Phase 1 talks | USMCA hurdles mount | China and Aussie dairies | CRP announcement
In today's updates:
* Kudlow working on new RFS plan after reports corn producers feel betrayed
Markets: Reports signal OPEC and its allies led by Russia are discussing increasing current cuts of 1.2 million barrels per day by more than 400,000 bpd, as well as extending their agreement from March, to June or later. Crude futures already soared 4.2% on Wednesday — the biggest gain since the attacks on Saudi Aramco's facilities — on output cut rumors and tightening American stockpiles. A final decision by OPEC+ is likely to come tomorrow afternoon. The group has curbed supply since 2017 to counter booming output from the U.S., which has become the world's largest producer.
What? A strike in France? Nationwide protests against changes to the pension system threaten to bring the country to a standstill today. One of the first words you learn in the country is strike... la grève. Protests are over Emmanuel Macron's plan for a top-to-bottom rebuilding of the pension system. Unions are going on an indefinite grève. The walkouts come as German industrial orders fell unexpectedly in October and euro zone retail sales slumped a worse-than-forecast 0.6%.
So this is why I bought a dark blue SUV... The Pantone Color Institute has reached back in time to calming, confident Classic Blue as its color of the year for 2020. The institute's vice president called the color a "reassuring presence" in uneasy times.
— Kudlow developing new RFS plan to boost biofuel mandates. National Economic Council (NEC) advisor Larry Kudlow is developing a new plan to bolster biofuel-blending requirements after ethanol proposals in politically important farm states complained the current proposal doesn’t do enough to compensate for waivers exempting some small refineries from the mandates. Kudlow participated in a Nov. 19 Oval Office meeting at which Sen. Chuck Grassley (R-Iowa) has said President Trump directed EPA Administrator Andrew Wheeler to ensure a 15 billion-gallon target for conventional biofuel isn’t undermined by exemptions.
Reports signal corn producers in key farm states like Iowa feel President Donald Trump reneged on prior promises to make them happy relative to fully offset refinery exemptions. Many observers think EPA will not completely offset those exemptions. Adjustments would be based on recent Energy Department recommendations for waivers, not the higher amount that the EPA has actually granted.
Even if EPA officials have the best intentions, “farmers don’t believe it” because of the agency’s track record, Grassley said Tuesday. “Even if your heart is in the right place, your regulation has to show that.”
A public comment period just ended on the proposal. EPA is reviewing feedback as it prepares a final rule setting 2020 ethanol and 2021 biodiesel mandates. Before that can happen, the EPA measure would be reviewed by a White House-led interagency committee. An agency spokesman has said the rule would be finalized this winter while the agency's regulatory guidance indicates the final rule would come yet this month.
— U.S./China trade policy update:
- China continues to insist on tariff rollbacks as part of Phase 1 deal. As close communications between the U.S. and China continue, China is making clear it wants tariffs lowered as part of any Phase 1 trade deal. "The Chinese side believes that if the two sides reach a Phase 1 deal, tariffs should be lowered accordingly," Commerce ministry spokesman Gao Feng told reporters. With tensions rising between the two countries outside of the trade deal, Gao was asked about the unreliable entities list that China may release. However, he indicated he had no more information to reveal at the time.
- In Washington, China’s Ambassador to the U.S., Cui Tiankai, said the two sides are trying to resolve their differences over trade, but warned some are trying to undermine those efforts. "At the same time, we must be alert that some destructive forces are taking advantage of the ongoing trade friction (through) extreme rhetoric such as 'decoupling,' the 'new Cold War,' and ‘clash of civilizations,'" Cui said in remarks at a U.S.-China Business dinner. He said some are trying to “rebuild the Berlin Wall between China and the United States in the economic, technological and ideological fields.” He called on U.S. and Chinese companies to withstand efforts he said were aimed at spreading “hostility and even create conflict between us," as well as "fake news" about the situations in both Hong Kong and Xinjiang. Cui did not specifically talk about the status of the trade talks, but said China remains committed to expanding bilateral trade and investment between the two nations.
- President Donald Trump reiterated an oft-used phrase on the U.S./China trade talks, saying they were going “very well.”
- Former World Bank president and USTR Robert Zoellick faults Trump’s China policy. Robert Zoellick, a former World Bank president who has served in past Republican administrations, delivered a public rebuke of President Trump’s China policy, warning the president risks pushing Beijing towards a parallel system that would clash with U.S. interests. Speaking to the US-China Business Council in Washington on Wednesday, Zoellick lamented the White House’s “logic of constant confrontation” with China, calling it ineffective and based on faulty reasoning. “I understand many of today’s complaints, but we are at serious risk of losing sight of American aims and how best to achieve them,” Zoellick said. Link to more from the Financial Times (paywall).
