Naysayers and Doubters Galore Re: U.S./China Phase 1 Accord

Posted on 01/16/2020 7:11 AM

USMCA vote in Senate today; White House event next week

In today's updates:

* Naysayers and doubters quickly sprout re: Phase 1 accord
* NYT: Phase 1 accord represent progress toward achieving a more stable relationship
* WSJ on Phase 1: 'The tariff truce is welcome, but the price has been high'
* Commodity analysts continue to note hurdles in reaching Chinese commitments
* Skepticism China can purchase $200 bil. in additional U.S. goods, services over 2 Yrs
* Will USDA analysts be given more specifics re: Chinese commodity purchases?
* Commodity groups fret China did not lift its counter-tariffs on U.S. farm products
* Will coming China buys of U.S. pork be reserved for cold storage supplies?
* Phase 1 text includes study of use of ractopamine in U.S. beef and pork production
* China made concessions to the U.S. meat industry
* Bottom line of Phase 1 comments from the U.S. business sector: de-escalation
* What did China get from Phase 1 accord?
* Senate approval of USMCA deal seen today
* Perdue signals MFP 2.3 payments will be made
* 2019 was second-warmest year on record
* USDA requests info on infrastructure needed for higher renewable fuels blends
* President Vladimir Putin proposed an overhaul of the Russian constitution
* House sends impeachment charges to the Senate for trial
* France & U.S. deadline next Tuesday to find compromise on digital-tax dispute
* Panama Canal surcharges triggered by low water levels aren’t going away soon
* Freight recession
* Merkel to FT: Brexit should be a "wake-up call" for the European Union
* Equity market responses to major geopolitical events since WWII
* Risks to oil supply have receded: IEA

Sugar high: Sugar prices are surging on an Asian supply shortfall. A Wall Street Journal article (link) notes the rally is easing pressure on farmers and sugar refiners after a long period of low prices.

Sugar one

sugar two

Speaking of sugar... PepsiCo said it will give everyone in the U.S. a free Pepsi Zero Sugar if the final score of either of this year's Super Bowl teams ends in a zero. If no teams score, Pepsi will refund the price of the drink, up to $2.50, to anyone in the U.S. who made the purchase from Feb. 2-4. "We are going 'all in' on Pepsi Zero Sugar this year and have created a bold, unapologetic new look to match its great taste, with a new matte black can and a black tab that will stand out anywhere," said Todd Kaplan, Pepsi's VP of Marketing. In 25% of previous Super Bowl games, at least one team finished with a score ending in zero.

Data from three agencies showed that global temperatures in the ten years to the end of 2019 were the warmest on record. The American space agency, NASA, Britain’s Meteorological Office and America’s National Oceanic and Atmospheric Administration also found that 2019 was the second-warmest year on record, just shy of the record set in 2016. NASA and the Met Office explicitly blamed man-made climate change for the rise. Link to New York Times article.

Late-night comedy: After a tense exchange between Elizabeth Warren and Bernie Sanders, James Corden noted, “I mean, for socialists they’re not very social.”


U.S./China trade policy update:

  • Phase 1 signing finally completed and signed. Link to our special report on specifics of the accord.
  • It didn't take long for naysayers and doubters of the agreement to surface. Several Democratic lawmakers likely had their negative responses written before the text was released, but that was expected. Some observers were quick to note the 60-day bailout clause in the language while others noted the deal includes some terms that China could use to claim that the U.S. is at fault if it doesn’t meet the purchase targets. But a senior administration official said the provision just allows for discussions and wouldn’t be a basis for China to claim it can’t fulfill its commitments. There is some concern about China's purchases of American products being "based on market conditions" — this development, combined with the weakness in the Brazilian real, sent U.S. soybean futures sharply lower on Wednesday.
    Soybean futures
  • Many commodity industry analysts continue to note the hurdles in reaching what they term lofty Chinese commitment purchases of U.S. farm products. Another typical negative response about the Phase 1 accord: China has reneged on agreements in the past. But Phase 1 supporters say at least now the U.S. has an enforcement mechanism.
    Path to 40
  • Others note the hurdles ahead in China purchasing $200 billion more in select U.S. products and services over the next two years. Bloomberg calculations signal that to achieve the increase in purchases, U.S. exports of goods and services would have to jump almost 56% this year from 2019 to reach the total laid out in the deal.
    Bloomberg 200

