Major Trade Pullback in China as More Comments Surface Re: Possible Phase 1 Delays

Posted on 02/12/2020 6:23 AM

New name for coronavirus illness: COVID-19

In today's updates:


* Major trade pullback evident in China
China’s coronavirus outbreak has scrambled the global trade in commodities
* White House National Security adviser talks about China’s purchase commitments
* Coffee not brewing in China due to border crossing shutdowns
* WASDE did not offer much new info re: Phase 1 China demand
USDA Chief Economist Rob Johansson comments on WASDE, China & Phase 1
* China reported 2,015 new cases of Wuhan coronavirus, now called COVID-19
* Experts see end in sight to coronavirus
* WHO chief Tedros Adhanom comments on vaccine timeline
* China could boost stimulus efforts if economy slows further due to coronavirus
* Bernie Sanders won the New Hampshire Democratic primary
U.S. denies special trade status for some WTO members
* Grassley: No new revenue, no new infrastructure plan
* Boozman leads effort to boost access to U.K. market for U.S. rice
* Brazil ethanol firm mulls adding corn to boost output, run year-round
Tyson Foods Inc. taking lessons from Inc. in how to count its chickens
* USTR releases report on failings of WTO appellate body dispute settlement system
* USDA Inspector General focusing on MFP process
* Fed’s Powell reiterates Fed ‘closely’ monitoring coronavirus situation


Markets: Global stocks and oil prices advanced today, and U.S. stock futures signal a strong open, as concerns about China’s coronavirus and the potential economic fallout eased. But, Chinese companies have canceled orders for crude oil and other goods, and the country’s once-congested ports are quieter. Prices for some natural resources plumbed multiyear lows. Meanwhile, Bitcoin hit its highest price this year, above $10,000 as Fed Chairman Powell discussed cryptocurrencies

Oil prices are higher as Russia said it was studying an OPEC+ proposal to curb crude output by a further 600,000 barrels per day, though Energy Minister Alexander Novak didn't specify when the country would make a decision are exploring oil revenue sharing options amid a political crisis.

Brazil’s currency has dropped 7% this year to a record low, helping make their commodities more competitively priced than other countries, including the United States. Last week, the central bank cut its policy interest rate to an all-time low of 4.25%, a trigger for currency weakness. Real rates, after inflation, are close to zero.


Late-night comedy: “Today, Joe Biden said that Mickey Mouse could run against President Trump and have a shot,” Conan O’Brien said. “Then Biden found out that he was polling third behind Mickey Mouse.”



— U.S./China trade policy update:

  • A major trade pullback is evident in China among a host of commodities and countries. Roadblocks and lockdowns have affected the flow of the meat to consumers in China, as well as delaying the launch of new breeding facilities. It’s becoming increasingly likely that Chinese officials by the end of the first quarter will seek consultations with their U.S. counterparts to delay previously promised purchases of U.S. farm products as part of the U.S./China trade accord. China’s Ministry of Agriculture and Rural Affairs said the country might have to delay its purchases of some $40 billion in U.S. farm goods because of the coronavirus, but it will fulfill its commitment within a year.
  • China’s coronavirus outbreak has scrambled the global trade in commodities. Markets for raw materials and food have all swooned amid worry over a broad weakening of demand, the Wall Street Journal reports (link), while stockpiles of industrial goods are growing and more ships are sitting idle. Chinese companies are canceling orders for crude oil and other commodities, and some Chinese buyers are declaring force majeure on their contracts to protect themselves from penalties. China National Offshore Oil Corp. recently sought the legal declaration to turn back deliveries of liquefied natural gas cargoes supplied by Total SA, BP PLC and Royal Dutch Shell PLC. Shippers of perishable goods are facing longer border delays, with fewer workers available at ports and some ships halted for quarantines. Agriculture exporters in the U.S. say they are concerned that space to hold their goods at Chinese ports is running out.

