, but we’ve been down a similar path before, only to see negotiations break down as both sides dig in their heels. It's similar to when you put something in the microwave that first needs defrosting. You then have to heat it up awhile at a higher level. So, the current thawing in U.S./China trade issues needs some “higher level” attention. That will come first with deputy-level talks next week and then higher-level talks in early October.

Mild shifts in corn, soybean FSA acres. Farm Service Agency (FSA) certified acres as of Sept. 4 signal no major changes to NASS’s acreage estimates are likely. In fact, our analysis of the data suggests changes of less than 100,000 acres for each corn and soybeans. Corn planted/failed acres increased only 128,000 acres to 86.821 million and prevent-plantings (PP) rose just 19,000 acres to 11.414 million. Soybean planted/failed acres increased only 106,000 acres to 74.896 million and the PP figure rose just 8,000 acres to 4.460 million.

Trump meets with biofuel-backing senators; oil-state lawmakers on today's agenda. President Donald Trump met with farm-state senators on biofuels Thursday, including Sens. Chuck Grassley (R-Iowa) and Joni Ernst (R-Iowa). Trump said, “I think we had a great meeting on ethanol for the farmers. Let’s see what happens.”

Ernst tweeted about the session, saying, Just finished a productive meeting with @realDonaldTrump about the #RFS. Iowans’ voices are being heard and progress is being made.”

Trump today will meet with oil-state senators, and they are likely to push issues they raised in a letter to Trump on Thursday. They stated that reallocating Renewable Fuel Standard (RFS) requirements that were covered by small refiner exemptions (SREs) would “violate the law and harm certain obligated parties, nullifying any relief achieved by issuing the SREs in the first place.” The lawmakers also pointed to EPA’s statement that “small refiner exemptions have not resulted in reduced ethanol demand.” They laid blame at the financial issues in the ethanol industry of being “unrelated to the RFS or the issuance of SREs,” stating that they were due to a “massive overcapacity problem.”

If the administration were to pursue reallocating obligations covered by SREs, the lawmakers said there needed to be “a conventional biofuel waiver credit that can serve as a safety value if RFS compliance costs, i.e., RINs [Renewable Identification Numbers], skyrocket in the wake of these changes.” The letter was signed by Sens. Pat Toomey (R-Pa.), Ted Cruz (R-Texas), Jim Inhofe (R-Okla.), Jim Risch (R-Id.), John Barrasso (R-Wyo.), Mike Enzi (R-Wyo.), Shelley Moore Capito (R-W.Va.) and John Kennedy (R-La.).

Some refiners are advancing an RFS reform plan that would allow the EPA to sell its own compliance credits whenever RIN prices get too high. The EPA-generated credits would not be tied to actual biofuel production or blending but revenue from their sale could be steered to building out fueling infrastructure to get more ethanol to consumers.

Pelosi on USMCA: “It boils down to enforceability... and I think it can be achieved.” Meanwhile, House Agriculture Committee Chairman Collin Peterson (D-Minn.) said he expected Congress to vote on the U.S.-Mexico-Canada Agreement within the next one or two months. "Right now, I'm optimistic about getting this done," Peterson said during a rally in Washington in favor of the agreement. Peterson said he spoke earlier this week with House Ways and Means Committee Chairman Richard Neal (D-Mass.), who has been leading negotiations with the Trump administration on a number of concerns that Democrats have raised about the pact. Peterson said Neal told him he was "pretty confident we're going to get a vote in the next month or two."

Almost three quarters of all operations with established production history are enrolled in the Dairy Margin Coverage (DMC) program. The 19,132 operations enrolled in DMC are expected to receive $257,684,307. On average, $13,469 are to be paid per operation in payments (link for details and caveats).

However, of total dairy operations, DMC enrollment is only at just over 50%.

Link to Farm Bureau update on DMC enrollment.

China pork duties, gene editing regs priorities for U.S. pork producers; USMCA, GIPSA rule, FMD vaccine bank other important focal points. Lifting of Chinese duties on imports of U.S. pork and a push for USDA to take the lead on the regulation of gene-edited animals are still two key policy priorities outlined during a Sept. 12 media briefing held by the National Pork Producers Council (NPPC). Other topics on NPPC's radar include ratification of the U.S.-Mexico-Canada Agreement (USMCA), bolstering U.S. defenses against an outbreak of African swine fever (ASF), and USDA's work on a new Grain Inspection, Packers and Stockyards Administration (GIPSA) rule and the foot-and-mouth disease (FMD) vaccine bank established in the 2018 Farm Bill.