200 details

  • The New York Times had some positive words about the accord: “If you put aside some of the grandest presidential promises, you can see some ways in which the deal does represent progress toward achieving a more stable relationship between the world’s two largest economies.”
  • WSJ editorial on Phase 1: “The tariff truce is welcome, but the price has been high.” Link. But it adds, “Americans have paid a high economic price in the hope that China will behave better in the future as the result of this deal.” Bottom line: “The Phase 1 deal is progress, but U.S.-China economic and political competition has decades to run.”
  • Will USDA analysts be given more specifics regarding Chinese commodity purchase intentions before the next WASDE on Feb. 11? Sources who ought to know say no. That will be the first USDA reading of the impact of the accord on 2019-20. The first USDA analysis of 2020-21 marketing years will come when supply/demand sheets are provided at USDA's Ag Outlook Forum slated for Feb. 20-21.
  • Some U.S. commodity and state groups are fretting that China did not lift its counter-tariffs on U.S. farm products. But that was not expected by most closely covering the situation prior to the text release. China will continue to grant tariff exclusions, waivers or exemptions — all terms used in the past. A senior Trump administration official said China will need to issue waivers or adjustments to tariffs to meet its buying commitments. The U.S. process is tariff exclusions relative to the 301 tariffs. China did not lift all of its tariffs largely because the agreement leaves in place U.S. tariffs on about three-quarters of Chinese imports. Trump reminded the crowd at the White House on Wednesday that he likes wielding tariffs because “otherwise we have no cards to negotiate with.” “The trade war won’t be over until all of these tariffs are gone,” said National Retail Federation President Matthew Shay.
  • Hog industry sources say they expect China's buys of U.S. pork to find their way into rebuilding cold storage supplies throughout China. That way China can use its usual strategy of tapping stocks to temper domestic prices and to help lower world prices if values spike.
  • Hog analysts are also noting the inclusion of the study required under the deal for the use of ractopamine in U.S. beef and pork production. While some argue the U.S. has been supplying pork to China already produced without ractopamine, but like with other components of the deal, the outcome of the study could further broaden the scope of U.S. supplies that could move to China. Plus, others note that the language that the study is to happen "as soon as possible without undue delay" in a way consistent with international organizations underscores the U.S. wants China to budge from its stance of banning imports of meat produced with the feed additive. A China watcher, however, informs that the word “ractopamine” in Chinese sounds very similar to a very negative word and in the past Chinese officials have noted this.
  • China made concessions to the U.S. meat industry. It agreed to eliminate cattle age requirements for beef shipments, and will ease limits on the use of hormones in cattle and rules requiring record-keeping on the animals’ origins, according to the text of the deal. The changes will make more U.S. beef eligible for export to China.
  • Bottom line of Phase 1 comments from the U.S. business sector: Corporate executives see the deal as a sign of de-escalation that can improve conditions for investment and raise hopes for a more comprehensive truce to come.
  • A frequent question raised re: Phase 1: What did China get? Some answer trade policy peace with the U.S. for at least two years. Others say time for China to continue to delink their purchases of strategic imports (tech, etc.) away from the U.S. One observer wondered if the U.S. gave a confidential nod to China regarding their South Sea interests.

Senate approval of USMCA deal seen today. The U.S.-Mexico-Canada Agreement (USMCA) is expected to be approved by the U.S. Senate easily today in a bipartisan victory after the chamber took the measure up Wednesday following approval by the remaining four committees that were tasked with okaying the deal. That will send the implementing legislation to President Donald Trump who will sign the measure next week.

The remaining action on the approval side will be ratification by Canada which is expected later this month when their parliament returns. “All eyes will be on Canada to get the job done quickly so we can all work together on implementation,” Senate Finance Committee Chairman Chuck Grassley (R-Iowa) said.

Regarding big trade deals, President Trump on Wednesday said, “We’re doing another big one next week.” That is expected to be the USMCA. After signing the USMCA, Trump will be able to note trade wins with five of the U.S.’ top six trading partners: Canada, China, Japan, Mexico and South Korea. Left out so far are the U.K. and the European Union, but they’re next in line for possible deals.

Perdue signals MFP 2.3 payments will be made. USDA Secretary Sonny Perdue, in an interview with Ag Day's Clinton Griffiths, was asked whether the ag sector can expect the third tranche of MFP 2 payments. “I absolutely do expect that and I don't know, I don't know where the fake news came from over the anxiety of that maybe not being there. But it didn't come from us. There's been questions from the Hill and from other industries there. But my expectation is that the President will direct us to fulfill that third tranche of the commitment of the 2019 MFP payments.”

Perspective: Despite the usual “fake news” refrain when a government official wants to hide something, government and industry sources confirm that Perdue and others were saying recently there was a hold on the third installment of MFP 2 — not that they were being halted. It appears that farm-state lawmaker and farm lobbyist pressure turned Perdue and others around regarding MFP 2.3 payouts.

