Commodity Rally May be Close as Traders Get Bearish on U.S./China Talks

Posted on 03/12/2019 6:13 AM

Lighthizer testifies | RFS waiver requests | Year-round E15 | Unica plays U.S. sugar card

Usually bullish commodity traders are in a bearish funk, exhausted after waiting for, what to them, is way too long to get a final U.S./China trade accord. Some have given up on the topic, thinking no agreement is likely. Trade policy watchers say the next step, if there is one, will come if a meeting between Chinese leader Xi Jinping and President Trump is announced, especially if China announces the details.
     U.S. Trade Representative Bob Lighthizer is going to be busy the next few days. Today he will testify before the Senate Finance Committee on the WTO and a host of other trade topics, including China. Later in the day he will meet with some pro-trade Democrats on the USMCA, and on Wednesday he will meet with a larger group of Democrats about their USMCA concerns.
     EPA to decide on 2017 RFS waiver requests in the next week, its director, Andrew Wheeler, said in Houston. He also said he’s aiming this week to sign a proposed rule allowing year-round E15 sales. “It’s in the final stages of OMB review, but we should have it out this week,” Wheeler said in Houston.
     Brazil cane group is playing the U.S. sugar policy card. The new head of Brazil cane industry group Unica wants tariff-free access to U.S. sugar market, telling Reuters, that would be similar to the tariff-free ethanol quota it offers to U.S. exporters of the biofuel. If not, then he said all U.S. ethanol should face a tax of a minumum of 20%.
     Automation isn’t the problem — capitalism is. Rep. Alexandria Ocasio-Cortez (D-N.Y.) says we could be more excited about robotic labor if unemployment wasn’t so financially devastating. If she were a Republican, Saturday Night Live would have some great skits.


U.S./China trade policy update:

  • It is now easy to predict whether there will be a final U.S./China trade accord. How? The confirmation if any will come from China should its leader, Xi Jinping, officially announce a meeting with President Donald Trump. If or until that occurs, officials from the two sides will continue to meet, but Xi wants no part of a session with Trump unless an agreement is known before they see each other.
  • There are no plans yet for Trump and Xi to meet, White House press secretary Sarah Huckabee Sanders said Monday, but she reiterated that he is “only going to make a deal if it’s a good deal.” The press secretary also said that she was unaware of any plan for Xi and Trump to speak by phone, and that Trump would not agree to anything short of a deal that benefited the United States.
  • Chinese Vice Premier Liu He discussed a trade agreement text with U.S. Trade Representative Lighthizer and Treasury Secretary Steven Mnuchin, state-run Xinhua reported. The call took place this morning in China. “Both sides had consultations on key issues regarding the text, and made a plan for the next stage of work arrangements,” the report said, without giving further details.
  • Lighthizer appears today before the Senate Finance panel. He will be asked about a host of trade issues, including talks with China, the WTO, the USMCA, U.S. metal tariffs on Canada and Mexico, and trade agreement proposals with the EU and Japan. Senate Finance Chairman Chuck Grassley (R-Iowa) said the hearing will examine the "current state" of the 24-year-old organization and "potential reforms that would strengthen" it. Lighthizer is expected to offer details on the exact changes the Trump administration would like to see at the global trading body.

Lighthizer to talk with Democrats about USMCA. U.S. Trade Representative Bob Lighthizer will address congressional Democrats Wednesday morning on the U.S.-Mexico-Canada (USMCA) agreement at the invite of House Speaker Nancy Pelosi (D-Calif.), according to her office. "The presentation from the USTR will be the first in a series of Caucus briefings and meetings on the USMCA with key stakeholders and experts, including labor leaders, environmental and access to medicine groups, business, and others," a spokesperson said.

Lighthizer is expected to meet with a group of pro-trade Democrats today – the New Democrat Coalition. Those lawmakers are viewed as being moderate, pro-trade members and their support is seen as a key.

Dems dismiss Trump's FY 2020 budget requests. The Trump administration on Monday released a $4.7 trillion budget that proposed sharply reducing spending on safety-net programs, while boosting defense and border-protection funding. Under the blueprint, the budget doesn't balance in 10 years and shows a $202 billion deficit in 2029, assuming economic growth at an average of 3% for the decade. "As we enter into negotiations on spending levels for 2020 and 2021, we are so far apart on our priorities that it makes — we have to wonder whether the White House is going to be a serious negotiator," House Budget Chairman John Yarmuth (D-Ky.) said of Trump's budget release.

Of the nonstarters from Trump's proposals, funding for the Army Corps of Engineers would be cut by 31% and the agency would not start any new projects.

