Hong Kong Latest Hot Spot in U.S./China Trade War; Big Sunday Protest Planned

Posted on 08/16/2019 5:31 AM

Report shows corn, cotton & wheat winners in MFP 2; soybeans just below MFP 1 win

In today's updates:

* Former USDA chief economist's preliminary analysis of MFP 2 payouts
* Will China mobilize military to confront Hong Kong protesters; big Sunday protest
* HK protest largest challenge to Xi Jinping since he took power
* Trump signals possible call with China leader Xi Jinping
* U.S./China talks to continue via telephone; face-to-face meeting in September
* Despite Trump delaying some new tariffs, no China pledge on farm product buys
* Any downturn could scramble Trump's 2020 strategy
* Figuring out USDA's corn and soybean plantings and prevent-plant acres
* RMA provides some relief to farmers impacted by floods this spring
* India faces WTO investigation over its sugar subsidies
* Poultry plants across Mississippi knowingly hired undocumented immigrants: report
* Israel makes concession on Tlaib visit
* Remaking Appalachia's agriculture

Markets: On Thursday, the yield on 30-year American bonds fell below 2%. Long-dated government bonds usually yield more than short-dated ones, because of the risk that the central bank will raise interest rates in the future. When that relationship inverts, it is a sign that markets expect interest rates to fall sharply in the future, as would happen in reaction to an approaching recession. The Economist notes that only once in the past half-century has the yield-curve inversion been a false alarm, at least in America; every other time it has predicted a recession.

Yield curve history

Markets are braced for a global downturn, says this week's Economist. “The signals from bonds, currencies and commodities are increasingly alarming.” (Link for details.)

President Donald Trump has considered buying Greenland from Denmark. America has military installations on the semi-autonomous island, the world’s largest. A Greenlandic legislator said “that will be a ‘no thanks’ from here” and Denmark’s last prime minister, Lars Lokke Rasmussen, called it “an April Fool’s joke...but totally out of season!” The item was first reported by the Wall Street Journal (link). Meanwhile, MarketWatch pointed out that the concept of the U.S. buying Greenland is not new — the U.S. made attempts to buy it from Denmark in 1867 and 1946.


Analysis: Corn, cotton & wheat winners in MFP 2. Former USDA chief economist Dr. Joe Glauber, now Senior Research Fellow at the International Food Policy Research Institute, provided us with his preliminary analysis of the second round of the Market Facilitation Program (MFP 2). He says relative to the first tariff aid payments, corn, cotton and wheat are the big winners, while a little less money will go to soybeans, though it would still have the second highest payout.

Glauber assumed 100% participation (it will be slightly less) and used FSA’s August planted acreage, which will be updated monthly.

He estimates MFP 2 payouts of $5.12 billion for corn (average per-acre payment of $59.88), $4.77 billion for soybeans ($64.47 per acre), $1.64 billion for wheat ($35.68 per acre) and $1.22 billion for cotton ($98.84 per acre).

Glauber's analysis does not factor in payment limits.

MFP 2 and Glauber analysis

U.S./China trade policy update:

