Phase 1 Snags Surface as China Rejects Numerical Figure for Farm Product Buys

Posted on 11/14/2019 6:33 AM

More perspective on Senate Democrats' claim that MFP is 'picking winners and losers'

In today's updates:

* China says no to putting a numerical number on U.S. farm product buy commitment
* Other Phase 1 snags center on tariff lifting differences
* Xi silent on Phase 1 talks/deal in comments at BRICS confab
* China says in-depth talks going on with U.S.
* China’s economy slowed further in October
* China lifts bird-flu linked import restrictions on U.S. poultry
* Bloomberg Businessweek tracks twists and turns of U.S./China trade war, talks
* More perspective on Senate Dems' claim that MFP is 'picking winners and losers'
* Reuters: Two sugar beet producers declared force majeure
* House Dems push credits for electric vehicles via possible tax extenders measure
* Federal Reserve chairman signals rate cuts are done this year
* Japan’s economy slowed sharply in the third quarter
* Germany’s economy eked out 0.1% growth in third quarter, averting recession
* Deval Patrick launches 2020 presidential bid
* House Ways & Means to hold Nov. 20 subcommittee hearing on U.S./Japan trade
* Trump: 'Fully briefed' on automotive tariff front; no decision yet
* Court rules Congress can have access to President Trump’s tax records
* Brouillette nomination hearing today

Markets: Crude futures are up for a second day after a report that the OPEC cartel sees a potential reduction in supply coming from non-OPEC members along with an “upswing” in the forecast for demand growth.

 

U.S./China trade policy update:

  • We now know why China has never officially confirmed the $40 billion to $50 billion in purchase commitments of U.S. farm products as part of Phase 1 talks. The reason is that China does not want to commit to a numerical figure, or at least not that large of a range. The commodity purchase range was revealed a few weeks ago by President Donald Trump and the top U.S. trade officials. But China never said the same numbers in public comments. This is why putting what both sides think they have agreed to into text is often two different things.
  • Beijing wants to avoid cutting a deal that looks more favorable to the U.S. than to China, the Wall Street Journal reported, adding that China also wants to have flexibility within the agreement should trade tensions escalate again. “We can always stop the purchases if things get worse again,” said one Chinese official quoted by the WSJ.
  • Another Phase 1 snag is disagreement over whether — and by how much — the U.S. would agree to lift tariffs on Chinese imports, a major Beijing initiative.
  • Still another lingering hurdle is China's resistance to U.S. demands for a strong enforcement mechanism for the package of potential agreements.
  • Trump takes the high road this time. Speaking to reporters at the White House Wednesday, Trump said talks were progressing. “We’ll see what happens, but it’s moving along rapidly,” Trump said. But just a day earlier, the president said he was prepared to raise U.S. tariffs on Chinese imports substantially if the two sides fail to reach an accord.
  • Xi makes no mention of Phase 1 talks/deal in comments at BRICS confab. Chinese President Xi Jinping told a BRICS summit that “protectionism and bullying” are hurting the world economy and had harmed international trade and investment, and intensified the downward pressure on the global economy, according to a report by state news agency Xinhua. He made no mention of any partial trade deal with United States. Xi said Brazil, Russia, India, China and South Africa – the bloc known as BRICS – should also push a “new round of technological and industrial revolution” in the face of new global changes.
  • China says in-depth talks going on with U.S. The U.S. and China are holding in-depth discussions on Phase 1 of a trade deal, with the cancellation of tariffs a key issue, according to Commerce Ministry spokesman Gao Feng. "China has emphasized many times that the trade war began with additional tariffs and should end with the cancellation of additional tariffs," said Gao. “If both sides reach a Phase 1 deal, the degree of tariff cancellation should fully reflect the importance of the Phase 1 deal; and its importance should be appraised by both sides together. Both sides are conducting in-depth discussions on this now.” However, Gao did not appear to have addressed the issue of increased buys of U.s. commodities, a U.S. demand in the negotiations in the Phase 1 deal and a component of the deal that the Wall Street Journal reported Wednesday was the latest sticking point. "Cancelling tariffs is in the interests of producers, consumers, China, the U.S., and the world," Gao stated.
  • China lifts bird-flu linked import restrictions on U.S. poultry. China announced it will lift its ban on imports of poultry meat from the U.S., making official the plan that was announced by China’s Commerce Ministry in late October. The measure has now been published by the country’s Customs Administration. The move comes after USDA’s Food Safety and Inspection Service (FSIS) published a rule in the Federal Register that would allow cooked/processed poultry products from birds slaughtered in China to come into the U.S. U.S. poultry has not had access to the Chinese market since the U.S. bird flu outbreak. However, U.S. poultry still faces stiff tariffs put in place by China, so the impact is likely to be minimal until those tariffs are removed.
  • Data signal China's economy is dragging. China’s official National Bureau of Statistics said value-added industrial output in October was up 4.7% from a year earlier, slowing from September’s 5.8% pace and short of the median 5.2% forecast. Retail sales were up 7.2%, slowing from September’s 7.8% pace and missing the 7.8% forecast. “There are many external uncertainties: Domestic cyclical issues have coincided with structural issues,” Liu Aihua, a spokeswoman for the statistics bureau, said today. “Downward pressure on the economy has increased continuously. Risks and challenges we are facing cannot be underestimated.” She expected governmental measures — which include tax cuts, monetary easing and some infrastructure spending — to have an effect, and expressed confidence that headline economic growth for the year would hit Beijing’s target of 6.0% to 6.5%. Growth in the third quarter slowed to 6.0%.
  • Economists think a U.S./China truce is unlikely in 2020. Link to Reuters poll.
  • Tracking the twists and turns of the U.S./China trade war, talks. Shawn Donnan and Jenny Leonard’s wrote a just-published story in Bloomberg Businessweek about “how Trump’s trade war with China morphed from a carefully calibrated strategy into a market-rattling roller coaster as unpredictable as the U.S. president himself.” Link to article.
    Twists and turns of China trade war