USDA requests info on infrastructure needed for higher renewable fuels blends. USDA has published a request for information (RFI) for the Higher Blends Infrastructure Incentive Program (HBIIP). The RFI seeks to gain input “to expand domestic ethanol and biodiesel availability.” USDA wants information “opportunities to consider infrastructure projects to facilitate increased sales of higher biofuel blends (E15/B20 or higher.)” Comments are due on or before January 30.

This effort seeks to build on the Biofuels Infrastructure Partnership (BIP) program USDA operated from 2016 to 2019 through state and private partners to expand the availability of E15 and E85 infrastructure to make available higher ethanol blends at retail gas stations around the country.

Goals of program. The request from USDA aims at informing where there may be “notable gaps, vulnerabilities, and areas to promote and protect in the HBIIP that may benefit from Federal government attention.”

Other items of note:

  • In his state-of-the-union speech President Vladimir Putin proposed an overhaul of the Russian constitution. The prime minister, Dmitry Medvedev, and the government resigned. Putin, who must step down in 2024, wants to reduce the power of the presidency (and thus his successor) and increase that of the prime minister and the State Council, which he heads. He could become prime minister himself, as he did in 2008, or wield influence from the council. Putin has been in power for 20 years, longer than any Russian leader since Stalin. The Constitution limits a president to two consecutive terms, meaning Putin, 67, would have to leave office in 2024.The new prime minister will be Mikhail Mishustin.
  • House sends impeachment charges to the Senate for trial. Seven impeachment managers chosen by Speaker Nancy Pelosi (D-Calif.) were approved by the House. They will argue the Democrats’ case for removing President Trump from office in the coming Senate trial.
  • France and the U.S. gave themselves a deadline of next Tuesday to find a compromise on a digital-tax dispute that threatens a transatlantic trade war. Without a resolution, Trump is threatening tariffs on $2.4 billion of French products in response to a 3% tax President Emmanuel Macron’s government instituted on the revenue of large tech companies. The EU has vowed to retaliate against the U.S.' retaliation.
  • Panama Canal surcharges triggered by low water levels aren’t going away anytime soon. The canal’s top administrator says the restrictions during the dry season and new year-round fees will likely continue for several years, the Wall Street Journal reports (link), until authorities engineer a long-term solution to address droughts at the critical hub for ocean trade. The canal is adding its extra charges, including what it calls a “freshwater surcharge,” starting on Feb. 15, and will start limiting daily reservation slots. It’s the result of changing weather patterns, including shifting rainfall, higher temperatures and greater evaporation that has lowered the water table near the transit point between the Atlantic and Pacific oceans. The article notes the Panama Canal Authority is considering two long-term fixes, one a lengthy pipeline and the other a dam to increase water storage. “Either could take three years to complete, leaving shipping lines to absorb the higher costs until then.”
  • Brexit should be a "wake-up call" for the European Union, German Chancellor Angela Merkel warned in a rare interview with the Financial Times. "I see the European Union as our life insurance. Germany is far too small to exert geopolitical influence on its own, and that’s why we need to make use of all the benefits of the single market," she added. "President Obama already spoke about the Asian century, as seen from the U.S. perspective. This also means that Europe is no longer, so to say, at the center of world events... that will be the case under any president."

Markets. The Dow on Wednesday rose 90.55 points, 0.31% at 29,030/22. The Nasdaq gained 7.37 points, 0.08%, at 9,258.70. The S&P 500 was up 6.14 points, 0.19%, at 3,289.29.

Dow chart

Equity market responses to major geopolitical events since WWII was the focus of a study conducted by Sam Stovall at CFRA. It shows how stocks have performed after 20 significant geopolitical events dating back to World War II. On average, stocks had fully recovered losses within 47 calendar days (less than seven weeks) after an average maximum loss of 5%. The stock market’s track record of recovering quickly from these events can be reassuring, says LPL Research, adding, they “want to be careful not to overstate the potential impact of geopolitical events, no matter how unsettling they might be.”
Geopolitical and Dow

Risks to oil supply have receded: IEA. "Today's market, where non-OPEC production is rising strongly and OECD stocks are 9 million barrels above the five-year average, provides a solid base from which to react to any escalation in geopolitical tension," the IEA said in its monthly report. "Even if they (OPEC+) adhere strictly to the cuts, there is still likely to be a strong build in inventories during the first half of 2020," the agency declared, adding that recently signed trade deals should "support growth."

North American freight volumes posted their sharpest year-over-year drop since the Great Recession in December. The Cass Freight Index, a measure of freight volumes and expenditures, showed weakness across the transport industry as high inventories and a manufacturing downturn weighed on the sector. Stifel analyst Dave Ross doesn't expect a rebound in 2020: "The tariff relief from the phase-one deal seems to be just that–a relief for some, but not a stimulus."

Freight recession chart


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