     Highlights of NPPC priorities:

  • "Trade remains our top issue," remarked NPPC President David Herring. NPPC members participated in a legislative fly-in this week, pressing lawmakers "to support ratification of [USMCA]" which will preserve "zero tariff pork trade in North America for the long term,” he observed.
  • USMCA vs NAFTA. Asked what specific benefits to the pork industry USMCA brings over its predecessor, the North American Free Trade Agreement (NAFTA), Herring said the pact would maintain access to "our largest value market," adding "that's what's most important to us." Upbeat prospects for USMCA were noted by NPPC Vice President and Counsel of Global Government Affairs Nick Giordano, who believes House Speaker Nancy Pelosi (D-Calif.) and her fellow Democrats "are getting close" to allowing the deal to come to a vote. "I believe there will be a vote this year and it's going to pass," he predicted.
  • China’s tariffs on imports of U.S. pork remain another trade issue, and NPPC hopes those will be removed. That wish may have been partially granted, as this morning news broke that China's State Council will exclude some agricultural products, including soybeans and pork, from additional tariffs on U.S. goods, China's official Xinhua News Agency reported. The recent sharp increase in the price of pork and other proteins in China, linked to the outbreak of African swine fever (ASF), is "unfortunate for Chinese consumers,” Herring remarked, but the situation represents a "tremendous opportunity" for U.S. pork producers. Should China roll back the 60% retaliatory duties currently in place, the U.S. is "going to be able to ship a lot of pork there," said Giordano, adding that would also benefit China as it "doesn't want food price inflation" to surge due to supply constraints. Data out of China this week indicated that retail pork prices in China rose nearly 50% in August compared to year-ago levels, indicating the ASF situation is impacting Chinese consumers. Lifting the duties "can really help both countries," he concluded. Were the additional Chinese duties not in place, the ASF situation would "unequivocally" benefit the U.S., as China is "obviously going to import more pork," Giordano continued. But in the current trade situation the picture is not as clear. There has been "upward pressure on global meat prices," he commented, which will benefit all producers. Giordano said those in Brazil, the European Union (EU) and other areas are better positioned to fill China's pork supply void — which U.S. producers will miss out on as long as tariffs remain in place. Despite those import duties, USDA on Thursday announced that China bought another 10,900 tonnes of U.S. pork for the week ended Sept. 5. Source of chart: Bloomberg.
    China pork buys
  • The U.S./Japan ag and auto trade agreement in principle is another opportunity that has pork producers "very excited," said Herring. "It's one of the greatest news tidbits we've had lately," he added. Details of the deal are not completely clear yet, but what has come out "sounds like it will be very good for U.S. pork," he observed. On how the deal might compare with the gains offered under Trans-Pacific Partnership (TPP) — which President Donald Trump withdrew the U.S. from on his third day of president — Herring said it's too early to know. However, he acknowledged there are some reports the agreement could provide even better Japanese market access than that afforded under TPP.
  • USDA should take lead on gene-edited animals. Another major policy priority for NPPC is seeing that USDA takes the lead on regulation of gene-edited animals, as opposed to the Food and Drug Administration (FDA), who the group fears would impose excessive regulatory burdens on the technology. "Either FDA has to take a radically different approach" on how it intends to regulate gene-edited animals or else it should leave the process to USDA, said Giordano. Without a nimble regulatory process, the US is at risk "of losing this industry," he warned. NPPC officials were also asked to weigh in on the recent discovery that dehorned cattle created using gene editing ended up with bacterial DNA in their genetic material. NPPC Director of Science and Technology Dan Kovich said that while the find was "concerning," he believes the issue is one that would be caught regardless of what agency regulates the technology. "One thing we need to be clear about is that we are not asking for [gene editing] to be deregulated," he stressed. NPPC understands consumer concerns with new technologies like gene editing, but FDA's approach "is simply not science based" and goes beyond precaution, Giordano observed. Ultimately, it makes sense that USDA should have authority "not just over the plant side but the animal side as well," when it comes to gene editing, he said.
  • FMD vaccine bank purchases could come early next year. Attention on implementation of the 2018 Farm Bill is another focus for pork producers, in particular the establishment of the FMD vaccine bank. USDA's Animal and Plant Health Inspection Service (APHIS) put out a "sources sought" notice to vaccine manufacturers earlier this week, which is a first step in creating the bank, noted NPPC Chief Veterinarian Liz Wagstrom. However, "we still don’t know" additional details about how and when money will be spend on the bank, though there are indications that APHIS will begin contracting with manufacturers to produce vaccine "sometime early next year," Wagstrom noted. "We would love to have instant gratification," Wagstrom said, but ultimately NPPC realizes the process of establishing the bank "will take time" including a ramp up in vaccine production by manufacturers. Over all, "we are encouraged to see the progress" to date on the bank, she concluded. Wagstrom and the other NPPC officials also said the group continues to urge Congress to bolster border defenses aimed at keeping animal diseases like ASF from spreading to US pork herds. The group repeated its call for Congress to quickly provide funding to fill a shortage of 600 Customs and Border Protection (CBP) ag inspectors, and for APHIS to boost user fees to ensure adequate funding is available to sustain a level of inspections required to protect US agriculture from the growing threat of pests and diseases.
  • GIPSA rewrite should leave out pork industry, Herring argues. USDA's revisiting of the GIPSA rule also surfaced during the briefing. "We don't think a new rule that addresses the pork sectors is necessary as it is a highly competitive market," Herring said. "Our producers asked their representatives in Congress to oppose any legislation or regulation that interferes with the pork producers' rights to freely enter into contractual business relationships," he added. An earlier iteration of the GIPSA rule – which was withdrawn by USDA Secretary Sonny Perdue – would have "negatively impacted a highly competitive US pork industry by encouraging frivolous litigation," NPPC said in a brief on the regulation. The group opposes any move to "restrict producers’ ability to sell and packers’ ability to buy livestock," warning that it "could lead to further consolidation of the livestock industry," the brief stated.

