USDA Officials, Forecasts are Murky Re: Factoring in Phase 1 of U.S./China Accord

Posted on 02/21/2020 6:36 AM

Another upward revision to number of coronavirus cases

In today's updates:

* USDA's look at new-crop (2020-21) supply and demand forecasts (link)
* USDA: Farm debt in 2020 to rise to a record $425 billion
* Perdue again says a third MFP is unlikely
* USDA's U.S. ag export forecast increased slightly, despite U.S./China accord
* USDA's look at 2020 acreage prospects
* USDA Sec. Perdue is hopeful regarding U.S./EU trade talks
* China now says more than 75,400 cases of COVID-19 virus; death count now 2,236
* At least 156 people in South Korea have tested positive for coronavirus
* U.S. officials do not expect changes in U.S./China Phase 1 accord due to coronavirus
* Coronavirus-hit Japan limits large gatherings
* IMF expects a “v” curve to China’s economy from virus
* Car sales in China fell 92% in the first half of February largely due to coronavirus
* U.S. lawmakers warned Russia is meddling to re-elect Trump
* Trump admin. to allow 45,000 additional seasonal (H-2B visa program) guest workers
* Scaled-back initiatives with India likely when Trump visits country next week
* G20 financial leaders meet in Riyadh
* Canada’s economy facing blows from two weeks of protests

Markets: Another upward revision to the number of coronavirus cases in Hubei, the Chinese province at the center of the outbreak, and a rise in infections in South Korea, have renewed fears, sent stocks in Asia lower and pushed down European and U.S. equity futures. Expert opinion remains divided on the spread of infection, and when it will peak. U.S. equity futures slipped 0.5% and oil fell nearly 2%, though gold remains on a tear, rising 1.1% to $1638/oz. Impacts of the virus were laid bare once again by Chinese car sales, which crumbled 92% in the first 16 days of February. Meanwhile, airlines project this could be their worst year since the global financial crisis. The International Air Transport Association (IATA) expects global air-traffic demand this year to be 4.7% lower than it previously predicted.

John Deere reports unexpected rise in quarterly profits. The farm-equipment titan posted a 4% rise in net income as the U.S. farm sector showed early signs of stabilizing.

U.S. CME Class III milk futures are tumbling amid concerns about weakening exports.

Milk futures

Garlic prices are rising due to the widening coronavirus outbreak that is causing disruptions in the supply chain in China, the world’s largest producer of the vegetable. In recent years, China has been responsible for as much as 80% of the global garlic supply. More than two-thirds of the fresh garlic that the U.S. imports comes from China. Because garlic takes nine months to grow, the recent price increases may be the first taste of still higher prices over the coming year. One of America’s largest garlic producers and suppliers says it has reached out to growers in other countries to mitigate big increases in wholesale prices.

Garlic


USDA's look at new-crop (2020-21) supply and demand forecasts. Link for details. The U.S./China deal is noticeably absent from the forecasts. USDA released its initial 2020/21 outlooks at the Agricultural Outlook Forum, with only scant mention of China in the update. The Phase 1 agreement is not mentioned in their text and the only mention of China in the grains and oilseeds portion is under soybeans: “Increasing global import demand, particularly for China, and a recovery in U.S. market share will support higher U.S. soybean exports following a sharp decline over the past two years.” The corn and soybean yields are a “weather-adjusted trend assuming normal planting progress and summer growing season weather.”

USDA: Farm debt in 2020 to rise to a record $425 billion, up from $415 billion last year. The debt-to-asset ratio for farms remains at its highest point in more than 15 years, USDA said, and farm bankruptcies jumped 24% last year. “The farm balance sheet remains tight,” USDA chief economist Robert Johansson said.  
  
Farm debtPerdue again says a third MFP is unlikely. USDA isn’t planning a new third Market Facilitation Program (MFP 3) for farmers to help them. “The market will handle … the pricing of commodities going forward,” Perdue told reporters at USDA's annual outlook conference. He said the government might reconsider if there were an unexpected disruption in global trade flows. Perdue expects Chinese buying of U.S. agriculture exports to ramp up this spring after the coronavirus outbreak abates.

