China Tariff Relief Boosts Global Stocks, Adds to Hopes Global Economy May Avoid Major Shock

Posted on 02/06/2020 6:50 AM

Coronavirus update | U.S. farm income | Senate acquits Trump | China purchase flexibility

In today's updates:

* China to cut tariffs on $75 billion of U.S. goods
* Perdue: China commitment delay request likely ahead
* Global Times: China decision on flexibility of Phase 1 likely at end of first quarter
* Companies find ways to bypass tariffs on Chinese goods
* Daily deaths caused by coronavirus reached another record level in China
* WHO asks for funds to fight new coronavirus
* Toll from the coronavirus outbreak is starting to hit maritime operations
* USDA forecasts net farm income rise in 2020 vs 2019; working capital down again
* U.S. trade deficit narrows for the first time in six years
* Senate acquits Trump on both impeachment articles
* Buttigieg, Sanders hold lead in Iowa
* USDA reduces area covered by Karnal bunt restrictions
* House panel today will discuss climate legislation with bipartisan support
* EPA publishes 2020 biofuels (2021 biodiesel) blending rule in the Federal Register
EU trade chief in Washington
* Pa. governor may veto bill providing tax breaks to use natural gas to make fertilizers
* U.S. trade deficit narrows for first time in six years
* U.S. December ag exports hold near $12 billion
* Fed studying potential for U.S. digital currency

Markets: China's announcement it would cut tariffs as part of implementing the Phase 1 agreement with the U.S. helped boost Asian and European equities — equities in Europe hit record highs this morning. U.S. stock futures indicate another higher open and more record highs for the major averages. China's announcement adds to hopes the global economy may be able to avoid a major shock from China's rapidly spreading coronavirus. Meanwhile, Brent crude rose 1% after U.S. government data showed a decline in U.S. gasoline and distillate stockpiles and expectations the Organization of the Petroleum Exporting Countries and its allies will cut production to alleviate concerns related to the spread of the coronavirus.

OPEC+ technical meeting drags on. A technical committee of OPEC+ has added a third day of meetings after failing to reach a recommendation on an emergency summit of oil ministers. Delegates are split over the threat the coronavirus poses to global consumption, with Saudi Arabia pushing for immediate and deeper output cuts to the opposition of Russia, whose budget is more resilient to lower crude prices.

Senate acquits Trump on both impeachment articles. The Senate acquitted President Donald Trump of abuse of power by a vote of 52-48 and obstruction of Congress by a vote of 53-47 on Wednesday. Sen. Mitt Romney (R-Utah) was the only Republican to vote guilty on the abuse of power charge, becoming the first senator in U.S. history to vote to convict a president from his own party in an impeachment trial. The vote on obstruction of Congress ran along party lines. President Trump will make his second address to the nation this week at noon from the White House.
Trump tears

Penguins talk like humans. Reports note there is compelling evidence that African penguins have speech patterns similar to ours. Link for details.


U.S./China trade policy update:

  • Perdue: China commitment delay request likely ahead. USDA Secretary Sonny Perdue said the Trump administration understands the coronavirus outbreak will make it challenging for China to timely meet its purchase commitments in the Phase 1 trade agreement. Although not aware of a formal request for flexibility from China at this time, Perdue said he would not be surprised if such a request was ahead. “I think we would be asking the same thing,” he said at a cattle industry annual convention. “If we don’t see them trying to fulfill those needs other places, if they’re really trying and it really just blows the economy out of the water, I think we would be understanding of that,” Perdue said. Chinese pledged to increase U.S. imports, agreeing to buy an additional $200 billion in goods, split across 2020 and 2021, with $77 billion in additional trade the first year and $123 billion the second year. Over the two years, China agreed to boost its purchasing of U.S. goods above 2017 levels, including an increase of about $78 billion in manufacturing, $32 billion in agriculture, $52 billion in energy and $38 billion in services. In 2017, the U.S. exported $186 billion of goods and services.