    Price declines
  • White House National Security Adviser Robert O’Brien is the latest Trump administration official to talk about China’s purchase commitments under the Phase 1 trade deal, telling an audience in Washington, “We expect the Phase 1 deal will allow China to import more food and open those markets to American farmers, but certainly as we watch this coronavirus outbreak unfold in China, it could have an impact on how big, at least in this current year, the purchases are.” He also said the virus could impact the U.S. economy “and also the world economy,” noting China’s role in the global supply chain. “We will have to wait and see how it plays out and whether alternate suppliers can be found,” O’Brien said at the event held at the Atlantic Council.
  • Coffee not brewing. In Vietnam, the source of more than a third of the coffee consumed in China, border crossings were shut for 10 days, creating a backlog of 3,000 tons of agricultural goods, including coffee, stuck at customs, the state-run Vietnam News Agency said. Vietnam’s statistical agency signal coffee exports will drop by a third in the second quarter of this year over the same period in 2019 as a result of the virus’s impact, contributing to trade losses of up to $800 million.
  • USDA’s supply/demand report, as expected, did not offer much in new China demand news. USDA Chief Economist Rob Johansson told USDA Radio there were three reasons: “An increase in exports to China will often times come from a decrease in exports to a number part of the globe,” he noted, and secondly, the USDA forecasts are reported for all destinations, not just one country. The USDA WASDE report bases forecasts of exports on a marketing-year basis while the Phase 1 purchases are on a calendar-year basis. “So, any changes in China purchases could occur now, could occur in October, November when we are harvesting our crop,” he noted. Not surprisingly, those comments echo the statements USDA made in a report Johansson’s office issued last week to address the potential impact of the Phase 1 agreement on various USDA export forecasts, including the monthly WASDE report.

    USDA mentioned China just a few times in their WASDE commodity market analysis. U.S. soybean exports were forecast higher this month than they were in January, with USDA analysts citing increased demand from China with the Phase 1 trade agreement implied as a factor  that prompted the adjustment. USDA increased all rice imports to a record 32.5 million cwt. “on an extremely fast pace so far this marketing year.” The increases were 1.5 million cwt. For long-grain and 0.9 million tonnes for medium- and short-grain imports. USDA noted the latter is in part due to “continued imports from China.” Ending cotton stocks are seen higher on larger production and lower consumption. “A 1-million-bale decline in China’s expected consumption is the largest single change this month: consumption is lower despite the positive impact of the U.S./China trade agreement, due in part to the negative economic effects of the novel coronavirus outbreak,” USDA explained. Bottom line: While there were few changes linked directly to the Phase 1 agreement, it was clearly mentioned as a factor in the report, confirming what USDA signaled last week in a report issued by the USDA Office of the Chief Economist — that they would be incorporating public information from the Phase 1 deal into forecasts coming from the agency.

— Coronavirus update:

  • China reported 2,015 new cases of Wuhan coronavirus, now called COVID-19 (from “coronavirus”, “disease” and “2019”), putting the total cases in the country at 44,653 with deaths in mainland China at 1,113, according to the National Health Commission.
  • Experts see an end in sight to coronavirus. China’s senior medical advisor, Zhong Nanshan, said Tuesday that the coronavirus outbreak could end in April, as the country recorded the lowest number of new cases since Jan. 31. Still, the World Health Organization (WHO) warned that the virus is “public enemy number one,” with China recording more than 1,100 deaths.
  • While the level of cases appears to be slowing in China, World Health Organization (WHO) official Dale Fisher told Reuters in an interview in Singapore that the situation is only starting elsewhere. Fisher, head of the Global Outbreak Alert and Response Network, said, “It has spread to other places where it is at the beginning of the outbreak.”
  • World Health Organization (WHO) chief Tedros Adhanom comments on vaccine timeline. Tedros cautioned, “The first vaccine could be ready in 18 months. So we have to do everything today using the available weapons to fight this virus while preparing for the long term using the preparations for the vaccines.”
  • Chinese apparel makers have pivoted production lines to produce medical protective suits and facemasks, according to Xinhua, with companies said to be converting some lines to the effort or adding to capacity. China’s National Textile and Apparel Council said that 60% of medical supply manufacturers in the textile industry have resumed production.
  • China could boost stimulus efforts if its economy slows further due to the coronavirus outbreak, according to International Monetary Fund (IMF) official Changyong Rhee. China had been taking steps to deleverage its economy prior to the outbreak, Rhee noted, adding, “We understand that if the coronavirus cases slow the Chinese economy… they have policy” for more stimulus. However, the head of the Asian and Pacific Department said they hope China “can also (continue) to do… structural reform and credit control.” The situation will be a focus of the Group of 20 (G20) finance ministers’ meeting in Riyadh, Saudi Arabia, Feb. 22-23. Rhee said the is a downside risk for China with the situation and “the downside risk will be large for countries which have close ties with China.” Asian tourism is one of the “major channels” that has been impacted, he noted.

