Last Installment of MFP 2 Payments in Doubt; Phase 1 Deal with China May Impact

Posted on 01/09/2020 5:28 AM

China confirms delegation coming to U.S. | Mideast update | China meat buys accelerate

In today's updates:

* Last installment of MFP 2 payments in doubt ahead of Phase 1 deal signing w/China
* China finally confirms Vice Premier Liu He will travel to Washington
* China provides no details on pledged purchases of U.S. farm commodities
* Why traders are so focused on China TRQ commodity buys
* Grassley: Finance panel priority to focus on making sure China buys U.S. ag products
* Booming Chinese meat demand continues
* China says inflation at 2.9% for 2019
* China is finally getting a handle on African swine fever
* World food prices again rose in December
* Analyst: More trade destruction than trade diversion right now
* Iran crisis cools, but tensions linger
* Pentagon rejects Iranians purposely avoided striking U.S. and Iraqi personnel
* Trump administration and intelligence officials held classified briefings for lawmakers
* Iran's Ayatollah Ali Khamenei comments on Mideast situation*
* Indonesia to test B40 biodiesel in April
* EU, Indonesia to hold consultations on EU biodiesel import duties
* Deere to cut costs and boost ag technology to increase profits
* Senate Democrats press Pelosi on articles of impeachment
* Appeals court allows use of military construction funds for border wall
* Five candidates have qualified so far for seventh Democratic presidential debate
* Justice Ruth Bader Ginsburg declared she is 'cancer free'
* World Bank sees modest growth
* Brazilian real has held up surprisingly well despite the large capital outflow

Markets: China's renminbi resumed its climb on the news that the U.S. and Iran averted a full-blown war.

France is still on strike. Rail workers walked off on Dec. 5, making it the longest continuous strike in the history of France’s national rail service. Protesters are returning to the streets while a compromise between the unions and the government over the reform — a re-election promise of President Emmanuel Macron — still seems out of reach.

Following a devastating early start to fire season in Australia, wildfires fueled by wind and scorching summer heat continued to burn across the southeast, where most of the country’s population lives. The New York Times takes an in depth look at the topic (link), with an interesting graphic which shows fire detections in southeast Australia by year:

Oh Canada... Jimmy Fallon said of the planned life change for the Duke and Duchess of Sussex: “I give them a lot of credit — tons of celebrities always threaten to move to Canada; they’re actually doing it.”

The last installment of MFP 2 payouts has not yet been agreed to, sources advise, with some contacts saying USDA Secretary Sonny Perdue has not pushed for them to be paid. While no final decision has been made, what appeared to be very high odds of the third and final installment being made under the program this month or in early February, it appears some in the Trump administration, reportedly including Perdue, want to see how the Phase 1 deal with China unfolds before making a final MFP 2 third installment decision.

Look for farm-state lawmakers and commodity and farm group lobbyists to accelerate their push for the payments to be made. The trade mitigation payments have been vital for farmer and ranchers impacted by the lengthy trade war with China. Some lobbyists say that even with a Phase 1 accord with China, it will take time for them to accumulate pledged purchases of U.S. commodities.

U.S./China trade policy update:

  • China finally confirms Vice Premier Liu He will travel to Washington Jan. 13 to sign Phase 1 of the trade deal with the U.S. on Jan. 15, confirming a signing ceremony previously announced by President Donald Trump. Liu, Chinese President Xi Jinping’s top trade negotiator will head the Chinese delegation, Ministry of Commerce spokesman Gao Feng said today in Beijing. The statement is the first Chinese confirmation of the signing.
  • Providing no additional information about the deal, Gao said the teams remain in close contact. China has not confirmed any specific numbers about agricultural product purchases U.S. trade officials said China has committed to buying, including $80 billion of U.S. farm products over two years. Trump has also said he will go to Beijing after the deal is inked to begin negotiations on the second phase, but China has yet to confirm that potential development.
  • Liu’s trip had been arranged following “an invitation by the U.S.,” Gao said, though the vice-premier will not bear the title of “special ambassador of President Xi Jinping”, and will instead travel to Washington as “a Politburo member, Vice-Premier and the China side leader for China/U.S. comprehensive economic dialogue.”
  • Besides Liu, the Chinese delegation will include People’s Bank of China governor Yi Gang, Commerce Minister Zhong Shan, vice minister of finance Liao Min, deputy chief of the National Development and Reform Commission Ning Jizhe, deputy international trade representative Wang Shouwen, and others, according to people familiar with the arrangements.
  • The 86-page, nine-chapter document will be publicly released after it is signed, U.S. Trade Representative Bob Lighthizer previously noted. Of note will be language related to enforcement and other details. Not included will be specific commodity purchase commitments by China nor timing of them.
  • China TRQ commitments. Some traders will focus on whether there is any language related to China's apparent pledge to U.S. trade officials that unlike past years, they will fulfill TRQ commitments. China has previously set the TRQs at 9.64 million tonnes of wheat, 7.2 million tonnes of corn and 5.32 million tonnes of rice. The U.S. challenged China’s operation of the TRQs at the WTO and won the case, and China said they would comply with the WTO ruling. Some traders note that if China fully purchases the quantities detailed, purchases from countries other than the U.S. means less of that commodity in competition on the world market.
  • Senate Finance Chairman Chuck Grassley (R-Iowa) said one of his panel's top priorities this year is to oversee the Phase 1 trade deal, to make sure China is making the increased purchases of U.S. farm commodities it has promised.

Booming Chinese meat demand continues. The Financial Times took a look at China's increasing meat imports (link/paywall). China’s meat imports jumped 63 per cent in the first 11 months of 2019 from the same period the previous year to $16.3bn, according to customs data.

China meat imports

Brazil, one of the leading suppliers of meat to China over the past year, saw the number of beef suppliers authorized by Beijing rise to 37 in December from 15 in August, according to Gro Intelligence, a commodity data firm.

Australian beef exports to China surged 81% to 265,000 tonnes in the first 11 months of 2019 according to Australia’s Department of Agriculture. China is set to leapfrog Japan as Australia’s largest beef market over the course of last year.

China says inflation at 2.9% for 2019. China’s consumer price index (CPI) for all of 2019 rose 2.9% compared with 2018, according to the National Bureau of Statistics (NBS). Inflation was at 2.8% in 2018 and the 2019 result was in line with the government target of 3% and had been running at a 2.8% rate for the first 11 months of the year. In December, CPI rose 4.5%, even with the November increase, driven in large part by a 17.4% rise in food prices which contributed 3.43 percentage points to the December increase. Pork prices gained 97% in December vs year ago, down from a 110.2% rise in November. On the wholesale side, the inflation mark declined 0.3% for 2019.

China food prices

China is finally getting a handle on African swine fever, the crisis that cut the nation’s hog population by at least a quarter and stoked inflation, the Wall Street Journal reports (link). “Beijing still has hard questions to answer about food safety, not least as it grapples with an outbreak of a new virus in Wuhan. But bringing swine fever under control will be great for Chinese consumers, and for the businesses that serve them,” according to the article.

China swine fever

World food prices again rose in December. World food prices rose for a third straight month in December to their highest mark in five years, according to the Food Price Index from the UN Food and Agriculture Organization, on increases for vegoils, sugar, dairy and a rebound in cereal prices.

The index moved up to 181.7 points in December, the highest mark since December 2014, up 2.5% from the November level.

For all of 2019, the index averaged 171.5 points, up 1.8% from 2018. However, that is still below the peak in 2011 of 230 points.

The index for vegoil prices increased to 164.7, up 9.4%, as palm oil prices moved up a fifth month on a rise in demand for biodiesel.

The meat price index was nearly steady at 191.6 in December, as higher pork and sheep meat prices were offset by a decline in beef prices.