EPA repealed a major Obama-era rule (WOTUS). The rollback is expected to take effect in a matter of weeks. The EPA will, in a second regulatory step, replace the WOTUS rule with its own definition. The agency’s December proposal would limit the amount of protected water bodies, including by excluding ephemeral streams, most ditches, and many wetlands.

President Donald Trump promised to repeal the regulation during his campaign, saying it impinged on the rights of farmers and rural landowners, and issued an executive order in 2017 instructing the EPA to do so.

EPA will now consult on providing a new definition of what should count as navigable water. Andrew Wheeler, the head of the EPA, said ”a new definition will provide greater regulatory certainty for farmers, landowners, home builders, and developers nationwide.”

A proposed replacement rule would remove several categories of waterways and wetlands from federal jurisdiction and limit the government’s oversight to large water bodies. It would also divide the waters the government can regulate into six categories, including “traditional navigable waters,” used for transportation and commerce; tributaries to navigable waters; certain lakes and ponds; and wetlands adjacent to the traditional navigable waters. It would exclude from federal protection most ditches, groundwater, storm water control facilities and waste treatment systems.

Reaction to the repeal-and-replace announcement:

  • Jay Timmons, the chief executive of the National Association of Manufacturers, said: “America is now one step closer to smart and balanced regulation that protects our nation’s precious water resources.”
  • Zippy Duvall, president of the American Farm Bureau Federation, said: “Farmers and ranchers share the goal of ensuring clean water, but the 2015 Waters of the United States rule was unreasonable and unworkable. It made conservation more difficult and created huge liabilities for farmers.”
  • Jon Devine, head of clean water solutions at the Natural Resources Defense Council, said: “This is reckless. Repealing these safeguards throws us back into uncertainty over which waters will be protected.” Devine said that his and other groups were looking into launching a legal challenge to the repeal, on the grounds that the administration had not properly assessed its impact.
  • The Center for Biological Diversity, which is promising legal action, estimates that the rule changes will “cut Clean Water Act protections for more than 3,000 watersheds in the western United States and accelerate the extinction of more than 75 endangered species, from steelhead trout to California tiger salamanders.”
  • Bob Wendelgass, president of Clean Water Action, also said his group is planning next steps to “stop” the repeal in the courts. “EPA gave corporate special interests exactly what they wanted — the ability to pave over or fill in streams, wetlands, and drinking water sources without accountability,” Wendelgass said in a news release. “The public, our water, science, and the law got shoved aside, again.”