— Sanders narrowly wins New Hampshire, with Buttigieg second and surging Klobuchar third. Sen. Bernie Sanders won the New Hampshire primary, narrowing besting Pete. Sen. Amy Klobuchar garnered third place after finishing fifth in Iowa. Sen. Elizabeth Warren and former Vice President Joe Biden, once at the top of the pack, had weak performances.


     Details: Sanders won 25.9%, followed closely by Buttigieg, the former mayor of South Bend, Indiana with 24.4%, with 96% of the votes counted. Klobuchar had 19.8% of the votes. Warren won 9.3% and former vice-president Joe Biden only took 8.4%. Delegate counts: Sanders and Buttigieg both received 9 while Klobuchar won 6. The combined results of the Iowa and New Hampshire contests left Buttigieg in the lead with 23 delegates and Sanders with 21. Klobuchar has seven delegates. Warren remained on eight, while Biden lagged in fifth place with six delegates. The eventual Democratic nominee will need at least 1,991 delegates to win the nomination.


     Andrew Yang and Sen. Michael Bennet ended their Democratic presidential bids.


     Schedule ahead: Candidates face 22 states voting in less than a month. Nevada holds its caucuses on Feb. 22, and South Carolina's primary is Feb. 29. Super Tuesday, on March 3, includes 14 states, accounting for more than one-third of the total delegates at stake.


— U.S. denies special trade status for some WTO members. The Trump administration issued a notice Tuesday that denies developing country status to nations the administration deems “wealthy” and says has “abused” special and differential trade treatment under World Trade Organization (WTO) rules. Among the countries excluded under the administration action are China, Brazil, India, Indonesia, Malaysia, Thailand and Vietnam. The criteria included gross national income per capita exceeding $12,375 or the country's share of world trade.


     Background. WTO rules on subsidies permit developing or least developed countries a higher threshold before rules against subsidies would apply to their exports.


     Membership in the G20 or status as an applicant or member of the Organization for Economic Cooperation and Development also disqualified a country for special treatment under U.S. law. This factor resulted in the U.S. excluding Argentina, Costa Rica, Colombia and South Africa in the action Tuesday.


     The USTR notice included a list of least developed and developing countries that still enjoy special status under U.S. law. Among the significant U.S. trade partners that still qualify are Bangladesh, Kenya, Cambodia, Honduras, Pakistan,  Zimbabwe, Ecuador, Egypt and El Salvador.


— Grassley: No new revenue, no new infrastructure plan. Senate Finance Chairman Chuck Grassley (R-Iowa) told reporters Tuesday that the chamber is "going to have a very difficult time finding the financing" for the $287 billion infrastructure bill passed by the Senate Environment and Public Works Committee in July. He said the Senate will have to find between $93 billion and $110 billion beyond existing motor fuels tax revenue to finance the bill. Neither Majority Leader Mitch McConnell (R-Ky.) or Minority Leader Chuck Schumer (D-N.Y.), he said, have indicated support for a gasoline tax increase, which would be the first since 1993.


     "If we're going to move forward, I've got to come up with that money," said Grassley. “But I've also gotta come up with something that can get through the United States Senate. And when you start looking at the political possibilities — particularly of the gas tax — if both McConnell and Schumer are against it, what's the chance of getting 60 votes? Practically nil.”


     Grassley said he would be meeting with Environment and Public Works members “shortly” to discuss options, and said there is a “grab bag full of ideas” on how to pay for a highway bill. But that bag, he said, “doesn't fill in a $93 billion to $110 billion hole.”


   The House has yet to advance a highway bill, but its leadership two weeks ago unveiled a $760 billion, five-year proposal Democrats say includes expanded broadband access, drinking water systems, clean energy systems and other infrastructure beyond surface transportation programs. That legislation is to include $329 billion for highways, but was broader than the straightforward surface transportation bill the Senate advanced.


     President Donald Trump’s budget released Monday called for a 10-year, $1 trillion investment. His proposal would provide $810 billion for highways and $190 billion in additional infrastructure spending. Trump also endorsed the Senate bill in his State of the Union address.


     Like the Senate, however, neither Trump nor the House has advanced a plan to pay for their proposals.


