Deputy-level Talks with China Start Thursday or Friday

Posted on 09/17/2019 6:22 AM

Saudi oil attack update | S. Korea finds ASF | Spreading ASF via feed | CCC funding

In today's updates:

* WSJ: Saudi oil attack came from Iran, U.S. says
* Timeline to get Saudi oil production back may be longer than initially expected
* Washington and Saudis confer on how to respond re: oil field attacks
* Average gasoline prices could jump by 'as much as a quarter per gallon' this month
* Oil price surge and inflation ahead?
* Iran won't negotiate with the U.S. on any level, its supreme leader said
* USTR quoted as saying trade talks with China start Thursday or Friday
* China delegation departs Wednesday
* China delegation to U.S. signals different players to focus on October talks
* China has significantly increased its imports of U.S. pork
* South Korea finds ASF, raises animal disease alert level
* Study looks at risk of spreading African swine fever (ASF) through feed
* House Dems modify CCC funding, including some major stipulations
* White House formally notified Congress it plans a trade agreement with Japan
* Court challenge is filed on EPA's ACE announcement
* Initial crop insurance base prices for 2020 crop HRW & SRW, major states
* NYC mulls banning chocolate milk in schools, citing health concerns/sugar content
* Israel votes
* FOMC starts its two-day policy meeting this morning
* Robust holiday retail sales forecast

Markets: West Texas-grade crude oil gave back a bit of Monday’s 15% surge. The pound weakened as Prime Minister Boris Johnson’s lawyers prepared to defend his Brexit strategy before the U.K.’s highest court today. The euro strengthened against the dollar.

Dreaming big for a risky hemp crop. “Farmers are rushing to plant newly legalized hemp in hopes of striking it rich, or at least making a good chunk of change in a period of low commodity prices. Hemp is a non-psychoactive form of cannabis. But as growers across 34 states start to harvest as much as half a million acres of hemp this fall, many newcomers have no idea who will buy their crop or even who will prepare it for sale.” Link to Stateline (PEW) article. Link to Farm Journal’s Hemp College taking place today.

Trump thinks he’s spending too much time on ethanol. Global disputes over trade and nuclear weapons have consumed plenty of Trump’s time and attention — but a narrow, domestic clash over U.S. biofuel policy may be giving those issues competition, Bloomberg reports (link). Trump has held more than a half dozen meetings and helped broker at least three near-deals on U.S. ethanol and biodiesel mandates since he moved into the White House. “Despite the intense Oval Office negotiations, a lasting compromise between warring oil and biofuel interests has eluded the commander-in-c hief. And now his patience may be wearing thin.”

 

U.S./China trade policy update:

  • Lighthizer: Deputy-level meeting Friday, but Reuters quotes USTR as saying Thursday; top-level meeting late this month or early October. U.S. Trade Representative Bob Lighthizer spoke to state and local business groups Monday in Washington. U.S. Chamber of Commerce Chief Executive Officer Thomas Donohue revealed Lighthizer said there are staff-level meetings between Chinese and U.S. negotiators on Friday, with senior negotiators to meet in the ensuing week or week and a half. However, Reuters reported the USTR said deputy-level talks will commence Thursday. Donohue said while Lighthizer indicated there’s some movement on China buying U.S. farm products and other issues, it’s “an extraordinary challenge” to get a complete deal. “While I’m optimistic about it, I’m also a dead-ass realist, and this is not a simple problem,” Donohue said, according to Bloomberg. Meanwhile, state-run news agency Xinhua said China’s Finance Vice Minister Liao Min will go to the U.S. for trade negotiations on Wednesday. He and Vice Minister of Commerce Wang Shouwen are leading the PRC delegation to Washington.
  • China's agenda. Liao will detail China’s agenda for the October talks, including items that were not negotiable, but observers note his inclusion in the talks meant this week’s talks would have a focus much broader than only trade. Liao is also a deputy director of the Office of the Central Commission for Financial and Economic Affairs, a Communist Party organ in charge of supervising economic work. It will be the first time he has taken a lead role in high-stakes trade talks.
  • U.S. agenda. “He was pretty clear that we have to do this one step at a time but that this has to be a real agreement,” Donohue said, referring to USTR Lighthizer. “A real agreement, in my opinion, will not be buying more crops and doing the small things that would be good to set the stage for us to have more substantive conversations.”
  • Hong Kong leader Carrie Lam said today she and her team would begin dialogue sessions with the community next week, while reiterating that violence that has roiled the city over three months of protests must end. Under pressure from Beijing to defuse the public anger, Lam said the dialogue sessions would be as open as possible.