— China goes after Australian dairy giants. Investors in Bellamy’s Organic, a Tasmanian infant-formula producer, overwhelmingly voted in favor of a bid from Mengniu Dairy, a Chinese milk conglomerate, to buy the company for A$1.5bn ($1 billion). Before the offer, Bellamy’s was losing two-thirds of its market capitalization in the 18 months before the Chinese offer arrived. Mengniu offered a 59% premium on its share price. The Chinese firm wants more producers of foreign milk, which Chinese middle-class consumers love. A scandal involving tainted formula in 2008 put many off buying local products. Mengniu has just made another bid, this time for Lion Dairy & Drinks, Australia’s second-largest milk processor.
— USMCA update:
- House Speaker Nancy Pelosi (D-Calif.) is pushing to strip out sweeping legal protections for online content in the new trade pact with Mexico and Canada, in what would be a blow for big technology companies. "Internet firms lobbied hard to include the immunity language in the trade agreement, seeing it as a way to extend to Mexico and Canada the broad umbrella of legal protection they enjoy in the United States,” the Wall Street Journal reported (link). "But the trade-pact language also could make it harder for Congress to withdraw the current federal online protections for internet firms in the future, some lawmakers fear. That is causing second thoughts about including the legal shield — regarded by tech firms as a pillar of the internet — in a trade pact."
- A top Mexican official said protections for biologic drugs are being rolled back in the pending trade deal being negotiated by the Trump administration, an apparent compromise that could attract Democratic support at the cost of the pharmaceutical industry. At the same time, Mexico has said it would resist allowing U.S. inspectors into Mexican factories, a key part of the trade deal's labor protections. Mexico Deputy Foreign Minister Jesus Seade, his country's lead negotiator, wrote in a column Wednesday for the newspaper El Universal that "the very high protections that were agreed to for biomedicines ... are going to be moderated drastically." The move would be a blow to the pharmaceutical industry, which had pushed for the protections in the U.S.-Canada-Mexico Agreement (USMCA), In the same column, Seade rejected allowing transnational inspectors into Mexican factories to ensure USMCA's labor rights provisions are enforced. Seade called that an "unacceptable" violation of his country's sovereignty. Abandoning that proposal would mean they could "soon have a treaty, and a very good one." In a tweet on Wednesday, Seade wrote, "I WILL NEVER accept anything that attempts against the interests + sovereignty of MX."
- Seade met privately with U.S. Trade Representative Bob Lighthizer for four hours Wednesday. He told reporters afterwards that a deal was close, "but there are things we cannot accept." Seade told reporters in Mexico City last week that U.S. labor leaders had become emboldened, throwing off talks.
- House Ways and Means ranking member Kevin Brady (R-Texas) urged Democrats not to attach a union pension rescue bill, known as the Butch Lewis Act, to the USMCA because of the potential to derail approval of the trade deal. “I believe the Butch Lewis Act needs a tremendous amount of work,” Brady told reporters at his regular weekly scrum. “It's not bipartisan. It doesn't solve the issue. And … no bill can be attached to this trade agreement without losing TPA protections.” Brady urged USTR, Mexico and House Democrats to wrap up negotiations on changes to the USMCA. “At some point you’ve got to put the pens down,” he said. There is still time for Congress to approve the trade deal this year, but that becomes less likely every day the talks stretch on, he said.
- Bottom line: House Democratic demand for changes in the pending USMCA are being seen as an overreach by some trade policy observers. They note that Mexican officials have privately expressed a willingness to walk away from the table and keep the status quo NAFTA rather than concede to U.S. demands. “For us, we are down to the bone,” Mexican Undersecretary for North America Jesús Seade said Wednesday night as he left his second meeting with U.S. Trade Representative Bob Lighthizer. “We have accepted 1,000 things.” The negotiations between Seade and Lighthizer will continue this morning. Mexico “should come to the conclusion quickly that what has been discussed between Democrats and USTR is reasonable,” said Rep. Jimmy Gomez (D-Calif.), a USMCA working group member. “If not, I’m not sure where the new USMCA will end up... Time does run out,” he added. “If they want a deal, it’s ripe now.”
— Global food prices rise amid gains in meat, vegoils: FAO. Food prices rose to their highest level in two years in November, according to the U.N. Food and Agricultural Organization (FAO) Food Price Index. The index reached 117.2 points in November, up 2.7% from October and 9.5% higher than a year ago.
Driven by a rise in palm oil prices, the Vegetable Oil Price Index tracked by the FAO rose 10.4% in November. The agency also noted that the price increase was from “robust global import demand, increased use for the production of biodiesels and expectations of possible supply shortages next year.”
Meat prices tracked by the FAO were up 4.6% in November, with beef and sheep meat prices up the most.
Cereal prices, however, declined 1.2%, in part on competition between wheat exporters.
— USDA to announce new CRP general signup. USDA today is expected to announce a general signup for the Conservation Reserve Program (CRP), reflecting changes made to the program via the 2018 Farm Bill. The interagency regulatory review of the CRP updates was completed Nov. 22.
At the end of October, there were 21.967 million acres in the CRP, including contracts that were to expire Sept. 30, but were given a one-year extension. Contracts on around 970,000 acres were extended, about 81% of acres that were eligible to be in the program for another year.
Continuous CRP signup in Fiscal Year (FY) 2019 enrolled about 245,000 acres.