USDA's U.S. ag export forecast increased slightly, despite U.S./China accord. USDA Chief Economist Rob Johansson set the tone in an opening presentation, noting that while uncertainties exist as 2020 gets underway, there have been gains made on the trade front that set an important stage for U.S. agriculture ahead. Three trade agreements were highlighted by Johansson — the US.-Mexico-Canada Agreement (USMCA), U.S./Japan agreement and the Phase 1 agreement with China. "Those three trade deals alone cover over half of U.S. agricultural exports,” he noted.

     Johansson singled out pork as being one of the key commodities that will likely see a benefit from the Phase 1 accord, notable as China scrambles to replace pork supplies that have been reduced by the African swine fever (ASF) situation. “Even with tariffs and ractopamine bans in place, China has dramatically increased purchases of U.S. pork with purchases from the U.S. up 150% from 2018,” Johansson said. “While China has mainly looked to the EU and Brazil to supply their shortfall in production, with the Phase 1 deal in place, we would expect a larger portion of that heightened demand to be filled by U.S. exporters.” The U.S./Japan agreement should also help boost demand for U.S. pork on the export market, Johansson added.

     Looking ahead, Johansson said markets like India hold potential gains for the United States. “Improved access to India’s $2.7 trillion economy, with nearly 1.4 billion consumers and rapid middle-class growth, could greatly boost U.S. agricultural exports,” he noted.

     Also playing a key role ahead for exports is the U.S. dollar, as the value of the currency will impact trade prospects, he said. “Many of the factors that influenced exchange rates last year are expected to continue,” he observed. “The U.K. pound has appreciated significantly against the dollar, up from near record lows, since the British elections in December. The value of the pound will continue to be closely related to the terms of the U.K.’s withdrawal from the EU.” Tensions between the U.S. and Iran and China also led investors to flock to the U.S. dollar and Japanese yen, Johansson said. “As these tensions have diminished, investors are flocking back to emerging markets, depreciating the dollar.” (Note: The WSJ Dollar Index, which tracks the dollar against a basket of 16 other currencies, rose 0.4% to 92.55, its highest closing level since January 2017.)

     Another trade outlook factor: Brazil and Argentina. “The Argentinian peso depreciated 60% in 2019 relative to the dollar, though it has remained stable since October following elections and a new government,” Johansson informed. “The Brazilian real has shown some of the greatest volatility over the past year, ebbing and flowing with the volatile commodity markets.”

     Impacts on USDA's ag export forecast: USDA now forecasts U.S. ag exports at $139.5 billion for fiscal year (FY) 2020, up from $139 billion forecast previously, and a $4-billion rise from FY 2019. China figures are key in the increased exports compared with FY 2019, Johansson said, “with nearly all of that increase due to higher projected exports to China.” Farm exports to China are seen rising from $11 billion in fiscal 2019 to $14 billion in 2020. "Exports for China are raised $3.0 billion from the November forecast to $14.0 billion, largely based partly on higher projected volumes for soybeans,” a USDA report said. However, Johansson cautioned that the recently released Longterm Projections report did not factor in the U.S./China Phase 1 agreement.

     Haze 1 agreement? Johansson said the forecast “reflects public information available right now on Phase 1.” USDA Sec. Sonny Perdue remarked on both the U.S./China trade deal and trade negotiations with the European Union (EU) as he answered questions during a press conference following his keynote address to the outlook conference. Asked why updated forecast unveiled by Johansson only expect a $3 billion increase in ag exports to China despite their commitment to purchase tens of billons of dollars more under the Phase 1 trade deal, Perdue emphasized that details of the accord were “not included” in those forecasts. USDA economists had to put the estimates together “based on what they knew at that particular time,” and so they did not include prospective China ag buys or impacts from the coronavirus outbreak in their calculations. “I think if you read the preamble [of the reports]… you’ll read that the contemplation of the Phase 1 was not included,” he added. On China, the report said, “The current outlook for exports to China is tempered by significant uncertainties surrounding the COVID-19 outbreak, which may affect the timing of China’s purchases under the Phase One Agreement during the calendar year.” Perdue said he expects “exports to be much greater” than those seen in USDA’s top-line numbers. As to when Chinese ag purchases may begin surfacing in USDA reports, Perdue said “I'm hoping certainly by the spring,” but he emphasized he had no additional specific information to share on that front. Perdue said he remains confident that China will live up to its purchase commitments. “They have some [hardline numbers] that are unilaterally enforceable” he observed, noting that China will face more tariffs if it fails to hold up its end of the bargain.