China has significantly increased its imports of U.S. pork.

          U.S. Export Meat Federation Year to date Accumulated Pork Exports
                                                 January 1 to September 5
                                                                In Tonnes

Country

YTD

2017

YTD

 2018

YTD

2019

YOY

Total

733,193

758,128

871,288

15%

Australia

24,239

26,752

34,498

44%

Canada

51,816

56,113

55,485

-1%

China

49,984

20,999

183,409

773%

Columbia

23,713

34,563

36,923

7%

Hong Kong

42,992

34,564

32,144

-7%

Japan

128,009

126,277

100,191

-21%

Korea

82,425

117,727

102,965

-13%

Mexico

270,080

278,227

247,225

-11%


There have been 35 weeks since January 1 to September 5.

South Korea finds ASF, raises animal disease alert level. South Korea has discovered a case of African swine fever (ASF) on a pig farm in Paju, a town near the North Korean border, with the Agriculture Ministry raising its animal disease alert level to its highest level. "We will make all efforts to stop the spread of African swine fever through swift disinfection measures," said Kim Hyeon-soo, South Korean Ag Minister. The country will also cull 4,000 head of hogs in a bid to thwart spread of the virus.

The find in South Korea comes four months after North Korea reported ASF had been found there.

A nationwide ban on movement of hogs and related livestock has been ordered as the government investigates the source of the outbreak.

Korean ag statistics indicate there are 11.3 million head of hogs in South Korea. This marks the first case of ASF in South Korea.

Update on attacks on Saudi Arabia oil sector:

  • WSJ: U.S. tells Saudi Arabia oil attacks launched from Iran. U.S. intelligence indicates Iran was the staging ground for a debilitating attack on Saudi Arabia’s oil industry, people familiar with the matter told the Wall Street Journal, as Washington and the kingdom weighed how to respond. U.S. officials shared with Saudi Arabia the intelligence reports and their assessment that Iran launched more than 20 drones and at least a dozen missiles at the Saudi oil facilities on Saturday, the WSJ reported. Following a briefing from his military and intelligence advisers at the White House on Monday, President Trump was asked whether Iran was to blame for the attack. He responded: “Well, it’s looking that way . . . That’s being checked out right now.” Colonel Turki al-Maliki, a spokesperson for the Saudi-led coalition fighting the Houthis in Yemen, said a preliminary investigation showed that the weapons were Iranian. “We are currently working to determine the location . . . The terrorist attack did not originate from Yemen as the Houthi militia claimed,” he told reporters in Riyadh.
  • Trump said Monday that he wants to avoid war with Iran, a day after warning that the United States was "locked and loaded" in response to attacks on Saudi oil facilities. Trump said that while he did not want war with Iran, America was “more prepared” for a military conflict than at any point in its history. “With all that being said, we’d certainly like to avoid it,” Trump said. Asked by reporters what options were available to the U.S. beyond taking military action against Iran, Trump said he had many but was “not looking at options right now”. He stressed that “we want to find definitively who did this.” But Trump said that he viewed lethal military action as a proportional response to the attack on the oil facilities, in a sign that he would be more willing to take military action than in June when Iran allegedly shot down a U.S. drone. Mark Esper, U.S. defense secretary, on Monday said the Pentagon was formulating a response with other parts of the government after the White House meeting. He added that the military was “working with our partners to address this unprecedented attack and defend the international rules-based order that is being undermined by Iran.”
  • Trump said he had not “promised” to protect the Saudis. Rather, Trump said, he will “sit down with the Saudis and work something out.”
  • Average gasoline prices could jump by "as much as a quarter per gallon throughout this month" as a result of the Saudi Arabia supply outage, American Automobile Association spokesperson Jeannette Casselano said in a statement. That would take prices up to about $2.80 a gallon.
    Oil stocks
  • Plentiful global oil supplies are keeping most oil-dependent operations running even as market prices gyrate in the wake of the attacks on Saudi Arabia’s oil industry. The moves up and down in crude prices have been some of the largest advances in 30 years, the Wall Street Journal reports (link), but analysts expect the impact to be relatively contained as long as Saudi production is restored fairly soon. On top of its domestic stockpiles of crude and refined-oil products, Saudi Arabia also stores oil close to key consumers in the Americas, Europe and Japan. Crude tankers were still operating in the region and vessel owners said their ships heading to Saudi Arabia were continuing on schedule. “That relatively calm reaction in tanker markets could change if the impact on Saudi output is measured beyond a few weeks and oil reserves around the world dwindle,” the WSJ article concluded.
  • Key now is how long it will take Saudi Arabia to restore output that was cut in half by the attacks on its production facilities. State-owned operator Saudi Aramco thinks it could be weeks or months before the majority of output is restored, according to Bloomberg. The attack was on Abqaiq, a crude processing center southwest of Saudi Aramco’s headquarters in Dhahran that prepares almost 70% of the kingdom’s crude for export. Saudi Arabia is firing up idled offshore oil fields and using stockpiles of oil to make up for lost production. But while the country has enough supply to last for weeks, analysts think it’s imperative that Abqaiq get back up and running, which will most likely require securing specialized replacement parts and repairing delicate equipment.
  • American shale-oil producers won’t make up for the lost volumes of Saudi exports, but they’re happy to benefit from higher oil prices. Link for details
  • The Saudis are also worried about the safety of their water supplies. The kingdom gets around half of its drinking water from desalination facilities, one of which was targeted in a rocket attack last June.
  • Senators urge briefing on Saudi attacks. Senators have received intelligence materials relating to the attacks on Saudi oil installations and are awaiting a briefing, Sen. Chris Murphy (D-Conn.) told reporters. Murphy said the Senate Foreign Relations Committee should have a briefing on the intelligence. “This administration weaponizes intelligence in a way that I’ve never seen before. They go out and make these broad statements about what they think the intelligence says, the president sometimes drops photos into tweets, and then we don’t have briefings,” he said

CCC funding likely in coming in continuing resolution (CR), with some major stipulations that could still impact MFP payouts. House Democrats on Monday were reviewing add-ons to a stopgap funding bill expected to run through Nov. 21. The language could include a package of health care program extensions, and White House-sought language extending the administration's ability to send payments to farmers affected by retaliatory tariffs via a replenishment of Commodity Credit Corporation (CCC) funding. As of yesterday, the 2019 Market Facilitation Program, authorized under the CCC, had paid out $4.07 billion to farmers, according to an agency spokesman. However, despite the coming CCC funding, language is being pushed regarding the program that could still hamper its operation, some contacts signal. Said one congressional source: “Late Monday, the Senate said no to the Democrats as did House Republicans. That is because the House Dems did not fully restore CCC funding and they wanted to restore less than half and with delaying strings attached." Lawmakers are negotiating language to ensure “accountability and transparency” and hope to conclude those talks soon. Unless the final language changes from what it contained Monday evening, some sources say it would not fully restore CCC funding and imposes conditions that would delay payments. If that language is not altered, GOP members would oppose.

Background. An initial 26-page draft of the bill circulated last week did not contain the increase in the CCC's $30 billion borrowing cap that the Trump administration asked for earlier this month. Without the increase, the White House wrote in their "anomalies" request to lawmakers, the agency "would have to stop making payments as soon as the borrowing ceiling is reached," which was expected sometime after the end of the fiscal year on Sept. 30. In July, the White House made up to $16 billion in additional payments to farmers and ranchers available, after an initial $12 billion payment program in 2018. Eligible producers who haven't signed up already can do so through Dec. 6, 2019, as long as the CCC borrowing limit is raised.