More trade destruction than trade diversion right now. Brad W. Setser of the Council on Foreign Relations writes (link) that previously, “there was a plausible argument that Trump's tariffs were mostly just diverting U.S. demand to other markets. But in recent months imports from China and imports from the United States' other trade partners are both falling. And the fall in imports has brought the non-petrol trade deficit down significantly from its levels this summer, though perhaps not permanently.” Some charts from Setser:

A look at the U.S. trade deficit with select countries.
Trade balances

The following chart has the year-over-year changes in imports (in dollar terms).
Imports from China

Mideast tension update:

  • President Trump on Wednesday indicated an ease in tensions with Iran, signaling no new U.S. military strikes following an Iranian missile strike on Iraqi bases housing American and allied military forces that resulted in no casualties. Trump said the U.S. would immediately impose more economic sanctions against Iran, but no details were provided. Bottom line: Iran crisis cools, but tensions linger.
  • While some observers said Iran’s attack on U.S. forces in Iraq was calibrated to avoid escalation, the Pentagon rejected suggestions the Iranians purposely avoided striking U.S. and Iraqi personnel based at Al Asad air base and at another base in Erbil in northern Iraq. “I believe, based on what I saw, and what I know, that they were intended to cause structural damage — destroy vehicles, equipment and aircraft — and kill personnel,” said Army Gen. Mark Milley, the chairman of the Joint Chiefs of Staff. A U.S. defense official said U.S. early-warning systems detected the incoming ballistic missiles well in advance, giving U.S. and coalition forces time to take protective measures.
  • The FBI and Department of Homeland Security sent a nationwide joint intelligence bulletin to law-enforcement agencies on Wednesday warning that Iran could carry out physical attacks and cyberattacks against U.S. interests in the near future, according to security officials.
  • Trump administration and intelligence officials on Wednesday held classified briefings for lawmakers on the conflict with Iran, seeking to justify the airstrike. Lawmakers were told that U.S. intelligence intercepted communications involving Gen. Soleimani that pointed to future plots. While many Republicans were supportive of Trump’s decision, at least two GOP senators said they would support a legislative measure to direct Trump to cease hostilities against Iran until he obtained congressional approval, a move the administration opposes. One of them, Sen. Mike Lee (R-Utah) said the presentation Wednesday “was probably the worst briefing I have seen, at least on a military issue, in the nine years that I’ve served in the United States Senate.”
  • House Speaker Nancy Pelosi (D-Calif.) sets vote on war-powers resolution. The House speaker scheduled a vote for today on legislation to curb Trump’s ability to use military force against Iran. Even if approved the matter will no nowhere in the Senate.
  • Iran comments. In a speech broadcast Wednesday on state television, Ayatollah Ali Khamenei, Iran’s supreme leader, said Iran’s ultimate goal was to expel U.S. forces from the Mideast. “Last night, they were given one slap,” he said. “Such military actions are not enough as far as the importance of retaliation is concerned. What’s important is that their corruption-creating presence should end.”

Indonesia to test B40 biodiesel in April. Indonesia’s Energy Ministry is expected to start road tests for biodiesel containing 40% bio content (B40), according to an official in the agency. The country already has boosted the bio content of its biodiesel to 30% (B30) as they seek to reduce energy imports and increase use of palm oil. The road tests in April will follow the conclusion of lab tests that will start soon, according to Dadan Kusdiana, head of energy ministry’s research and development. He told reporters they hope to conclude tests in August. The B40 fuel will be different from the current B30, said Djoko Siswanto, acting head of the oil and gas area of the energy ministry. The B40 fuel will be made by blending fatty acid methyl ester (FAME) with fossil fuel and green diesel, Siswanto told reporters.

EU, Indonesia to hold consultations on EU biodiesel import duties. The European Union (EU) and Indonesia will hold consultations on EU import duties on biodiesel from Indonesia late this month as part of the WTO actions the two trading partners have launched. "We will have a consultation forum that will kick off on January 30," Trade Deputy Minister Jerry Sambuaga said earlier this week at a press briefing, according to the Jakarta Post. The two sides are to meet in Geneva Jan. 28-31.

