Brexit | U.S. ag sector outlook | U.S./EU auto trade talks | House hearing on RFS waivers
In today's updates:
* China media confirms country will boost imports of certain goods, including ag
Markets: The Federal Reserve injected $99.9 billion in temporary liquidity and $7.5 billion in permanent reserves into financial markets yesterday. Meanwhile, global stocks are dropping on fears of weak US earnings, another Brexit delay, and further Hong Kong disruption.
The Impossible Burger is part of a new generation of plant-based patties. How do they taste? The New York Times tested six. Link for results.
— U.S./China trade policy update:
- China says it will boost imports of certain goods, including ag products. State television in China is reporting the country will increase imports of certain goods, including agricultural, consumer and component products, as part of its effort to stabilize foreign trade, citing China’s state council. This is the first mention in Chinese media of the intent to purchase U.S. farm products, a development President Donald Trump and other members of his trade and economic team have previously noted.
- China’s NDRC announces plans aimed at making it easier to do business in China. New rules to improve conditions for doing business in China will be implemented Jan. 1, 2020, according to the National Development and Reform Commission (NDRC). Equal access to markets and protections for fair competition in the market, along with strengthening existing protections under law, are among the measures to be implemented. Foreign and domestic companies would be treated equally under the rules, with a system that that establishes punitive damages for infringements on intellectual property, according to the Xinhua News Agency. In addition, public bidding and procurement systems should be transparent, fair and open to all, according to the plan. “It also clarifies rules regarding the faster establishment of enterprises, equal market access, solid implementation of tax and fee reduction policies, and easing financing difficulties,” the state-run China Daily reported.
- China’s government is reportedly developing a plan to replace Hong Kong chief executive Carrie Lam with a possible successor who could be installed by March, according to the Financial Times. If Xi Jinping, China's president, moves forward on replacing Lam, her successor would reportedly remain in place until the end of her term in 2022. Meanwhile, China’s government today formally withdrew the measure that prompted months of protests, and the murder suspect whose case led to the bill was released.
- However, China blasts report of plan to replace Hong Kong leader. A report by the Financial Times that China had drawn up a plan to replace Hong Kong chief executive Carrie Lam is a “political rumor with ulterior motives behind it,” according Foreign Ministry spokesman Hua Chunying. He said the Chinese government would continue to support Lam and efforts by the Hong Kong government to end the violence taking place there. This comes as Hong Kong’s legislature Wednesday formally withdrew legislation that would have allowed extradition to mainland China, the measure that has sparked months of unrest in Hong Kong.
— House Dems to hold hearing on RFS waivers. A House subcommittee next Tuesday will hold a hearing on the Trump administration’s plan to reallocate waived biofuel volumes relative to the Renewable Fuel Standard (RFS) program. Chairman of the House Energy and Commerce Committee, Frank Pallone (D-N.J.), and the chairman of the Environment and Climate Change Subcommittee, Rep. Paul Tonko (D-Ill.), said in a statement that “the Trump administration’s abuse of EPA’s waiver authority is undermining the RFS program and devastating the renewable fuel industry.”
Peterson comments. "Our farmers and rural communities rely on the RFS for their economic viability, and EPA’s actions have done nothing but provide uncertainty and the potential for economic ruin," House Ag Committee Chairman Collin Peterson (D-Minn.) said in a statement welcoming the hearing.
Perspective: Perhaps the hearing will help explain what EPA is going to do to make sure the RFS corn-based ethanol mandate gets to 15 billion gallons, something USDA Secretary Sonny Perdue said would take place once farmers understand the plan.
— USMCA focus continues. U.S. Trade Representative Bob Lighthizer as expected will meet today with House Democrats as the two sides continue to work toward a deal that will pave the way for House consideration of the U.S.-Mexico-Canada Agreement (USMCA). But Senate Finance Committee Chairman Chuck Grassley (R-Iowa) Tuesday expressed concern the trade pact may not be approved by Congress yet this year. Grassley said that he was “very worried for the first time, starting about now.”
