China Protests U.S. Law on Hong Kong but Signals Hope for Trade Deal

Posted on 11/29/2019 7:16 AM

Gov't payments key in latest USDA farm income forecasts

In today's updates:

* Muted China reaction after Trump signed a bill supporting Hong Kong’s protesters
* China pig bubble bursts, supply still short
* U.S. soybeans are coming into China again as port congestion eases
* EPA updates data on small refinery exemptions (SREs)
* Government payments key contributor to rise in U.S. 2019 farm income forecast
* Trump says Taliban peace talks to resume
* EU approves U.S. beef import increase
* Canadian PM Trudeau, Mexico representative to meet on USMCA today
* USTR to release report on France's digital services tax on Dec. 2

Markets: Putting pressure on OPEC+ to avoid a major policy shift, Russian oil companies have proposed not to change their output quotas as part of the current global supply cut deal. Non-OPEC oil producers and OPEC nations are due to discuss the agreement on Dec. 5-6, after curbing output to support prices for the last three years.


U.S./China trade policy update:

  • President Donald Trump signed two bills supporting Hong Kong’s pro-democracy protesters. One requires America’s government to reconsider Hong Kong’s special trade status each year and threatens sanctions for human-rights violations. The other blocks new export licenses for tear-gas, rubber bullets and handcuffs for delivery to Hong Kong’s police. China’s foreign ministry has condemned the bills, which could also complicate trade talks.
  • China's reaction is muted. Despite the legislative language criticizing what Beijing calls U.S. interference in China’s domestic affairs, and a second summoning of the U.S. ambassador in a week, China’s leadership still wants a trade deal to help alleviate pressure on its economy, observers note. Asked whether the bill’s signing would affect trade talks, Chinese Foreign Ministry spokesman Geng Shuang didn’t answer directly but demanded the U.S. not implement the law because it would risk “undermining our bilateral relations and cooperation in important areas.” China's focus was on whether Trump would implement any of the bill’s measures. Chinese officials noted a sentence in Trump’s signing statement that emphasized his “constitutional authorities with respect to foreign relations.” Chinese officials were also encouraged by Trump’s emphasizing his respect for Chinese leader Xi Jinping. “I signed these bills out of respect for President Xi, China, and the people of Hong Kong,” Trump said in the statement. Meanwhile, Hu Xijin, editor in chief of the state-run Global Times, said on Twitter that China was considering barring those responsible for drafting the legislation from entering mainland China, Hong Kong and Macau.
  • China pig bubble bursts, supply still short. Source: Dim Sums: Rural China Economics and Policy. “Chinese pork prices have dropped about 20 percent in November. Most industry analysts seem to view the decline in pork prices as a temporary market correction, and they expect a moderate rebound because there is still a 15-to-20 mmt deficit in pork supply. Prices stabilized or started to increase again in nearly all provinces last week... Chinese news media are thick with propaganda about farmers rebuilding production capacity. Ministry of Agriculture officials at a press conference last week instructed news media to report good news to restore the confidence of hog farmers. A Chinese Academy of Ag Sciences official recited the party line that production has already begun to rebound and the overall meat supply is stable as increases in supply of poultry, beef and lamb and imports have filled in the deficit. While officials spread the mantra of stability, the situation on the ground suggests an industry still on a knife's edge, with panic-selling and new disease risks tipping the market into a downturn despite a yawning supply gap that consumers are learning to live with.”
  • U.S. soybeans are coming into China again as port congestion eases. Bloomberg News reports that congestion at ports is easing after China loosens customs policy (link). While China agreed to waive a 30% retaliatory tariff on imports of U.S. beans, buyers still had to pay a deposit before seeking a refund from the government. Many struggled to come up with the cash, which caused a logjam at Chinese ports of as much as 2 million tons of soybeans from the U.S. as well as shipments from other countries that were caught up in the congestion. China’s customs authorities now are letting importers use a letter of guarantee from banks instead of cash to pay the deposit, and the beans are flowing again.

EPA has updated their data on small refinery exemptions (SREs). EPA has updated their data on small refinery exemptions (SREs). For the 2018 compliance year, EPA data shows 42 were submitted, 31 were approved and six were rejected. EPA data had previously shown three to have been withdrawn or declared ineligible. In late August, EPA data showed two were still labeled as pending.

As of Nov. 21, EPA now shows 42 were requested for the 2018 compliance year, 31 were approved, six were denied, and now it has separated the declared ineligible or withdrawn categories. Those figures now show that two have been declared ineligible and three have been withdrawn and no petitions are shown as pending for the 2018 compliance year.

For the 2019 compliance year, EPA now lists 10 petitions for SREs having been received as of Nov. 21, and all 10 are still shown as pending.

Government payments key contributor to rise in U.S. 2019 farm income forecast. U.S. net farm income is now forecast at $92.5 billion for 2019, up $8.5 billion (10.2%) from the 2018 level, according to USDA’s November 2019 Farm Income Forecast. In inflation-adjusted terms, net farm income is seen up $7.0 billion, down 32.3% from $136.6 billion in 2013. In August, USDA forecast net farm income at $88.0 billion.

Net cash farm income is seen at $119.0 billion, a rise of $15.5 billion (15.0%) from 2018, and up from the August forecast of $112.6 billion.

Contributing to the increase is a rise in cash receipts for all commodities of $2.2 billion, reaching $374.2 billion for 2019. With total animal/animal product receipts basically unchanged, there is a $1.9 billion rise forecast for total crop receipts compared with 2018. After adjusting for inflation, total cash receipts are forecast to decline $4.6 billion (1.2%) following a $3.0 billion (1.7%) decline in animal/animal product receipts and a $1.7 billion (0.8%) decline in crop receipts.