USDA's look at 2020 acreage prospects. Planted acres of the eight major row crops — corn, soybeans, wheat, upland cotton, sorghum, rice, barley and oats —averaged nearly 257 million acres during the recent peak in 2012-14, and since 2014, have averaged nearly 250 million acres, including last year. In 2019, planting woes caused a fall in the principal crop acreage for 22 crops, adding up to more than 16 million acres, Johansson said. The expectation in 2020 is that “a good portion of those unplanted acres are to be planted to corn and soybeans in 2020,” Johansson said.

     “Current futures prices point to a large U.S. corn crop — the soybean-to-corn price ratio has dipped to four-year lows. In addition, local demand and transport costs will drive regional economic signals to plant corn or soybeans this spring,” Johansson said. “Right now, the soybean:corn price ratio favors the planting of more soybeans in the Dakotas compared to a signal to plant more corn in the eastern Corn Belt.”

     Johansson said that the outlook for livestock and dairy is for another year of record total meat and dairy production. “We project that total meat and poultry production will reach nearly 109 billion pounds in 2020, as production of beef, pork, broilers, and turkey all increase,” he detailed.

     “Overall, going into 2020, the basic fundamentals for many farms look better than they did last year,” Johansson explained. “Nevertheless, the farm balance sheet remains tight for farms without significant land equity. Total costs, including land rent, exceed expected revenues in many regions.”

     And trade deals will also be an important factor, Johansson concluded. “Improved trade deals, stable economic conditions, and improved weather will all boost 2020 fundamentals,” he observed.

USDA Sec. Perdue is hopeful regarding U.S./EU trade talks. USDA Secretary Sonny Perdue on Thursday addressed responded to a question on reports that the U.S. and EU are continuing to make progress towards a potential trade agreement. One factor helping matters is that EU Trade Commissioner Phil Hogan “has I think somewhat softened his rhetoric about no agriculture (in the talks)” Perdue said, but he cautioned “it remains to be seen how serious they are about that.”

     Seeing the EU relax its hard line against certain ag technologies like GMOs and sanitary and phytosanitary (SPS) restrictions will be key to whether a deal including agriculture is possible, Perdue noted. “I want to take peracetic acid over there and show them what it is and how safe it is,” he remarked, referring to the sanitizing substance used in U.S. poultry during processing, but which has drawn pushback from the EU. “We try to do trade deals based on scientific evidence,” Perdue continued. “When you’ve got a policy that’s not following sound science, it makes it very difficult to do that,” he added, noting that EU politicians and regulators “are being led by public opinion that’s not based on science.”

     On whether the U.S. could levy new tariffs on EU automobiles to pressure them to reach a new trade agreement, Perdue was ambivalent. “President Trump has demonstrated his ability to use the leverage [of tariffs] in order to level the playing field,” he observed. He suggested if tariffs are imposed, as with China, it could lead to a better “long-term” outcome for farmers through a lowering of non-tariff trade barriers —including environmental restrictions he called “nothing more than a proxy for protectionism.”

Coronavirus update:

  • China now says there are more than 75,400 cases of the COVID-19 virus, with the death count now at 2,236. Cases on mainland China rose by 889 as of Feb. 20, according to the National Health Commission, with the death toll rising by 118. China is struggling to maintain economic output. The virus keeps spreading, especially in South Korea (see next item), and according to a Chinese expert, patients who think they’ve fully recovered could still be infectious.
     
  • At least 156 people in South Korea have tested positive for the disease, around 80 of whom seem to have caught it during church services attended by one infected woman. So far 99% of the confirmed cases worldwide are in China.
     
  • Coronavirus-hit Japan limits large gatherings. The rising number of new coronavirus cases makes Japan one of the biggest sites of infection outside China, leading the country to begin suspending major gatherings. Link to WSJ article.
     
  • U.S. officials do not expect changes to be made in the U.S./China Phase 1 agreement due to the COVID-19 situation, according to a senior U.S. Treasury official briefing reporters ahead of the G20 finance ministers meeting in Saudi Arabia. "At this stage, we are not expecting changes to implementation of Phase 1 .... We still expect them to meet their commitment, but it is over a period of time,” the official said. The official also noted it was too soon to make any forecast on how the virus will impact the global economy.