Farm-state Dems make their move. On Monday, House Agriculture Committee Democrats urged their leadership to reconsider and include the White House-backed language in the continuing resolution. "Although we mutually have concerns with President [Donald] Trump’s approach to trade negotiations, we refuse to engage in the same tactics that punish our constituents and harm our communities that rely on agriculture," said Agriculture Chairman Collin Peterson (D-Minn.) and Filemon Vela (D-Texas) and Jim Costa (D-Calif.), who chair Agriculture subcommittees on farm commodities and livestock, respectively. "We cannot and will not allow our farmers to be used as political pawns," the three senior Agriculture panel Democrats added.

Next steps. The House Rules Committee will meet late this afternoon to move along the measure for floor consideration. The bill may not be introduced until today. The measure is currently on the House schedule for Wednesday or later in the week, with a placeholder in the absence of an official bill.

The White House formally notified Congress it plans a trade agreement with Japan on tariffs and an executive agreement on digital trade. Trump announced a U.S.-Japan agreement in principle in August with plans for both countries to sign documents this month. In a Sept. 16 notice to Congress, Trump again mentioned the initial accord and said the U.S. would be entering an “executive agreement” with Japan on digital trade, without providing details. The communication cites section 103(a) of the legislation, which gives the president the authority to do so as long as the tariff is no higher than 5%.

Tokyo warned that any final deal must include assurances that Trump won’t slap new tariffs on Japanese auto exports.

Background. President Trump and Japanese Prime Minister Shinzo Abe announced a tentative deal on Aug. 25, with a goal of working out final details by the end of September. Under the proposal, Japan would cut tariffs on U.S. agricultural products, including beef, pork, dairy products, wine and ethanol. The U.S. would cut tariffs on some Japanese industrial products, but not on cars. Trump also said Japan would purchase large quantities of U.S. wheat and corn, while Abe said only that they were a possibility. Japanese media reported that the U.S. and Japan had agreed to lower tariffs on U.S. beef and pork to levels offered to members of the TPP.

Tokyo focusing on auto tariffs. Japanese Foreign Minister Toshimitsu Motegi says Tokyo wants to stymie the threat of new auto tariffs before agreeing to a final trade deal with the U.S. and is seeking confirmation on the position. Motegi, Japan’s point person with U.S. on trade negotiations, told reporters in Tokyo that there is consideration of language covering car tariffs.

Currency language an issue. U.S. Treasury Secretary Steven Mnuchin has said the U.S. wants any trade deal with Japan to include language that would prevent competitive devaluations — notably currency moves designed to boost exports. The U.S. insisted similar language be included in its revised trade deal with Mexico and Canada, and that prohibition is expected to be part of any U.S./China deal. Japan, however, wants to avoid any clause that might tie the Bank of Japan’s hands. Foreign Minister Toshimitsu Motegi, Japan’s point person for the trade talks, has said that any discussion on currency is between Japan’s Finance Ministry and the U.S. Treasury Department, under an agreement reached in February 2017.

Outlook: Trump and Abe are looking to sign a deal when the Japanese leader visits the United Nations General Assembly meeting in New York later this month.

Court challenge is filed on EPA's ACE announcement. Consolidated Edison filed a petition in the D.C. Circuit Court of Appeals to challenge the Environmental Protection Agency’s new Affordable Clean Energy (ACE) Rule. Con Edison is joining a coalition of public and private electric utility companies because it believes the EPA’s rollback of the Clean Power Plan is the wrong approach to combat climate change. It also said the rollback undermines the company’s own efforts to achieve meaningful reductions in greenhouse gas emissions, according to a statement.

Other items of note:

  • Iran won't negotiate with the U.S. on any level, its supreme leader said.. “Sometimes they say negotiations without any precondition and sometimes with 12 conditions,” Ayatollah Ali Khamenei said in comments published by semi-official ISNA news agency today. “Such statements either come from their disheveled policies or are a ploy to confuse the other side.”