Direct government farm payments are forecast to increase $8.8 billion (64.0%) to $22.4 billion in 2019, USDA said, “with the increase due to higher than anticipated payments from the Market Facilitation Program” (MFP 2). USDA in August said those direct government payments were to be $19.5 billion, an increase of $5.8 billion from 2018. The 2019 forecast includes payments from the program first implemented in 2018 but received by producers in calendar year 2019, plus the expected payments from the first and second tranches of the program announced in 2019. “We assume producers will receive 75% of the announced 2019 payment total of $14.5 billion,” USDA stated.

Payments under the Price Loss Coverage (PLC) program are expected at $1.92 billion compared with $2.07 billion in 2018, while payouts via the Ag Risk Coverage (ARC) program are expected at $641 million, down from $1.1 billion in 2018.

Other government program payments include:

  • Conservation payments are forecast at $3.53 billion, down from $3.99 billion in 2018.
  • Dairy Margin Coverage payments are forecast at $214 million for 2019.
  • Disaster payments via the Wildfire and Hurricane Indemnity Program (WHIP+) program are expected at $1.75 billion, up from $916 million in 2018.

Total production expenses are seen rising by $700 million, reaching $344.6 billion in nominal terms. The increases were tabbed to feed costs and hired labor, while seed, pesticide, fuels/oil and interest all seen declining from 2018 levels. In August, USDA saw production expenses rising to $346.1 billion. In its August update, USDA said that interest at that point was expected to see the biggest increase relative to production expenses. But three consecutive rate reductions by the Fed have altered that situation. Interest expenses are expected to decline for the first time in five years, down 6.3% ($1.3 billion) to $19.3 billion in 2019.

Farm business average net cash farm income is forecast to increase $15,000 (19.5%) to $91,800 per farm in 2019, USDA said, which would be the first increase after four straight years of declines.

Farm sector equity is forecast up by $56.5 billion (2.2%) to a level of $2.68 trillion in 2019, driven in part by a 2.1% increase in farm real estate values. Farm debt is seen at $415.5 billion. Farm debt in nominal terms is forecast to increase by $13.5 billion (3.4%) to $415.5 billion, led by an expected 4.6% rise in real estate debt. The farm sector debt-to-asset ratio is expected to rise from 13.28% in 2018 to 13.42% in 2019. The debt-to-equity ratio is expected up at 15.5%. “The farm sector's solvency ratios are forecast to be at their weakest points since 2009 but are close to their long-term averages from 1990 to 2018,” USDA said. “Working capital, which measures the amount of cash available to fund operating expenses after paying off debt due within 12 months, is forecast to decline 12.5% from 2018,” USDA noted.

Bottom line: The latest USDA forecasts clearly show how important government payments have become. While the ag sector remains still in healthy financial shape, the key indicators of U.S. farm solvency continue to rise and farmers working capital continues to fall. All this means even higher focus on USDA’s first look at the 2020 income picture, which will arrive in February 2020. Unless there is a third round of MFP payments to farmers, the 2020 farm income forecast is likely to show a sharp drop in those payments as only the remaining 25% of the MFP 2 payments could arrive in January if USDA deems that necessary.

Other items of note:

  • President Trump said he had re-opened negotiations with the Taliban. Trump was speaking during a surprise Thanksgiving visit to American troops in Afghanistan. Peace talks with the jihadist group collapsed nearly three months ago following a deadly attack that killed 12 people including an American soldier. “The Taliban wants to make a deal,” said the president.

  • EU approves U.S. beef import increase. The European Parliament voted by 457-140, with 71 abstentions, in favor of a plan to permit U.S. farmers a larger share of an existing 45,000-ton quota from 2020. It came with a resolution that urges the removal of U.S. tariffs on EU steel and aluminum, and the withdrawal of a threat to raise tariffs on EU cars. "The message of this agreement is clear: we would like to de-escalate trade tensions with the U.S, but we want to see the same efforts of de-escalation on the other side of the Atlantic," said Bernd Lange, head of parliament's trade committee.

  • Canadian PM Trudeau, Mexico representative to meet on USMCA today. Canada’s Prime Minister (Pierre Trudeau and Mexican Undersecretary of Foreign Relations Jesus Seade will meet today, with the central focus on the U.S.–Mexico–Canada Agreement (USMCA) talks.

  • Sugar from Mexico. ITC gives notice that it has instituted reviews pursuant to the Tariff Act of 1930, as amended, to determine whether termination of the suspension investigation on sugar from Mexico would be likely to lead to continuation or recurrence of material injury. Interested parties are requested to respond to this notice by submitting the information specified below to the Commission. Link to Federal Register notice.

  • The U.S. Trade Representative will release its report on France's digital services tax on Dec. 2 and announce any action to retaliate against French products under a provision of U.S. law. The tax falls primarily on U.S. companies that sell advertising aimed at French internet users or provide a digital marketplace.

Markets. U.S. stock indices finished at record levels ahead of the Thanksgiving holiday. The Dow gained 42.32 points, 0.15%, at 28,164.00. The Nasdaq was the biggest gainer, moving up 57.24 points, 0.66%, at 8,705.18. The S&P 500 rose 13.11 points, 0.42%, at 3,153.63. U.S. stock markets will close early today, halting trading at noon (CT).

The biggest shopping weekend of the year is here, and 165.3 million Americans are planning to shop or bargain hunt during the holiday, according to the National Retail Federation.


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