Dairy deal | Bayer & BASF judgment | Japan’s economy shrinks 6.3% | Bloomberg qualifies for debate
In today's updates:
* China beginning March 2 to accept tariff waiver applications for U.S. farm products
Markets: Equities are under pressure following word Apple would not meet its revenue projections for the current quarter due to the coronavirus outbreak, which it said had limited iPhone production for world-wide sales and curtailed demand for its products in China. The development has potential far-reaching impacts as the disruption in China will cause worldwide fallout as supply chain stutters across several industries. Meanwhile, HSBC Plc plunged the most in three years after saying it will slash jobs in a “fundamental restructuring,” while also flagging risks due to the virus — HSBC said it would cut 35,000 jobs over the next three years, and $100 billion of assets.
— U.S./China trade policy update:
- China announces steps to accept tariff waiver applications for U.S. farm products. China’s Ministry of Finance said it will allow firms to apply for exemptions from tariffs on U.S. commodity and energy products. Pork, beef, soybeans, corn, wheat, denatured ethanol, crude oil and liquefied natural gas are among the list of 696 eligible American products that are currently subject to retaliatory tariffs imposed by Beijing amid the U.S./China trade war. Applications for one-year waivers will be accepted from March 2. The ministry will approve application within three working days. Buyers must get approval before their cargoes clear customs. Link to list and statement. Link to pdf of list.
- U.S. opens office to monitor China deal as Phase 1 unfolds. The Trump administration is creating a new arm of the Office of the U.S. Trade Representative to monitor Beijing’s compliance with the U.S./China Phase 1 trade agreement that took effect Friday. The announcement said “it has been expressly agreed that the complaining party in a dispute is not required to include information that could identify any company at issue or confidential business information.” Nearly half the U.S.-China Business Council member companies that responded to a survey released last week said they were unsure if they would use the agreement’s complaint process if they thought Chinese officials were violating provisions. Of the 20% of respondents who said they would use the complaint process, a little more than a third said they would go through trade associations to reduce the possibility of being identified. Deputy Trade Representative Jeffrey Gerrish will lead the new Bilateral Evaluation and Dispute Resolution Office. The U.S. office will work with a Chinese counterpart on resolving complaints and disputes. As the agreement is implemented, there will be monthly meetings by designated representatives of both countries, quarterly meetings at the deputy USTR-vice minister level and semi-annual meetings at the U.S. trade representative-vice premier level. The text establishes a 90-day dispute resolution process that can be set in motion by a party formally submitting an appeal to the other party’s dispute resolution office. Consultations would then take place at the “designated official” level and, if necessary, move up to the deputy U.S. trade representative-vice minister level. If the matter is not resolved there, it would go to the top level. If the various consultations do not resolve the complaint, the complaining party is allowed to take “proportionate responsive action” it deems appropriate after giving advance notice to the party complained against, the trade office said.
- China’s commitments to purchase U.S. energy and other products will be impacted as the Chinese economy falters. This is especially likely with China’s oil demand taking a hit following the coronavirus outbreak. China’s oil demand is estimated to have fallen by about a third, taking 3 million to 4 million barrels a day of demand off the market, or the equivalent of total Japanese oil product demand. China’s refiners have announced run cuts of about 2 million barrels a day, or 15% of their productive capacity in February alone. Chinese gas demand has plummeted too. As part of the Phase 1 deal, China committed to increasing its purchases of American energy products from their peak in 2017 — estimated at $8 billion to $9 billion — to $18.5 billion this year and $33.9 billion in 2021. Meanwhile, speculative accounts had built up a massive bet against U.S. natural gas futures. But the forecasts for colder weather (within a couple of weeks) have created a bit of a short squeeze in natural gas. Meanwhile, Reuters reports that Chinese independent refineries are said to be boosting their buys of crude supplies as prices have fallen. However, the report also indicated the buys are purely price driven and are not reflecting a sudden upturn in China’s refining industry.
- The Trump administration is considering banning U.S. exports of some jet engines to China, the Wall Street Journal reports (link). The newspaper also reported (link) that Trump is considering placing new trade restrictions on China to limit the use of American chip-making equipment.
— Coronavirus update:
- China reported that more than 72,000 people have now been infected by covid-19, which has killed at least 1,868 people in the country. Chinese scientists released their largest study yet about the new strain. Of the 44,000 cases of covid-19 examined, 80% have been mild. Hospital workers, the sick and the elderly are the most at risk from the infection.
- The fatality rate of the new coronavirus is far higher than that of the seasonal flu, according to a new analysis from the Chinese Center for Disease Control and Prevention. The study found a fatality rate of 2.3% in China as of last week, though later figures suggest the rate has increased. In the U.S., flu fatality rates hover around 0.1%.