  • Focus on Hong Kong is the biggest current topic in ongoing U.S./China situation. Hong Kong (HK) is bracing for weekend protests amid Chinese threats after a week of violent clashes. A large rally is set for Sunday. Mainland China has already issued a stern warning, with the Chinese ambassador in London saying Thursday that China would “not sit on its hands and watch” if the protests get out of hand. Hundreds of paramilitary People’s Armed Police ran drills in Shenzhen, just across the border from Hong Kong.
  • Beijing realizes the risk of sending in troops, but it remains a real option, especially as Chinese officials have begun to use “terrorism” in describing the behavior of protesters. The HK crisis began when Carrie Lam, HK's Beijing-appointed chief executive, tried to implement a controversial extradition law that would have allowed HK residents, for the first time ever, to be extradited to China to face trial for certain crimes. That led to a major protester backlash. Chinese officials, media and others in the country stressed chaos at the airport would justify military intervention if needed. HK has both its own currency, pegged to the U.S. dollar, and an open capital account. Should Beijing send in troops, it would very likely trigger international sanctions and put Beijing in an even worse situation.
  • What is the trade war connection with HK? “Should China’s security forces stage a large-scale intervention in Hong Kong, the linkage to trade would become direct,” wrote Michael Hirson, an analyst at the Eurasia Group, in a research note. “Even if he were so inclined, Trump would likely have no choice but to cancel trade talks.”
  • CEO of the Hong Kong-based airline Cathay Pacific, Rupert Hogg, has resigned, a week after the Chinese authorities criticized the involvement of its staff in protests. 
  • President Trump signals possible telephone call with China leader Xi Jinping, saying he would hold a phone call “soon” with Xi, as he suggested that the trade war between the world’s largest economies would be “fairly short... “I think we’re having very good discussions with China. They very much want to make a deal,” Trump said. “I think the longer it goes the stronger we get . . . I have a feeling it’s going to go fairly short.” Others, however, see China digging possibly waiting until after the 2020 U.S. presidential election to strike a deal.
  • Some U.S. lawmakers are putting increasing pressure on Trump to take a tougher stance to prevent a crackdown by Beijing on HK. U.S. House Speaker Nancy Pelosi (D-Calif.) called on HK's chief executive to meet with protesters this week, prompting Beijing to say American lawmakers should mind their own business. Trump tweeted that China wants a trade deal but “let them work humanely with Hong Kong first.”
  • Talks ahead. U.S./China trade officials will hold teleconference within two weeks, while China confirms person-to-person meeting in Washington in September.
  • No commitment of big China buys of U.S. farm products. Despite a Trump concession on delaying some previously threatened tariffs, Hu Xijin, editor of China’s Global Times, tweeted that a delay in U.S. tariffs won't get China to resume large purchases of American farm goods.
  • China’s state council has vowed to retaliate against the U.S. for the new looming tariffs, saying the U.S. had “deviated from the correct track of consultation and settlement of differences.” President Trump said, “I don't think they'll retaliate. But if they did, we have the ultimate form of retaliation... We would be able to step it up,” Trump said. “I’ve been very mild about it, very, very mild. There’s a long way I can go.”
  • The Trump administration published details about the next tariff increase in a Federal Register notice, which didn’t include an exemption for goods already en route from Chinese ports. Link for details.
  • Slower economic growth in China and its ongoing trade war with the U.S., and fears of a recession ahead in the U.S. have complicated strategies of both countries. The New York Times notes that, “As evidence mounts that the global economy is slowing, President Trump is caught between his pursuit of the trade war with China and his need to keep the U.S. economy humming as he campaigns for re-election.” Link
  • Trump pressured Treasury Secretary Steven Mnuchin to label China a currency manipulator two weeks ago, the Washington Post reports (link).
  • Any positive news? Trump said he received a “very strong message” from China that the country will follow through on its promise to stop exports of the opioid fentanyl to the U.S.
  • More positive news: China's foreign ministry issued a statement through a spokesperson expressing hope for a trade solution. "We hope the U.S. can work in concert with China to implement the two presidents' consensus that was reached in Osaka, and to work out a mutually acceptable solution through equal-footed dialogue and consultation with mutual respect," the spokesperson said.
  • Bottom line: After threatening retaliation against incoming American tariffs, China urged the U.S. to meet it "half way," while President Trump talked up formal negotiations and said he expected the trade dispute to be short-lived. Focus now is on a planned big protest Sunday in Hong Kong and whether that will bring in Chinese military and tanks. If so, Trump may have to cancel upcoming talks with China on trade issues.

Another China problem: soaring food prices, an ominous development for the Communist Party leadership. The main factor in China’s rising food prices is the Asian swine fever (ASF) outbreak. Pork prices have jumped by 27%, and China claims 1 million pigs have been slaughtered, while experts say a more realistic figures may be closer to one-third or one-half of the country’s herd.

China food prices

USDA corn and soybean acreage numbers are not much out of line even with prevent-plant. One cannot say farmers just planted x acres and then add prevent plant (PP) to get the individual crop intended plantings. Corn's PP benefit via insurance was bigger than that for soybeans, so farmers took the option to plant corn PP first if they could. But if you took corn PP, you could still plant. After the corn PP declaration by farmers, USDA said farmers had to plant to get the new Market Facilitation Program (MFP) 2. So many did plant even if they took the original option to declare PP on their land. So that is the FSA data.