More perspective on Senate Democrats' claim that MFP is 'picking winners and losers' between regions and crops. The Senate Democratic minority paper on the Market Facilitation Program (MFP) this week (link) says 95% of the top payment rates have gone to southern farmers, who have been harmed less than other regions. The following is a table with MFP 1 and MFP 2 so far by state. Of the top 25 states, 16 are not southern.

Rank

State

MFP 1 & 2
Per Acre

1

Mississippi

$111.64

2

Arkansas

$85.24

3

Tennessee

$84.26

4

Ohio

$82.90

5

Illinois

$82.85

6

Indiana

$81.01

7

Alabama

$77.20

8

Georgia

$76.19

9

Iowa

$73.56

10

Missouri

$73.03

11

Kentucky

$71.47

12

Louisiana

$70.46

13

Virginia

$59.64

14

Nebraska

$58.89

15

Michigan

$57.15

16

North Carolina

$56.87

17

Maryland

$55.82

18

Arizona

$53.50

19

New Jersey

$52.53

20

South Dakota

$52.38

21

Vermont

$50.53

22

Kansas

$46.74

23

Delaware

$46.15

24

South Carolina

$46.06

25

Pennsylvania

$44.03

Meanwhile, reviewing some trade data from GATS on USDA shows the impact of trade. One interesting statistic:

Trade to China

 

2008-2017 Average

2018

Loss

Midwest

$3,455,073,500

$1,723,137,000

$1,731,936,500

South

$9,027,778,500

$3,021,995,000

$6,005,783,500

Point: Whatever criticism there may be concerning MFP, it is not accurate to say that the Midwest was harmed more by the retaliatory tariffs than the south. This perspective is in no way intended to minimize the impacts on any State; it is simply to clarify that arguments suggesting some regional disparity are not effective if based on actual data.

Reuters: Two sugar beet producers declared force majeure due to freezing U.S. weather conditions. Beet producers Western Sugar Cooperative and United Sugars Corp issued force majeure notices to clients late Tuesday, Reuters reported, citing three market participants, after a cold snap hit large portions of the United States. "The recent unprecedented weather conditions have resulted in Western Sugar allocating its available supply of product among its customers," said Heather Luther, general counsel for Western Sugar Cooperative, based in Denver, which operates across Colorado, Wyoming, Montana and Nebraska. "These are the worst weather conditions we have had as a cooperative," she said, which dates to 2002. The item said that while the U.S. will look to Mexico to meet initial incremental demand due to a shortfall, market participants disagreed about whether Mexico would have sufficient supplies on hand to meet U.S. need, or whether the U.S. would need to look to the world sugar market. If Mexico cannot meet the incremental U.S. needs, imports will likely come from Central America and Brazil, market participants said.