     Background. The current surface transportation authorization bill (PL 114-94) expires Sept. 30. It relies on a federal gas tax of 18.4 cents per gallon and 24.4 cents per gallon for diesel to pay for most federal highway programs. In recent years, however, Congress has had to transfer money from general revenue to fully pay for those programs, and groups including the U.S. Chamber of Commerce have lobbied for an increase in the gas tax to pay for them.


— Other items of note:

  • Boozman leads effort to boost access to U.K. market for U.S. rice. Sen. John Boozman (R-Ark.) and a group of his colleagues are urging the Trump administration to push for increased market access for U.S.-grown rice during negotiations with the United Kingdom (U.K.) for a new trade agreement. In a letter to U.S. Trade Representative Bob Lighthizer, the senators note that prior to 2007, the U.K. was one of the largest export destinations for American rice. However, for more than a decade, the European Union (EU) has severely limited market access for U.S.-grown rice. Now that the U.K. is no longer tied to the EU, negotiations for a new agreement provide a fresh opportunity for U.S. rice farmers to help meet the country’s needs, the lawmakers noted. Boozman authored the letter, which was signed by Sens. Tom Cotton (R-Ark.), Roy Blunt (R-Mo.), Josh Hawley (R-Mo.), Roger Wicker (R-Miss.), Cindy Hyde-Smith (R-Miss.), John Cornyn (R-Texas and Ted Cruz (R-Texas).
  • Brazil ethanol firm mulls adding corn to boost output, run year-round. Sao Martinho announced Tuesday that it is considering adding the capability to process corn into ethanol to be able to boost ethanol production and run throughout the year at its plant in Pradopolis in Sao Paulo state, the world’s largest ethanol plant. The plant currently processes sugarcane into the fuel which means the plant typically operates only during the April-December period. Several sugarcane-based ethanol plants in Brazil have added the ability to process corn, using cane waste as an energy source to process the corn. The plant is located in Pradopolis in Sao Paulo state. The company’s CFO made the announcement during a conference call on earnings, indicating that the size of the plant could compensate for logistical costs for the project and make it feasible, but no final decision has been made.
  • The U.S. Trade Representative released a report on the failings of the appellate body of the World Trade Organization’s dispute settlement system. Link for details.
  • Tyson Foods Inc. is taking lessons from Inc. in how to count its chickens. The largest meat producer in the U.S. is expanding its use of computer vision to track poultry moving through its plants, the Wall Street Journal reports (link),  part of an effort to invest more in automation and artificial intelligence to cut costs and reduce waste. By the end of the year, Tyson expects to use cameras, machine-learning algorithms and near-real time data analysis to record hundreds of thousands of pounds of packaged chicken every week.
  • Focus on MFP process. USDA Inspector General Phyllis Fong’s office is reviewing the department’s authority to provide more than $20 billion in direct payments to producers without an appropriation from Congress, as well as questions about whether the aid is unfairly tilted to certain states and commodity groups, she told House appropriators. “We’re going to start out with the basic issue of authority for the programs, and then we’re going to get into the design and implementation, eligibility and look at the producer questions,” Fong said. “The first piece of our work should be coming out in the next several months.”

— Markets. The Dow on Tuesday eased 0.48 point, 0.00%, at 29,276.34. The Nasdaq rose 10.55 points, 0.11%, at 9,638.94. The S&P 500 was up 5.66 points, 0.17%, at 3,357.75. Both the Nasdaq and S&P 500 managed to notch new records with the close.


     Fed’s Powell reiterates Fed ‘closely’ monitoring coronavirus situation. “The question for us really is what will be the effects on the U.S. economy? Will they be persistent? Will they be material? That’s really the question,” Powell said before the House Financial Services Committee. Powell told lawmakers it was too soon to say whether the outbreak would change the central bank’s view that the current level of short-term rates remains appropriate to support solid economic growth and hiring — but it is the kind of threat that illustrates why the Fed is more likely to cut than raise rates, observers note. "The FOMC believes that the current stance of monetary policy will support continued economic growth, a strong labor market and inflation returning to the committee’s symmetric 2% objective, he added. "As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy will likely remain appropriate." Powell will be back on Capitol Hill today, this time before the Senate Banking Committee in the second day of his semi-annual testimony on monetary policy. No changes to his text are expected from his Tuesday appearance, putting the full attention on questions from lawmakers.




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