- Group of 20 finance ministers and central bank chiefs are scheduled to meet Feb. 22-23 in Riyadh, Saudi Arabia, and are expected to discuss efforts to support growth amid the coronavirus threat.
- The Centers for Disease Control and Prevention announced it will begin testing for the novel coronavirus in five cities — New York, Chicago, Los Angeles, San Francisco and Seattle — as part of an existing flu surveillance system. People with symptoms, who test negative for flu will be tested for coronavirus.
- State media reported China’s legislature may postpone its biggest political meeting of the year — its annual congress, set for March 5 in Beijing — due to the coronavirus. The gathering usually lasts at least 10 days, with delegates passing legislation and setting economic targets. One-third of National People’s Congress (NPC) delegates are provincial or city officials working to slow the outbreak.
- Carriers have canceled more than 50 sailings from China since the outbreak of the coronavirus, the Wall Street Journal reports (link), and logistics operators say remaining ships serving the country’s troubled ports are leaving China with only a small fraction of their capacity filled. Several carriers say privately they are preparing for a heavy impact on earnings as they scramble to cut sailings in line with the diminished demand. Germany’s Hapag-Lloyd AG is due to release preliminary results for its 2019 fiscal year this week that may include comments on the impact on shipping lines, including projections for capacity in the coming weeks. Shipping analysts warn that a rebound in China’s output in the coming weeks may overwhelm transportation networks, triggering a sharp upturn in freight rates.
— Conaway signals need for third round of MFP. Rep. Mike Conaway (R-Texas), ranking member of the House Ag Committee, said the Trump administration will likely authorize a 2020 round of Market Facilitation Program (MFP) payments despite USDA Sec. Sonny Perdue telling farmers not to count on one. “I think there will probably be an MFP 3, given what’s going on with the coronavirus in China may in fact make it difficult for them” to keep their import commitments under the Phase 1 trade deal, Conaway said during a crop insurance industry annual meeting in Florida.
— Some farmers wonder why Senate and House Democrats are questioning prior MFP efforts. House Ag Chairman Collin Peterson (D-Minn.), according to reports, indicated that USDA may not have the funding authority to make another round of payments without action by Congress.
Meanwhile, a federal watchdog has agreed to review the Trump administration’s trade mitigation package for farmers, granting a request by the Senate Agriculture Committee’s top Democrat. Sen. Debbie Stabenow (D-Mich.). The Government Accountability Office (GAO) agreed to investigate whether USDA equitably distributed trade mitigation payments for farmers, and whether USDA accurately estimated the damages from retaliatory tariffs, according to a letter transmitted to Senate Agriculture ranking member Stabenow last week. Stabenow requested the review in January, following her office’s own analysis indicating that farmers living in Southern states were overcompensated on a per-acre basis, while wealthier operations and foreign-own companies benefited disproportionately over smaller farms. Stabenow asked GAO to determine three things: how the payments would have been distributed if USDA abided by the same limits included in the 2018 farm bill; what measures the department is using to prevent waste, fraud and abuse; and whether USDA’s formula for calculating payments reflect all the actual trade damage to specific commodities, or if another model would be better. Stabenow also asked what criteria could be used to ensure that the farmers most vulnerable to going out of business are prioritized.
Also, USDA Inspector General Phyllis Fong last week told lawmakers her office would also be reviewing the MFP effort.
— National Cotton Council: Cotton exports, plantings projected down. Economists at the National Cotton Council are projecting that cotton growers will plant fewer acres this year and that U.S. cotton exports will fall despite the Phase 1 deal with China. Cotton acreage is forecast down 5.5% to 13 million acres because of cotton prices are relatively weak versus competitive crops corn and soybeans.
U.S. exports are expected to drop slightly despite cotton exports to China likely rising by 25% to 2.5 million bales this year. Reason: record stocks outside China, and the U.S. will face more competition from Brazil and Argentina this year.
— Rep. Crawford to push legislation regarding biosecurity in U.S. Ag industry stakeholders should listen to what Rep Rick Crawford (R-Ark.) said during an appearance on our Signal to Noise podcast. Link to Crawford’s remarks on this and other topics, including the need for a third round of MFP.
— EPA discussing court case impact on RFS with White House, Justice. EPA is currently consulting with the White House and Department of Justice on the potential impact of the recent court ruling that three small refinery exemptions (SREs) granted by EPA in the 2016 compliance did not meet requirements under the Renewable Fuel Standard (RFS), according to a report from Reuters. The court ruled that the three in question did not meet the RFS law which they said requires that any SREs granted after 2010 have to be an extension.