    Meanwhile, talks between U.S. and China officials on implementing the Phase 1 trade deal are proceeding as scheduled despite the coronavirus outbreak, Michael Ward, the senior U.S. agricultural attaché at the U.S. Embassy in Beijing, said. Beijing faces severak regulatory and administrative deadlines in the coming months and year on various market-opening commitments for dairy, beef, pork, pet food, infant formula and related products, he said. Ward added that China has not asked to delay work on any of those issues, nor has the coronavirus had a noticeable impact on the availability of Chinese government officials. The two sides continue to hold digital video conferences to go over the details, he said.

     
  • IMF expects a “v” curve to China’s economy from virus. The International Monetary Fund (IMF) said it was still too early to tell the impact on the global economy, according to IMF Managing Director Kristalina Georgieva. "We are still hoping that the impact will be a V shaped curve,” Georgieva said, with a sharp decline in China but a sharp rebound after the virus is contained. “But we are not excluding that it might turn to be a different scenario like a U curve where the impact is somewhat longer.”
     
  • Car sales in China fell 92% in the first half of February as the coronavirus shutdown took its toll, according to an industry trade body. Car dealerships have remained closed while buyers have stayed away to prevent the spread of the deadly virus. Nationwide car sales slumped 96% in the first week of February to a daily average of just 811 vehicles. China is the world's biggest car market, selling just over 21 million cars last year, according to Statista. The U.S. is the second biggest market. Even before the deadly outbreak, car sales in China were in decline due to a slowing economy and trade tensions with the United States.

Other items of note:

  • U.S. lawmakers warned Russia is meddling to re-elect Trump. A classified briefing to House members is said to have angered the president, who complained that Democrats would “weaponize” the disclosure. Details in the New York Times.
     
  • Trump administration plans to allow 45,000 additional seasonal (H-2B visa program) guest workers to return to the U.S. this summer, the highest number since the president took office, according to administration officials. The Department of Homeland Security plans to announce the additional seasonal-worker visas next week. They will become available in two waves: the first 20,000 will be immediately available, while employers can apply for the remainder for jobs beginning June 1. The additional visas are being made available ahead of the summer, when demand for short-term work is typically highest.
     
  • Scaled-back initiatives with India likely when Trump visits country next week. A $2.6 billion Indian purchase of Seahawk naval helicopters from Lockheed Martin could be one of the announcements next week when President Trump visits India (Feb. 23-26), but prior plans for a mini-ag accord and perhaps more have been revised to “after the election.” U.S.-India trade has grown from $97.3 billion in 2013 to $142.6 billion in 2018, but trade frictions have worsened. Both countries have placed tariffs on each other’s goods. Last year the U.S. ended Indian access to the Generalized System of Preferences (GSP) program, which allowed it to export $5.6 billion of goods to the U.S. duty-free. Bottom line: The two sides have been unable to seal even a modest trade agreement ahead of or during Trump’s visit to India.

Markets. The Dow on Thursday fell 128.05 points, 0.44%, at 29,219.98. The Nasdaq lost 66.21 points, 0.67%, at 9,750.96. The S&P 500 was down 12.92 points, 0.38%, at 3,373.23.

     G20 financial leaders meet in Riyadh. The finance ministers of the world’s 20 largest economies meet in Saudi Arabia on Saturday and Sunday. The leaders are expected to announce a modest rise in global growth in 2020 and 2021, while highlighting the risk of the coronavirus, according to a draft statement seen by Reuters. (China is not sending officials to the meeting.) The draft also endorses global tax rules proposed by the OECD that would have consequences for technology companies such as Google and Facebook.

     Here's how the S&P 500 performed in recent presidential cycles:

     S&P and elections

     Canada’s economy is facing a blow from two weeks of protests that have blocked multiple railway lines, stranding shipments and snarling supply chains in key commercial corridors, the Wall Street Journal reports (link). The country’s largest passenger-rail operator Wednesday issued temporary layoff notices for 1,000 workers, a day after Canadian National Railway Co. said it would temporarily lay off 450 workers of its own. Factories in central Canada could be next in sending workers home, said the head of a national lobby for manufacturers and exporters. Economists said the stoppages threaten to shave 0.1% to 0.3% from economic output in February, adding the damage could be greater the longer the interruption drags on.


 

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