In the final rule on CRP, the agency is not changing the scope of the program. Under the 2018 Farm Bill, the CRP acreage cap is increased from 24 million acres to 27 million acres by Fiscal Year (FY) 2023, and includes 8.6 million acres for continuous practices and two million acres for grasslands. Two new pilot programs under CRP are the Clean Lakes, Estuaries, and Rivers initiative (CLEAR 30, which has 30-year contracts) and a Soil Health and Income Protection Program (SHIPP). FSA expects to target at least 40% of continuous CRP acres for the practices considered as Clean Lakes, Estuaries, and Rivers (CLEAR).
The focus on CRP will increase over the next year with contracts on 5.36 million acres set to mature Sept. 30, 2020, including 4.7 million in general CRP contracts and 660,000 enrolled via continuous signups. That could allow for a very robust general signup given the current level of CRP acres and the size of maturities in September 2020.
Looking ahead, maturities are set to be 3.01 million acres in 2021 and another 4.01 million acres in 2022. Currently there are 10 states with one million or more acres enrolled in CRP.
— Other items of note:
- House Speaker Nancy Pelosi (D-Calif.) tonight will hold a CNN-based “town hall in D.C.” Meanwhile, Pelosi will deliver a statement on the “status of impeachment inquiry” into President Trump at 9 a.m. ET, her office announced early this morning.
- The U.S. attorney general is in Mexico today as the Trump administration pushes for a cartel crackdown. William Barr is in Mexico City will discuss the security situation in the country, as President Donald Trump considers officially designating Mexican drug cartels terrorist groups. Barr has meetings scheduled with Mexican President Andrés Manuel López Obrador, Foreign Minister Marcelo Ebrard, and other top law enforcement officials. The Trump administration will make a decision about the terrorist group designation on Friday, Bloomberg reports. If it goes forward, the cartels would fall under the State Department’s Foreign Terrorist Organization (FTO) category, along with the Islamic State and al Qaeda. The designation is usually intended to disrupt groups’ financing. The suggestion has alarmed Mexico, which called it “interventionism.”
- Extended discussion on tax extenders. House Democrats discussed the tax extenders at a caucus meeting Wednesday. Majority Leader Steny Hoyer (D-Md.) said Ways and Means Chairman Richard Neal (D-Mass.) and Sen. Chuck Grassley (R-Iowa) have not reached a deal on any plan. Sen. Ben Cardin (D-Md.), another tax writer, is optimistic lawmakers will be able to act this year. "I think we have a reasonable chance to get some form of an extender bill done," he said.
- Brazilian President Jair Bolsonaro promised to open the world’s largest rainforest to industry and scale back its protections. New figures show his government is succeeding: More than 3,700 square miles were razed in the past year, the largest loss in a decade. Using video and photographs, the New York Times documented the scale of deforestation in the first year of Bolsonaro’s presidency. Link for details.
- Iran is using violence in Iraq as cover to build a hidden arsenal of short-range ballistic rockets inside its neighbor, according to U.S. officials. Link for details.
- Having it both ways... The Trump administration complained a French digital tax is a unilateral, legally dubious remedy to a global problem. How ironic. U.S. steel tariffs are a unilateral, legally dubious solution to a global problem: A Chinese global supply glut. Wall Street Journal writer Greg Ip notes that individual nations, rather than working together to rewrite international rules, are choosing to go it alone and further undermining the world-trading system. Link for details.
- Schools waste an estimated 530,000 tons of food annually, costing up to $1.7 billion per school year, according to a report due out today from the World Wildlife Fund. Wasted milk could be as high as 45 million gallons per year. The group analyzed food waste at 46 schools across nine U.S. cities. Link to report.
- The U.S. meat industry is taking aim at the potential health benefits and risks of plant-based alternatives, hoping to blunt the growing popularity of products like the Impossible Burger and Beyond Meat. A new marketing campaign refers to such products as “ultra-processed imitations” and compares them to dog food. Link to NYT article.
- Separating the news from politics? The NRA ran an ad on Bloomberg.com opposing Michael Bloomberg’s presidential run. Bloomberg pulled it.
— Markets. The Dow on Wednesday rose 146.97 points, 0.53%, at 27,6439.78. The Nasdaq gained 46.03 points, 0.54%, at 8,566.67. The S&P 500 added 19.56 points, 0.63%, at 3,112.76.
President Trump’s 2017 tax cuts reduced the U.S. tax burden to one of the lowest among major world economies. The Organization for Economic Cooperation and Development found the U.S. now has lower taxes than all but three countries that belong to the intergovernmental organization.
Japan approves $120 billion stimulus. Prime Minister Shinzo Abe’s cabinet approved a $120 billion stimulus program, Japan’s largest in more than three years, citing the same global economic risks that have led central banks in the U.S. and Europe to cut interest rates. Abe’s plan is also aimed at healing a self-inflicted wound on the Japanese economy: the October increase in the national sales tax to 10% from 8%. Retail sales fell 7.1% in October and car sales were particularly hard-hit, suggesting the tax may have led consumers to refrain from big-ticket purchases.