Other items of note:

  • South Korea's Moon and Donald Trump are expected to meet at the United Nations this month amid hopes for new North Korea talks. The announcement came days after North Korea said it was willing to reopen denuclearization talks with the United States within the month.
  • Twitter blocked several accounts linked to the Cuban government, including those of Raúl Castro, the communist party leader, and state-run media outlets. The action was taken just before Miguel Díaz-Canel, Cuba’s president, addressed the nation about fuel shortages and American sanctions. Twitter did not detail what had prompted the measures.
  • Lawmaker wants fresh potatoes added to any U.S./Japan ag accord. The U.S. should add fresh potatoes to the menu of U.S. farm goods to be covered by a largely agriculture-focused U.S.-Japan agreement under negotiation, Rep. Dan Newhouse (R-Wash.) urged USDA Secretary Sonny Perdue in a letter. Washington is a top potato producer.
  • The House Agriculture Committee has scheduled a subcommittee hearing for next week to review implementation of federal farm and disaster programs.
  • Cotton AWP moves above loan rate. The Adjusted World Price (AWP) for cotton rose to 52.28 cents per pound, effective today, up from 51.57 cents per pound the prior week. This moves the AWP back above the national average loan rate of 52 cents per pound.
  • Ben Carson is cleared. Investigators found no evidence that the housing secretary had acted improperly when he tried to buy $31,000 in office furniture in 2017, according to an inspector general’s report.

Markets. The Dow on Thursday rose 45.41 points, 0.2%, to 27,182.45, a seventh advance and the longest series of gains for the blue-chip index since an eight-session rally ended May 14, 2018. The S&P 500 increased 8.64 points, 0.3%, to 3,009.57. The Nasdaq advanced 24.79 points, 0.3%, to end at 8,194.47. The Dow and S&P are just about 0.7% and 0.5% from their respective record closes, while the Nasdaq is 1.6% from its all-time closing high.

The U.S. government's red ink for fiscal 2019 swelled past the $1 trillion mark in August, the first time that level has been eclipsed in seven years. The total shortfall rose to nearly $1.07 trillion, thanks to a difference between revenue and expenses of more than $214 billion in August. The government last saw that large of a fiscal deficit in 2012.

In Europe, the ECB cut the interest rate on bank reserves, money banks deposit with it, for the first time since 2016, by a tenth of a percentage point to -0.5%. It will restart its quantitative-easing (QE) scheme, which it drew to a close last year. From November it will buy €20 billion worth ($22 billion) of bonds a month. The central bank is also easing the terms of its lending program to banks by lowering the interest rate and extending the maturity of its operations from two years to three. To mitigate the impact of subzero interest rates on banks’ profit margins, it will exempt some bank reserves from the negative deposit rate. As if on cue, President Trump tweeted his frustration, accusing the ECB of waging a currency war and again attacking the Federal Reserve. “They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports.... And the Fed sits, and sits, and sits.”

OPEC agreed to cut oil output by asking two of its members, Nigeria and Iraq, to lower production. Oil prices have remained stubbornly low as America has been increasing its production. Saudi Arabia, OPEC’s most important member, needs prices to rise in order to balance its budget.

U.S. has evidence that Iran sold oil to Syria. The U.S. State Department said Thursday that it has evidence that the Iranian tanker released by Gibraltar last month sold its oil to the Syrian government, breaking a pledge that it wouldn’t sell to the country. Britain’s foreign ministry claimed earlier this week that the Adrian Darya 1 had transferred the oil to Syria’s government, raising tensions between the countries. Iran denies the allegations.

London Stock Exchange rejects £32bn bid from Hong Kong rival. The London Stock Exchange Group has rejected the £32bn takeover approach from the Hong Kong stock exchange, saying its board had “fundamental concerns” about the offer’s strategy, structure and value.

Surprises are not always negative. The Citi Economic Surprise Index shows differences between reported economic data and Wall Street expectations. The index is at its highest level since February, which means that if there are surprises, they're good surprises.
Surprise Citi


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