Meanwhile, Grassley has continued to drum up support for the pact, playing up the benefits for agriculture and linking it to his farming roots via an editorial in the Marshalltown Times-Republican. “After months of positive discussions in Congress, now is the time for action. We must move forward with the USMCA,” he wrote. “The USMCA is too important to the farming communities, to Rural America and the prosperity of the United States to stand still.”
This comes as President Donald Trump on Tuesday spoke with Canadian Prime Minister Justin Trudeau as the two leaders “reaffirmed their commitment to close cooperation between Canada and the United States, and discussed progress being made towards ratification of the new North American Free Trade Agreement,” according to a statement released by Trudeau’s office.
House Ways & Means Committee Chairman Richard Neal (D-Mass.) said with the Canadian elections over, he will go to Canada to meet with Trudeau on USMCA. He also noted House Democrats continued to meet with Mexican officials this week on labor issues. As for the negotiations between USTR and House Democrats, Neal said, “Staff are back and forth every hour. We hit some bumps but have overcome them.”
Despite the concerns expressed by some on USMCA prospects this year, White House economic adviser Larry Kudlow said in Washington Tuesday that House Speaker Nancy Pelosi (D-Calif.) has been cooperative during the negotiations and USMCA could be approved by the House and Senate this fall.
The biggest hurdle for USMCA ratification, first in the House, is there is not many congressional days left in this year’s session — only 22 days, unless there is an extended session… a few more days for the Senate.
— Economists signal U.S. ag sector’s economic challenges to continue even with government payments. A panel of economists said U.S. gov’t payments have helped temper recent declines in U.S. farm income, but even an improvement in trade and weather conditions, will likely mean U.S. farmers will not likely see a quick return to higher commodity prices and farm incomes seen just a few years ago. The panel, held Tuesday as part of the Farm Foundation Forum series of events, was comprised of John Newton, American Farm Bureau Federation chief economist; Keith Coble, president of the Agricultural and Applied Economics Association (AAEA) and head of the Mississippi State University Agricultural Economics Department; and Food and Agricultural Policy Research Institute (FAPRI) Associate Director Seth Meyer.
- Federal support buffering farm income: Newton. Net farm income is forecast to reach $88 billion this year, according to the latest data from USDA, but just $69 billion of that total is derived from sources besides government support, Newton stated, well below the historical average. A confluence of trade challenges and a general decline in commodity prices are the primary drivers of recent farm income weakness, Newton said. Higher commodity prices in the earlier part of the decade led to an expansion in output. However, global economic growth began flagging in 2012-2013, which “led to a slowdown in demand at the exact same time that we were increasing supply,” he observed.
Over the past two years, trade headwinds have compounded the impact of lower commodity prices. U.S. ag exports to China dropped due to the trade war, while exports to places like Japan also began to decline as U.S. exporters began to lose business to competitors via trade deals like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and Japan-European Union (EU) Economic Partnership Agreement (Japan-EU EPA), Newton said.
Farmers have also had to contend with challenging weather conditions. Midwest flooding, hurricanes in the Southeast and wildfires in California have also “contributed to a very significant downturn in the farm economy,” Newton observed.
On the flip side, government support from USDA’s Market Facilitation Program (MFP) and Wildfire and Hurricane Indemnity Program Plus (WHIP+) have helped stem some of the farm income declines linked to trade and weather. Of the $88 billion in net farm income forecast for 2019, $33 billion is tied to federal support payments, including MFP, WHIP+, farm safety net programs and crop insurance — an increase of 53% year over year.
Farm income tied to commodities and livestock produced on the farm, however, continues to decline, and was down some 14% for 2018, Newton said.
One factor that has helped prevent an even greater hit to conditions across the farm economy is a relatively healthy debt to asset ratio. “Farmers still have a very, very strong asset base in their farmland,” Newton remarked.