Look at 2018: Combined corn and soybeans acres were 178.3 million acres. And, prevent plant combined was 1.2 million acres. That equates to 179.5 million acres.

In 2019, the combined corn and soybean plantings were 166.7 million acres, given lower soybean acres. Take the 15.5 million acres of prevent plant for corn and soybeans, that gives you 182.2 million acres, so only 2.7 million acres higher than 2018.

Other items of note:

  • USDA's RMA as expected is providing some additional relief to farmers hit by flooding this spring. The agency is delaying charging interest on premiums that were due on Thursday. RMA earlier agreed to allow earlier haying and grazing of cover crops planted on prevent-plant acres. Link for details.

  • Federal immigration officials said they have probable cause that all five companies operating poultry plants raided by ICE in Mississippi last week violated immigration law by knowingly hiring undocumented immigrants. It was unclear whether the companies or managers would face charges or penalties. Link to Washington Post article.

  • Kraft Heinz Co. and Mondelez International Inc. will have to pay a $16 million penalty over a wheat manipulation case that dates back to 2015, the CFTC announced. Link to Reuters for details.

  • India is facing an investigation at the World Trade Organization over its sugar subsidies, the Financial Times reports (link).

  • Israel will allow U.S. lawmaker to visit family. Prime Minister Benjamin Netanyahu’s government said today that Rep. Rashida Tlaib, one of the two congresswomen whom it barred the day before, would be allowed into the country on humanitarian grounds to see her 90-year-old grandmother, who lives in the West Bank.

  • Remaking Appalachia's agriculture. An indoor farmer is building a 60-acre greenhouse in an economically distressed part of Kentucky. A Wall Street Journal article asks, “Will his high-tech approach help fix the flaws of the U.S. food system?” Link

  • Cotton AWP declines another week.  The Adjusted World Price (AWP) for cotton eased to 52.22 cents per pound, effective today (Aug. 16), down from 52.67 cents per pound the prior week. As with the rate in effect Aug. 9, the AWP level is the lowest since the week of May 27, 2016, when it was 51.50 cents per pound. 

Markets. The Dow on Thursday moved up 99.97 points, 0.39%, at 25,579.39. The Nasdaq eased 7.32 points, 0.09%, at 7,766.62. The S&P 500 added 7.00 points, 0.25%, at 2,847.60. The upticks came a day after all three major indexes dropped about 3% and the Dow suffered the biggest decline of the year. Major stock indexes are trading about 6% below the all-time highs they set last month.

Mixed U.S. economic data released Thursday. U.S. retail sales data showed consumer spending, which accounts for more than two-thirds of U.S. economic activity, remains a major element of domestic growth. Retail sales climbed a seasonally adjusted 0.7% in July from a month earlier. Industrial output fell in July, as the manufacturing sector continued to struggle with trade-related headwinds, the Federal Reserve said Thursday.

Japan edged out China as the largest holder of U.S. Treasuries in June. Japan’s holdings of U.S. gov't bonds rose to the highest level in two and a half years, according to data released by the U.S. Treasury on Thursday. That brought its holdings to $1.12 trillion. China reversed a four-month selling streak, increasing its holdings to $1.11 trillion in June.

Fed’s Bullard notes trade uncertainties but says U.S. economy remains strong. The drop in U.S. equity markets Wednesday was a “big selloff,” St. Louis Fed President James Bullard told the Fox Business Network. But he also noted, “Come on, the market’s way up this year and, you know, even if nothing else was going on, you might have expected some repricing there.” Asked about the potential for a 50-basis-point cut in the target range for the Fed funds rate when U.S. central bankers meet Sept. 17-18, Bullard said he did not want to prejudge the meeting outcome. He also dismissed speculation that the Fed needs to call a special meeting to move on lowering rates ahead of the September Federal Open Market Committee (FOMC) meeting. “A couple of weeks one way or the other probably doesn’t matter,” he said. “What matters is that you’re in the right zone for interest rates and that you’re reacting appropriately to the incoming data.” 


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