Background. The EU filed a WTO challenge on Indonesia’s nickel ore export ban while Indonesia is challenging EU import duties on palm oil. Indonesia contends the EU import duties run counter to the Indonesia-EU Comprehensive Economic Partnership Agreement (CEPA). If no agreement is reached during the consultations, the matter would most likely proceed to a WTO dispute settlement panel.

Deere to cut costs and boost ag technology to increase profits. Deere & Company will reduce costs and increase investment in data-driven ag technology and its services business in a bid to increase profits, according to CEO John May. The company aims to increase its profit margin to 15% by 2022 from a projected mark of 12.5% for 2019.

The company has already cut production and laid off workers.

May indicated that Deere is looking at its overseas manufacturing footprint and has been offering a voluntary separation program to its salaried employees which is projected to save the company $120 million. That, however, is down from an early estimate the action would save $150 million.

The cuts are expected to add one percentage point to Deere’s profits by 2022, May said, in line with the profit boost it expects to see from investing in data-driven farming or precision agriculture.

Other items of note:

  • Senate Democrats press Pelosi. A growing number of Senate Democrats are calling for House Speaker Nancy Pelosi (D-Calif.) to send over the articles of impeachment against Trump, saying the party has little to gain from further delay.

  • Appeals court allows use of military construction funds for border wall. The Fifth Circuit’s order allowing the Trump administration to proceed with using $3.6 billion in U.S. Defense Department funds for the wall wasn’t a final ruling on the merits of the case, but gives the administration a green light for now.

  • The seventh Democratic presidential debate will be moderated by CNN's Wolf Blitzer and Abby Phillip as well as the Des Moines Register's Brianne Pfannenstiel next week, the network announced on Wednesday. Blitzer anchors The Situation Room on CNN. Phillip is a political correspondent for the network. Pfannenstiel is chief political correspondent for the DSM. CNN, in partnership with the Des Moines Register, will air the debate live on Jan. 14 at 8 p.m. CT from the campus of Drake University in Iowa. The debate will be the final face-to-face meeting between the candidates before the nation begins heading to the polls, beginning with the Iowa caucuses in early February. Five candidates have qualified so far: Former Vice President Joe Biden, former South Bend, Indiana, Mayor Pete Buttigieg, Minnesota Sen. Amy Klobuchar, Vermont Sen. Bernie Sanders and Massachusetts Sen. Elizabeth Warren.

  • Justice Ruth Bader Ginsburg declared she is “cancer free,” beating the disease for the fourth time after undergoing treatment for pancreatic cancer in the summer. The 86-year-old justice offered the health update to CNN in an interview in her chambers Tuesday evening. “I’m cancer free. That’s good,” Ginsburg said, with CNN reporting that she was “sounding energized and speaking animatedly.” She is one of four members of the Supreme Court’s liberal wing. Link to NYT article.

Markets. The Nasdaq on Wednesday moved to a record close as the situation in the Middle East did not escalate despite the Iranian missile attacks on U.S. military bases in Iraq. The Dow gained 161.45 points, 0.56%, at 28,745.09. The Nasdaq rose 60.66 points, 0.67%, at 9,129.24. The S&P 500 added 15.87 points, 0.49%, at 3,253.05.

World Bank sees modest growth. After slumping in 2019, the global economy is expected to make only a modest improvement this year, according to new forecasts from the World Bank. Global growth hit 2.4% in 2019, World Bank economists estimate, the worst year since the global financial crisis, driven by a contraction in global trade and a drop in manufacturing. The bank forecasts the economy will grow 2.5% in 2020, perhaps more of a stabilization than a rebound. The slight pickup is expected to come almost entirely from improvements in emerging market economies. The U.S., meanwhile, is among countries where growth is expected to slow—to 1.8% this year from 2.3% in 2019.

World Bank estimates

The Brazilian real has held up surprisingly well despite the large capital outflow seen last year.
Brazil real


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