Ways and Means Democrats push credits for electric vehicles as part of possible tax extenders measure. House Ways and Means Chairman Richard Neal (D-Mass.) on Wednesday said he's drafting an energy tax package that would triple the number of electric vehicles per manufacturer eligible for generous consumer tax credits, extend expiring wind and solar tax credits and more. Neal has been trying to hammer out a tax extenders deal with Senate Finance Chairman Chuck Grassley (R-Iowa), who's also anxious to move renewals of energy-related provisions like the expired biodiesel tax credit.

Negotiations have faced hurdles, including divides over cost and budget offsets and whether to bring in new items like major expansions of child tax credits and earned income tax credits for lower-income households. "We'll figure that out; you've seen me in action," Neal told reporters after a meeting with Ways and Means Democrats when asked what the vehicle would be for the energy package. "Maybe we'll end up combining some elements, but for the most part I also want something free-standing to discuss."

Neal, who said the measure would be "pretty all-encompassing," called the package "pretty carefully integrated" across a number of energy issues and will "incorporate obviously some of the measures we've traditionally done in extenders."

Renewing electric vehicles credits is opposed by the oil industry and critics say mostly flow to well-off households. The Congressional Research Service has reported that in 2016, tax filers with more than $100,000 in adjusted gross income claimed 78% of total electric vehicle credits, and 83% of the dollar value.

Neal has been promoting the concept of a large year-end tax package that could encompass several different initiatives, including traditional tax extenders, refundable credits for low-income families and more. "I think a lot of big things are going to move at the end" of the year, Neal said.

Other items of note:

  • Deval Patrick launches 2020 presidential bid in New Hampshire today. Deval Patrick launched a late-stage bid for the White House today, emphasizing themes of hope and unification that lifted him to two terms as Massachusetts governor. “I don’t think that we need to, or ought to, trade unity for dealing with big, entrenched serious problems,” Patrick said in a Boston Globe interview Wednesday night. “I think we have to set a tone that says we don’t have to agree on everything to work together on anything.”

  • House Ways and Means Committee will hold a subcommittee hearing on U.S.-Japan trade, focusing on the farm-focused agreement signed last month and prospects for another phase of negotiations. It’s scheduled for Wednesday morning, Nov. 20.

  • President Donald Trump said he has been “fully briefed” on the automotive tariff front but has not decided whether to impose tariffs on imports.

  • A federal appeals court ruled that Congress can have access to President Trump’s tax records, paving the way for a Supreme Court battle. Link to NYT article.

  • Brouillette nomination hearing today. Senate Energy and Natural Resources Committee will hold a hearing today on the nomination of Dan Brouillette to lead the Energy Department. President Trump nominated Brouillette in early November for the post soon after Rick Perry announced he would resign this year. A former executive at Ford Motor Co. and USAA, the financial services company for military veterans, Brouillette is expected to prioritize the export of natural gas — an administration and Republican priority — if confirmed.

Markets. The Dow on Wednesday gained 92.10 points, 0.33%, at 27,783.59. The Nasdaq lost 3.99 points, 0.05%, at 8,482.10. The S&P 500 edged up 2.20 points, 0.07%, at 3,094.04.

Fed: Three times and out. Federal Reserve Chairman Jerome Powell told lawmakers the central bank saw little need to cut interest rates further after making three reductions since July. “Of course, if developments emerge that cause a material reassessment of our outlook, we would respond accordingly,” Powell told the Joint Economic Committee on Wednesday. Powell said very low and negative rates seen elsewhere "would not be appropriate for our economy.” President Trump again this week criticized the Fed for keeping rates too high and said he envied nations in Europe that have rates below zero: “I want some of that money.” Powell this morning appears before the House Budget Committee.

Japan’s economy slowed sharply in the third quarter with exports falling, as its government considers the size of a stimulus package it intends to launch to counter the weakness. Japan’s economy grew at the slowest pace in a year as the U.S./China trade dispute and frictions with South Korea weighed on exports. Daiwa Securities's Mari Iwashita expects the economy to shrink by annualized 2.1% in the final quarter of 2019.

Germany’s economy eked out 0.1% growth in the third quarter, narrowly averting recession against expectations. "While the numbers show the country avoided a technical recession in the third quarter, economic development in the region is still fragile," said German Economy Minister Peter Altmaier. Growth for the euro area was just 0.2%, as the manufacturing slump in the region’s largest economy takes its toll.


 

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