Land prices and cash rental rates, while down in some areas, are “not down as substantially as one would think,” Newton said, with support payments helping temper land-value declines.
Newton expressed a hope that “maybe, just maybe 2019 may end up being a better year for farmers and ranchers, but it’s only on the back of the Federal payments.”
- Ad hoc support has drawbacks: Coble. While ad hoc programs like MFP have certainly helped prevent an even steeper slide in net farm income, they also carry drawbacks, noted Coble. For the second MFP program (MFP 2) announced this year, USDA set payment rates on a county-by-county basis to avoid distorting farmers’ planting decisions. The downside, Coble noted, is that “avoiding distorting markets means you are disconnected from perhaps some of the specific needs of an individual farm.”
Where traditional farm safety net programs are typically more focused on factors specific to an operation, that is often impossible with ad hoc programs. “This has an implication for us in terms of where we put the dollars relative to where was the real loss, and that's always a challenge for these programs,” Coble observed.
Coble said he sees implications for traditional farm bill programs like federal crop insurance, and the safety-net programs like Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC), from current trade turmoil and extreme weather linked to climate change. “In this lower [commodity] price world… we’re going to see a big shift from ARC to PLC” due to where triggers for each program are set, he noted, with that expected shift being driven largely by the lower-price impacts of the trade war.
Looking forward, policy makers will have to consider trade headwinds and climate change as they consider the shape of the next farm bill, Coble predicted. Right now, U.S. farmers are “outpacing climate change” by adapting quickly, but that may not always be the case. That brings the question, Coble said, of “how do we give people the right incentives to adapt?”
Another word of caution offered by Coble: the U.S. is at risk of falling behind China in ag research. He highlighted data showing the U.S. now trails China in public ag research spending. While the U.S. still leads in private ag research investment, those dollars “are being spent for different research purposes” than the public funding, noted Newton, agreeing with Coble’s observations on that front. He emphasized the importance of “getting those public sector dollars in R&D for agriculture to make us more successful.”
Shift towards larger, more efficient farms to continue: “In a very aggregate level,” Coble said, “we are going to continue to see the best farms, the largest farms — the farms that are using data” expand “at the expense of the less efficient farms.” As less-efficient operators leave, the larger operations are likely to continue absorbing the land those exiting leave behind. On the smaller end of things, Coble was more optimistic, seeing the local food movement and other trends as more supportive of those operations. However, he said he still expects a continuation of the “the trend towards a hollowing out of mid-sized [farms].”
- Lower farm income, commodity prices likely the new normal: Meyer. After robust early- to mid-decade farm income gains, there was a general feeling that the trend “will continue forever,” noted Meyer. But he pointed out a return to lower prices and a pullback in farm income seen in recent years is “not so unusual” from a historical standpoint.
Since World War II, farm income peaks have been followed by longer periods of below-average income and commodity prices. The most recent declines follow the “longest period of above average farm income” since World War II, noted Meyer. Sometimes the declines are brief, but in this case, “we are seeing a situation that suggests continued challenges going forward,” he said.
For ag commodities, technological advances have typically been a major driver on the supply side, while population and income growth has driven the demand side. Even as global population growth is expected through at least mid-century, Meyer noted much of that growth looks to be concentrated in areas where the income growth picture is less clear.
Even in areas like India, where income growth is expected to be robust, higher incomes could translate to higher consumption of dairy but not meat — so forecasting demand growth for various types of ag and food commodities becomes more complicated. Bottom line, Meyer said, is that the demand picture is not so clear cut.
Of course, the trade war and African swine fever (ASF) are having a negative impact on demand too, Meyer said.
Finally, a slowdown or even slight reversal in biofuels usage is another factor potentially limiting demand growth for commodities — particularly corn and soybeans, noted Meyer. He commented that since the inception of the Renewable Fuel Standard (RFS), the U.S. energy picture has changed. “We’re in a much different situation than we were when we passed that legislation,” he observed.