    Trade China

  • China decision on flexibility of Phase 1 likely at end of first quarter. Mainland China media reported today that the coronavirus outbreak could prompt China to consider triggering a disaster-related clause in the trade deal it signed with the United States Jan. 15. Global Times, a nationalist tabloid affiliated to Communist Party mouthpiece People’s Daily, quoted an unnamed Chinese trade expert close to the government as saying a decision on launching a consultation with the U.S. on the disaster clause was unlikely until the end of the first quarter. In a commentary published on Wednesday, the newspaper said: “The Phase 1 agreement clearly stated that the two parties would consult with each other, ‘in the event that a natural disaster or other unforeseeable event outside the control of the parties delays a party from timely complying with its obligations under this agreement’. Without doubt the epidemic fits this scenario.” Chinese Foreign Ministry spokeswoman Hua Chunying said she had no information on the disaster-related clause.
  • China to cut tariffs on $75 billion of U.S. goods as part of implementing Phase 1 accord. Beijing said it would slash tariffs on $75 billion of U.S. imports in half as part of its efforts to implement a Jan. 15 signed trade agreement with the Trump administration. Beginning Feb. 14, China will cut tariffs on some U.S. goods to 5% from 10%, while levies on some other items will be reduced to 2.5% from 5%, China’s Ministry of Finance said in a statement today. In a statement accompanying today's announcement, the Finance Ministry said the decision was intended to “alleviate economic and trade frictions and expand economic and trade cooperation” between the two countries. “We hope to work with the United States towards the ultimate elimination of all increased tariffs,” it added. The U.S. agreed to cut tariffs on $120 billion of Chinese goods by half, to 7.5%, within about 30 days, and to forgo other planned tariffs.
  • Companies find ways to bypass tariffs on Chinese goods. Many U.S. companies are using a variety of strategies to avoid the payments without upending their supply chains, trade lawyers and logistics consultants say. Link to WSJ article.

    Tariff revenue

Coronavirus update:

  • Daily deaths caused by coronavirus have reached another record level in China, with 73 fatalities confirmed in figures released by health authorities this morning, taking the country’s death toll to 563 and the biggest jump since the outbreak began. Almost all of the new fatalities were in Hubei province, which remains under mass quarantine. The number of new infections in mainland China and the total within its central province of Hubei – the outbreak’s epicenter – both fell on Wednesday compared with the day before. There were 3,694 additional cases in the country and 2,987 in Hubei, national and provincial health authorities announced on this morning. Japan has the largest number of confirmed cases outside China —33— and senior Japanese officials are already warning that the outbreak could disrupt the 2020 Tokyo Olympics.
  • WHO asks for funds to fight new coronavirus. The chief of the World Health Organization (WHO), Tedros Adhanom Ghebreyesus has called for $675 million to help countries address the outbreak of the new coronavirus that originated in Wuhan, China. The WHO, which will convene hundreds of experts in Geneva next week, hopes to speed up research into drugs and a vaccine to fight the virus.
  • Coronavirus is straining China's medical-mask market. Officials are buying up local supplies of medical masks and directing them to the front lines of the outbreak, leaving companies to ramp up production to fill global demand.
  • Travel restrictions to and from China are increasing, with Saudi Arabia the latest to announce bans on visits to the country. Authorities in Beijing accused those imposing the restrictions of “sowing panic” and going against WHO recommendations. Businesses are also suffering, with China’s top LNG buyer declaring force majeure on contracts.
  • The coronavirus is leaving tropical fruit rotting at China border crossings, with farmers in Myanmar, Thailand and Vietnam hit hard as city lockdowns disrupt trade.
  • China may delay the annual National People’s Congress session which is to begin March 5 and last for at least 10 days in Beijing, according to Reuters. While the focus is on meeting that scheduled start, an unnamed official told Reuters, “We are discussing a range of options as the (virus) situation doesn't look likely to be contained by March. A delay is one of those options.” However, the official noted such a development “should come as no surprise given that we are in a very difficult time."
  • The toll from the coronavirus outbreak is starting to hit maritime operations from container terminals to shipyards. A report from Alphaliner projects the impact of factory shutdowns and other restrictions crimping China’s output will reduce global ocean container volumes, by about 0.7% this year, the Wall Street Journal reports (link), as Beijing struggles to rein back the outbreak while keeping its economy on track. “The dour outlook for a key segment of global trade comes as international container lines cancel a growing number of scheduled sailings through China and airlines ground flights to the region, squeezing cargo capacity for a broad range of shippers and logistics operators,” the article notes. Ship brokers say operations at China’s seaports are slowing down as more workers stay home. China’s travel restrictions also are hampering some critical maintenance work, with executives reporting delays in completing installations of the sulfur-trapping emissions systems known as scrubbers.

USDA forecasts net farm income rise in 2020 versus 2019, despite gov't payment decline; net cash income to drop 9%. The difference between net farm income and net cash farm income is based on what is included in each forecast. Net cash farm income encompasses cash receipts from farming as well as farm-related income, including government payments, minus cash expenses, according to USDA, but it does not include noncash items — changes in inventories, economic depreciation, and gross imputed rental income of operator dwellings — reflected in the net farm income.