  • Israel votes. Prime minister Benjamin Netanyahu is in a close race against former military chief Benny Gantz in the country’s second general election in six months. In April, he failed to form a viable coalition. Polls show Netanyahu’s Likud party nearly tied with Gantz’s Blue and White party, with neither party projected to win nearly enough seats — 61 — for a majority. Netanyahu is seeking to win a fifth term.

  • Initial crop insurance base prices for 2020 crop HRW & SRW, major states:
       * HRW: Kansas, Oklahoma, Texas: $4.35 per bu.; 2019-crop initial: $5.74 per bu.
       * HRW: Colorado, Nebraska, South Dakota: $4.48 per bu.; 2019-crop initial: $5.84 per bu.
       * SRW: Illinois, Indiana, Ohio, Missouri: 2020 crop base: $4.94 per bu. vs $5.72 2019-crop

  • Study looks at risk of spreading African swine fever (ASF) through feed. The virus can survive a 30-day transoceanic voyage in plant-based feed and ingredients, according to a study by Kansas State University (link). The new data highlights the potential risks of imported feed, and can be used by the U.S. and other countries to safeguard their pork production, said Megan Niederwerder, who led the team of veterinary researchers.

  • The current Brexit turmoil as Britain's highest court begins hearing arguments today on whether the government's decision to suspend Parliament was lawful (judges in England and Scotland previously came to contrasting conclusions). Boris Johnson argues that he asked the Queen to prorogue the lower house in order to introduce a new legislative agenda, but critics accuse him of attempting to stymie debate and push through a no-deal Brexit before an Oct. 31 deadline.

  • New York City is considering banning chocolate milk in public schools, citing health concerns, specifically sugar content, as the driving force, the New York Post reports (link).

Markets. The Dow on Monday declined 142.70 points, 0.5%, to 27,076.82. The S&P 500 lost 9.43 points, 0.3%, to 2,997.96. The Nasdaq dropped 23.17 points, 0.3%, to 8,153.54.

The FOMC will also start its two-day policy meeting this morning against the backdrop of fading hopes for an interest rate cut. The Fed Funds Futures market on Monday was pricing in a 34% chance that the Fed will stay put on rates; the probability was zero a month ago and just 5.4% a week ago, according to the CME.

Robust holiday retail sales forecast. Despite the U.S./China trade war and threat of another economic slowdown, holiday retail sales for 2019 are forecast to increase 4.5% to 5%, exceeding $1.1 trillion. That would be better than the Census Bureau data of sales growth of 3.1% on sales of nearly $1.1 trillion from last November to January.

Oil price surge and inflation ahead? Outages at Saudi Arabian oil facilities after attacks this weekend have sent oil prices up sharply. The impact to inflation remains small at present, but if persistent it could further challenge real spending as tariffs take hold, Wells Fargo said in a research note. The weekend’s attacks are estimated to have knocked off 5.7 million barrels-a-day of production, or about 5% of global production. While a meaningful share of the market, the outages caused by Saturday’s attacks “are small when compared to the oil shocks of the 1970s. At the time of the 1973-74 OPEC embargo, the block accounted for about half of global output, representing a much more sizable shock to the market. Oil prices more than tripled over the 7-month embargo. Following the 1979 crisis, prices more than doubled.” Wells Fargo said the details on when production might come back online are sparse at this time, making it difficult for markets to fully price the impact of the outages on supply going forward. “The direct impact to inflation would remain fairly small if oil prices continue to trade near current levels. Based on our model of the Consumer Price Index, a 10% increase in WTI prices is estimated to raise the year-over-year rate of inflation 0.1-0.2 percentage points. That bump would prove temporary as prices ease again after production comes back online, all else equal. But of course, things are rarely ever equal. This weekend’s event brings geopolitical risks for oil prices back to the forefront and raises the potential for prices to stay elevated even as production returns to normal. If prices remain elevated for an extended period of time, either due to Saudi production taking a while to come back online or the perception of risks around supply going forward, U.S. production could strengthen further.”


 

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