U.S. oil production has risen dramatically due to the shale boom while U.S. gasoline consumption has leveled off as consumers shift to more efficient vehicles. Those factors, Meyer believes, are likely to limit an “underlying spark, which would bring us back to continued biofuels growth,” at least over the next decade.
On the supply side, Argentina, Brazil and Ukraine are seeing rising production of crops like corn and soybeans. Some of that shift has been aggravated by the trade war, but the U.S. share of global ag exports has been declining for several decades, Meyer noted.
“In the last decade, we've fallen below a 50% share of corn and soybean exports, and we’ve fallen below 25% of global share of wheat,” Meyer stated. “That changes really the dynamic of the farm sector when you talk about going from the dominant global supplier to maybe you're less than 50%” of a given market.
Overall, given the supply and demand picture, even if the trade war with China is resolved, Meyer concluded it is hard to “envision that there’s a spark” which could lead to dramatically higher commodity prices without some other shock taking place.
— Other items of note:
Brexit backed, but schedule rejected. U.K. lawmakers endorsed Prime Minister Boris Johnson’s Brexit deal. But lawmakers voted minutes later against a proposed timetable to push it through Parliament by Oct. 31. What happens now will depend on the EU, which is set to decide how long an extension to grant Britain for reaching a decision. A longer delay could mean a plan weighted down by amendments, while a shorter delay may mean a continued push through Parliament. The EU is likely to grant an extension until Jan. 31, leaving time for the vote and giving Johnson a chance to secure a working majority in Parliament.
Top Ukraine diplomat Bill Taylor testified that he was told a military aid package to Ukraine had been withheld by President Donald Trump pending an agreement by that country to launch investigations into Trump's political rivals. Trump has repeatedly denied that there was any quid pro quo.
House panel clears drug pricing measure. The House Ways and Means Committee late Tuesday approved Speaker Nancy Pelosi's (D-Calif.) drug pricing bill, sending the legislation to the full House floor for a vote expected before the end of this month. The legislation, which passed three committees along partisan lines, has a high chance of approval in the Democratically controlled House.
Turkey and Russia reach deal over northern Syria. Turkish President Recep Tayyip Erdogan and Russian President Vladimir Putin struck a deal on Tuesday allowing Russian and Syrian forces to deploy along the Turkey-Syria border today to remove Kurdish fighters from the area. Turkish and Russian forces will then jointly patrol the “safe zone” Ankara has sought to establish in Syria’s northeast.
The food delivery site Just Eat has rejected a hostile $6.3 billion takeover bid by Prosus, the internet investment arm of the South African conglomerate Naspers.
Commerce Secretary Wilbur Ross suggested the U.S. could open negotiations with the EU to avoid imposing tariffs on European car imports. He told the Financial Times, when asked about Trump’s threat to impose tariffs on EU auto imports in November, that “some other form of negotiation” might be an option, pointing to a possible reprieve. Observers note that it has probably helped that the EU did not immediately retaliate against the Airbus tariffs.
Rural/urban divide also in Canada. Election results showed that, as in other Western nations, an urban versus rural split and increasing regionalism have taken hold in a country known for social cohesion.
— Markets. The Dow on Tuesday was down 39.54 points, 0.15%, at 26,788.10. The Nasdaq fell 58.69 points, 0.72%, at 8,104.30. The S&P 500 lost 10.73 points, 0.36%, at 2,995.99.
Home sales softened in September. Sales of existing homes in September slowed to an annualized rate of 5.380 million units, according to the Existing Home Sales update, down 2.2% from the August level that was revised up slightly to 5.5 million units. But sales were up 3.9% from September 2018, the strongest reading since March 2017. The median price rose 5.9% over the year to $272,100, a reflection of a tight supply of homes on the market — 1.830 million units, which is 4.1 months supply. Expectations are that Thursday’s New Home Sales update will also show an easing from the August pace. However, with mortgage rates remaining low, the housing sector should continue to provide support for the U.S. economy.