Trump's proposals for USDA showed, as expected, deep funding cuts and were roundly criticized. The proposals focused heavily on unspecified cuts to mandatory funding for the Supplemental Nutrition Assistance Program (SNAP/food stamps) totaling $219.8 billion over 10 fiscal years. For fiscal 2020, the administration would reduce food stamp spending by $17.4 billion. Several groups that have been successful in the past defeating proposals to reduce crop insurance funding called the budget request a short-sighted proposal “that, if adopted, would undermine a critical safety net for farmers when they need it most.'' The groups include the American Association of Crop Insurers, Crop Insurance and Reinsurance Bureau, Crop Insurance Professionals Association, Independent Insurance Agents and Brokers of America, National Association of Professional Insurance Agents, and National Crop Insurance Services. Link for USDA funding details.

Here’s a look at how major agencies would fare under Trump’s proposals:

Trump FY 2020 budget proposals

Bottom line: The budget has little chance of passing in its current form, but it does offer a preview of the president’s re-election campaign priorities. Look for Democrats in farm states to focus on what many say are draconian cut proposals for the ag sector. From a longer-term perspective, the proposed cuts will give ammo to program opponents and lawmakers wanting to slice funding. This could be more important whenever Washington gets serious about reducing the annual budget deficits and debt.

EPA to decide on 2017 RFS waiver requests in the next week. EPA will make a decision on the seven remaining requests for small refinery waivers under the Renewable Fuel Standard (RFS) in the next week, EPA Administrator Andy Wheeler said Monday. In remarks to the CERAWeek event in Texas, Wheeler said the agency would act on the seven pending RFS small refiner waivers and then will turn its attention to those submitted for the 2018 compliance year.

The small refiner waivers have generated considerable angst with biofuel backers, arguing the agency has essentially reduced the level of biofuels used in the US by granting the waiver requests.

EPA data as of Feb. 21 indicated that there were still seven waiver request outstanding for the 2017 compliance year and another 37 had been received for the 2018 compliance year. EPA has granted 29 requests for the 2017 compliance year, one was declared ineligible or withdrawn and seven were outstanding.

Meanwhile, Wheeler said he’s aiming this week to sign a proposed rule allowing year-round E15 sales. “It’s in the final stages of OMB review, but we should have it out this week,” Wheeler said in Houston.

Other items of note:

  • House Speaker Nancy Pelosi (D-Calif.) opposes pursuing impeachment of Trump. She doesn’t support pursuing the impeachment of President Trump, saying such a step would be too divisive and the Democratic Party should focus instead on winning back the White House in 2020. “He's not worth it,” Pelosi declared.

  • Brazil cane industry group wants tariff-free access to U.S. sugar market, the new head of Brazil's powerful cane industry group Unica told Reuters, similar to the tariff-free ethanol quota it offers to U.S. exporters of the biofuel. Evandro Gussi, who took over last month as the head of Brazil's main sugar and ethanol lobby, said in an interview that if a tariff-free sugar quota was not accepted, then Brazil should scrap the current system and tax all ethanol imports by a minimum 20%. Brazil currently gives the U.S. a tariff-free quota of 600 million liters of ethanol per year, limited to 150 million liters per quarter. Volumes above that are taxed by 20%t. That system ends in August. If not renewed, all imports will be taxed by 20%, the general Mercosur tariff. By comparison, the U.S. taxes Brazilian ethanol by only 2.5%. A higher tariff of $0.54 per gallon was canceled back in 2011. Brazilian President Jair Bolsonaro will meet with President Donald Trump next week in Washington and the two leaders are expected to discuss bilateral trade, among other issues.

Markets. The Dow on Monday rose 200.64 points, 0.8%, to 25,650.88. The S&P 500 climbed 40.23 points, 1.5%, to 2,783.30 and the Nasdaq Composite added 149.92, 2%, to 7,558.06.

"We have secured legal changes," Theresa May said in a late-night news conference beside the EU's Jean-Claude Juncker, ahead of today's vote in the U.K. parliament on the divorce agreement. The pound climbed 0.5% on the news, buying $1.3215 and taking its gains over two days to more than 1.5%. It's not clear if the assurances over the Irish backstop will be enough to win over the 116 additional lawmakers she needs to approve her Brexit accord, but the alternatives are leaving the EU without a deal on March 29 or delaying Brexit.

The International Energy Agency (IEA) is forecasting that the U.S. is on track to become a net petroleum exporter by 2021, and soon after that will surpass Russia and even rival Saudi Arabia in oil exports. The agency says the U.S. will double its gross crude oil exports by 2024, boosted by the coming “second wave of the U.S. shale revolution,” including surging output from the Permian Basin. The IEA says the U.S. will account for 70% of the total increase in global crude production capacity over the next five years and 75% of the expansion in liquefied natural gas trade. That will have a profound impact on oil and gas trade flows, as export terminals and tanker capacity align with the country’s growing export trade. Link to Wall Street Journal article.


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