The agency aims to have an announcement by March 9, according to the report. "EPA and (the Department of Justice) are reviewing the decision and carefully considering its potential impact on the program," EPA spokeswoman Molly Block said in a statement. The number of SREs requested and granted by EPA has risen sharply in recent years and some of those SREs are potentially impacted by the court decision, with EPA Administrator Andy Wheeler telling reporters recently that the action has the potential to impact the SRE process.
— Other items of note:
- Bloomberg qualifies for Nevada debate. Former New York mayor Mike Bloomberg has qualified for Wednesday’s Democratic presidential debate in Las Vegas, based on a poll released this morning that showed him with the requisite support. Bloomberg had failed to qualify for past debates in part because the Democratic National Committee had set a threshold for campaign contributions, which he is not accepting. The elimination of that requirement — a change criticized by Bloomberg’s rivals — allowed him to join Wednesday’s event in Las Vegas. Nevada’s caucuses are Saturday.. He will begin appearing on ballots in March, having skipped the first four primary/caucus contests.
- Dairy Farmers of America, the country’s biggest milk cooperative, is planning to pay $425 million to buy a portion of the ailing milk company Dean Foods. The arrangement must be approved by a bankruptcy court overseeing Dean and by antitrust regulators. Some small farmers support the merger, hoping it stabilizes the milk market amid falling demand. Others say Dairy Farmers of America benefits from keeping milk prices low, which would hurt farmers. Dean operates 57 facilities in 29 states; under the deal, DFA would acquire 44 of them. Dean filed for Chapter 11 bankruptcy protection in November. The company in the past purchased about 10% of U.S. farmers’ production. Dairy Farmers of America markets nearly one-third of milk in the U.S. and operates its own milk-processing plants and dairy facilities. Besides plants from Dean, the dairy farmers’ proposal would include Dean’s Mexican subsidiaries and its ownership interest in a distribution venture with organic dairy cooperative Organic Valley. As part of the agreement, Dean committed to pay the cooperative a $15 million breakup fee if Dean ends up accepting a rival proposal.
- Bayer and BASF equities are under pressure after a jury ordered them to pay $265 million to a Missouri peach farmer following a lawsuit over the weedkiller dicamba. The farmer, Bill Bader, sued the companies claiming the herbicide damaged thousands of his fruit trees, having drifted from neighboring cotton fields. The fields themselves had been treated with dicamba-resistant seeds. The jury found the two companies equally liable for the damages. More than 140 similar cases involving dicamba are set to be heard later this year in U.S. courts. Bayer said it was “very disappointed” with the verdict and would “swiftly appeal.” A spokesperson for BASF said: “We are surprised by the jury’s decision and we will use all legal remedies available to us.”
- Like a 'second wife': Wind energy gives American farmers a new crop to sell in tough times. Link to USA Today article.
- The struggle to mend America’s rural roads. As supersize vehicles bear heavier loads, maintenance budgets can’t keep up. Wisconsin farmers are paying the price. Throughout much of the Midwest and South, the rural transportation system is crumbling, and as supersize vehicles bear heavier loads, maintenance budgets can’t keep up. Link to New York Times article.
- WTO chief admits no solutions yet for Appellate Body differences. WTO chief Roberto Azevêdo sat down with American, European and Chinese envoys Monday to discuss the WTO’s Appellate Body crisis, acknowledging during the meeting that there are no solutions in sight. He told ambassadors he understood why some members were looking for alternatives to the Appellate Body and said he was available to help them achieve their goals.
— Markets. The Dow on Friday fell 25.23 points, 0.09%, at 29,398.08. The Nasdaq ended at a new record, rising 19.21 points, 0.20%, at 9,731.18. The S&P 500 added 6.22 points, 0.18%, at 3,380.16.
For the week, the S&P 500 rose 1.6, the Nasdaq gained 2.2%, and the Dow advanced 295.57 points, 1%.
Japan’s economy shrinks 6.3% as sales-tax boost stymies consumption. Japan, the world’s third-largest economy after the U.S. and China contracted at an annualized rate of 6.3% in the October-December quarter, worse than economists’ forecast of a 3.9% contraction. The biggest reason was a sharp drop in private consumption after the national sales tax rose to 10% on Oct. 1 from 8%. The contraction in the October-December quarter was the first in more than a year and the biggest since the April-June quarter in 2014, the last time the sales tax was raised.
Germany’s central bank warned that it sees no sign of improvement in the growth outlook in the first quarter of 2020. Germany’s economy, Europe’s largest, has stagnated for almost two years as international trade tensions weighed on its large manufacturing sector. The coronavirus outbreak in China is an additional threat. The Bundesbank said a temporary decline in China’s economy is likely to damp German exports. The Bundesbank called on the government to spend its large surplus to provide a boost.