     Farm income

     Why 2020 net cash farm income is down while 2020 net farm income forecast is up. “The divergence between the two measures in the 2020 forecasts is largely caused by how net sales from inventories are treated,” USDA stated. “Net cash farm income records income in the year the sale occurred, while net farm income counts it in the year the production occurred. High net sales ($14.7 billion) from crop inventories forecast in 2019 are expected to boost net cash farm income significantly that year. Very low net sales from inventories ($0.5 billion) in 2020 are expected to contribute to a decrease in net cash farm income between the two years.:

     Key factors in the farm income picture include the fully expected decline in government payments. USDA economists are unable to forecast a 2020 Market Facilitation Program (MFP 3) will take place. That is the primary factor in USDA forecasting direct government farm program payments to fall $8.7 in 2020 (36.7%) compared with 2019. USDA forecasts total direct government farm program payments at $14.98 billion compared with $23.65 billion in 2019.

     MFP payments in 2020 are forecast at just $3.69 billion, the remaining 2019 (MFP 2) payments going out to producers this week. Last year, USDA forecast MFP payments (a combination of MFP and MFP 2) at $14.31 billion.

     Farm program payments. While MFP payments are forecast down substantially, USDA economists forecast Price Loss Coverage (PLC) payments at $3.39 billion, up from $1.92 billion for 2019. The forecast marks in 2020 are the highest for PLC since the first payments under the program were made in 2015. The Ag Risk Coverage (ARC) payments are forecast to fall to just $39 million from $690 million in 2019. The 2020 mark is the smallest since USDA paid out $6.06 billion in 2016 under ARC. USDA expects that more farmers will opt for PLC for 2019 crops when they enroll under provisions in the 2018 Farm Bill than when they made their prior elections in 2014. “Many farmers are expected to switch their enrollment from ARC to PLC because declines in market prices are expected to trigger PLC payments for some crops but not trigger ARC payments which are based on historic revenue,” USDA said. USDA looks for loan deficiency payments to rise to $322 million compared with $1.1 million in 2019, while marketing loan gains are seen declining to $166 billion from $203 billion in 2019.

     Conservation payments are seen rising to $4.2 billion in 2020, up 4.4% from 2019.

     The Dairy Margin Coverage (DMC) Program is forecast to result in payments of $637 million, up from $203 million forecast for 2019.

     Supplemental and ad hoc disaster payments are seen at $2.5 billion, with most coming from the Wildfire and Hurricane Indemnity Program (WHIP+) enacted through the Disaster Relief Act of June 2019.

     Farm cash receipts are forecast to increase $10.1 billion (2.7 percent) to $384.4 billion in 2020, according to USDA, with those broken down as being $198.6 billion from crops (up $1.9 billion from 2019) and animals/products at $185.5 billion (up $8.2 billion from 2019).

     U.S. farmers continue to burn through capital. Working capital (the amount of cash available for farmers to fund their operations after paying off all debt due within a year) for U.S. farmers in 2020 is forecast to decline 15% after a 12.7% fall registered in 2018. USDA said that working capital on U.S. farms recently peaked at well over $160 billion in 2012 and is now forecast at just $52 billion in 2020. Farm groups and farm-state lawmakers will likely use this development as evidence why an MFP-3 program is needed for 2020.

     But farmers still are in relatively solid shape based on debt-to-asset ratios. USDA forecasts the 2019 ratio at 13.45 and 2020 at 13.59, the highest since it was 14.96 in 2002. But that is still well below the peak in 1985 of 22.19. Similarly, the debt to equity ratio is forecast at 15.73 in 2020, up from 15.54 in 2019, but still well below the 1985 peak of 28.51.

     Rising debt levels are still a concern as USDA sees total farm debt at $425.3 billion, up from $415.5 billion in 2019.

Other items of note:

  • Pete Buttigieg, 38, and Bernie Sanders, 78, are nearly tied with 97% of Iowa results counted, and the Associated Press says it still doesn't have enough data to declare a winner. A new batch of results released just after midnight narrowed their margin, with Buttigieg ahead by just a handful of state delegate equivalents out of 2,098 counted.
  • USDA reduces area covered by Karnal bunt restrictions. USDA’s Animal and Plant Health Inspection Service (APHIS) is amending the Karnal bunt regulated areas in La Paz, Maricopa, and Pinal Counties in Arizona. Following a review of the results of the 2019 survey of Karnal bunt-regulated areas, APHIS is reducing the regulated area by 38,547 field acres and there will be no more restrictions on the interstate movement of Karnal bunt-regulated articles from these areas. APHIS is adding one field (seven field acres) in the Palo Verde area of Maricopa County to the list of regulated areas as it was a formerly abandoned field that is now in production in a regulated area, not because they found Karnal bunt.
  • The House Energy and Commerce’s environment panel today will discuss climate legislation with bipartisan support. The USE IT Act (HR 1166) would spur research and development of carbon capture, the technology that catches carbon dioxide before it enters the atmosphere and stores it underground or recycles it for industrial use. It’s a companion bill to the Senate’s S 383, which the Senate environment panel approved in April 2019.
  • EPA today published its 2020 biofuels (2021 biodiesel) blending rule in the Federal Register, seven weeks after it was signed on Dec. 19. Link. There are no changes relative to the final rule that EPA published on its site Dec. 19 regarding the levels for biofuels in 2020 and biodiesel for 2021, except that the version published in the Federal Register is now listed at 310 pages versus 172 in the version released by EPA. That is due to the agency adding to its commentary on certain issues. EPA reiterates that they are not going to finalize their review of the court-ordered 2016 RFS levels based on “many comments received.” The agency still expects to finalize that sometime early this year. Regarding biodiesel, EPA has not changed their proposal for 2021 biodiesel despite Congress having approved and President Donald Trump signing into law the retroactive extension of the biodiesel tax credit from 2018 through 2022. However, EPA indicated that even a resumption of the tax credit for 2020 would not result in a shift in 2020 biodiesel production and use. Perspective on the EPA changes: It took EPA seven weeks to write 138 additional pages.
  • EU trade chief in Washington. European Union (EU) Trade Commissioner Phil Hogan is in Washington again, meeting with U.S. Trade Representative Bob Lighthizer today, according to the European Commission, who said that Hogan would meet with other U.S. officials. The trip is aimed at laying the groundwork for a U.S./EU trade deal which Commission President Ursula von der Leyen wants to reach soon. But agriculture will remain a key for prospects of that deal. Hogan hinted in January that doing something like brining non-tariff trade barriers into the talks could be a way to bring agriculture into the discussion.
  • Pennsylvania Gov. Tom Wolf (D) is threatening to veto a bill that would provide tax breaks for facilities that use natural gas extracted in the state to make fertilizers. Link for details.

Markets. The Dow on Wednesday climbed 483.22 points, 1.7%, to 29,290.85. The S&P 500 advanced 37.10 points, 1.1%, to 3,334.69. The Nasdaq rose 40.71 points, 0.4%, to 9,508.68.     Equities yesterday

     U.S. trade deficit narrows for first time in six years. U.S. exports declined last year for the first time since 2016, dropping 0.1%, the Commerce Department said Wednesday. But imports fell more sharply, decreasing 0.4%. That combination shrank the overall trade deficit 1.7%, to $616.8 billion. China lost its rank as the top U.S. trade partner, falling to third place behind Mexico and Canada. And the U.S.’s total trade in goods rose faster with Vietnam than with any of its largest trading partners, while trade with China fell most rapidly — the U.S. deficit in goods with China fell 17.6%, to its smallest level since 2014.   

Deficit narrows

     Trade countries

     U.S. December ag exports hold near $12 billion. The value of US ag exports in December moved down to $11.85 billion, down from $12.66 billion in November, putting total exports for the first three months of fiscal year (FY) 2020 at $36.59 billion. Ag imports rose to $10.75 billion in December, up from $10.31 billion in November, putting the FY 2020 total at $31.98 billion. The monthly trade surplus was $1.1 billion pushing the quarterly surplus to $4.62 billion. So far in FY 2020, exports have totaled more than $1 billion above the year-ago period, while imports have risen nearly $100 million. The rise in exports compared with year ago is an encouraging sign but even more surprising is that imports have not risen more. The overall U.S. December trade results showed that imports rose significantly in December, a trend not matched in the agricultural data. Now the focus will shift to how USDA alters their outlook for U.S. ag exports later this month, in particular how they account for the Phase 1 agreement with China and the ag purchase commitments in that pact.

     Fed studying potential for U.S. digital currency, said Federal Reserve Governor Lael Brainard. “Given the dollar’s important role, it is essential that we remain on the frontier of research and policy development regarding” central bank digital currency, or CBDC, Brainard said yesterday in the text of a speech prepared for delivery at the Stanford Graduate School of Business in California. “We are conducting research and experimentation related to distributed ledger technologies and their potential use case for digital currencies, including the potential for a CBDC.” The Bank for International Settlements and the International Monetary Fund have called for central banks to at least study the possibility of digital currencies as private sector firms propose and experiment with a competing unit of exchange. Leaders of six major central banks, including the U.K., the eurozone, Japan, Canada, Sweden and Switzerland, are also undertaking joint research on cryptos and may hold their first meeting in Washington in mid-April.


Add new comment