Policy Updates: August 25, 2017

Posted on 08/25/2017 6:15 AM

Harvey update | Yellen, Draghi to speak | Fed officials comment | Dairy safety net | Crop insurance | U.S.-Canada lumber dispute | Trump comments on debt-limit debate | Tax reform | Major food retailers face stock collapse | China focuses on egg producers | Argentina may take legal action on U.S. biodiesel duties

— Hurricane Harvey is forecast to be the worst storm to hit the Texas coast in more than a decade when it makes landfall in the next 24 hours. The slow speed of the storm means it has the potential to drop feet of rain on land close to the coast over the coming days. The storm is forecast to make landfall late today or early Saturday, packing winds of up to 125 mph.

The governors of Texas and Louisiana have declared emergencies, and evacuations are underway in some areas. Gasoline futures surged to the highest level in four months as refineries are shut, while a barrel West Texas Intermediate was trading near $48 as crude production was not expected to be much affected.

Hurricane Harvey is closing in on the Texas coast as a Category 3 storm, the strongest for the region since Hurricane Ike arrived in 2008 as a Category 4 hurricane. BP, Exxon Mobil, Anadarko and other oil companies have already evacuated deepwater rigs. The Bureau of Safety and Environmental Enforcement (BSEE) has estimated shutdowns have taken 10% of production off line in the Gulf as of Thursday, with today's update likely to show a higher percentage. The storm will also snarl crude exports from Corpus Christie, the port shipping out much of U.S. crude.

Cotton impacts are also possible. With Harvey forecast to stall once it hits land, spreading hefty rains inland, USDA Meteorologist Eric Luebehusen said it could put the early cotton crop in the area at risk. "I'd imagine producers are rushing, harvesting right now trying to get as much out as they can because that appears to be kind of ground zero for the area most at risk." Luebehusen told USDA radio. About 14% of the state's crop is ready to harvest, much of which is in the line of the storm.

Big media is watching closely as they say this will be President Trump’s first major natural disaster test.

— Central banker focus today as Draghi, Yellen speak at confab. Fed Chairwoman Janet Yellen and European Central Bank (ECB) President Mario Draghi are both on the schedule today at the Kansas City Fed's Jackson Hole Symposium. Yellen speaks at 9 a.m. CT, while Draghi speaks at 2 p.m. CT.

Markets have been awaiting their appearances all week, hoping to glean some monetary policy guidance out of the remarks. Inflation observations will be of note from Yellen since an increasing number of Fed officials and the minutes from the Fed's July meeting have revealed growing concern about inflation not moving toward the Fed's 2% goal.

Financial regulation is expected as another potential topic for Yellen as we arrive at the 10-year anniversary of the financial downturn. If she addresses this topic, look for Yellen to reiterate her stance that rolling back too many of the post-crisis regs would not be positive.

Draghi, meanwhile, is expected to lay out the case for the ECB to start paring back its quantitative easing effort. However, some expect he may not be to explicit in his remarks given some concerns over a rising euro.

Meanwhile, the New York Times today reports that President Trump must soon decide whether to renominate Yellen or pick someone more worried about inflation. The question at the central bank’s annual policy conference beginning today is how quickly the Fed will raise interest rates.

— Dallas Fed's Kaplan, KC Fed's George talk asset prices. The US economic outlook would not be altered greatly if there is a sharp drop in asset prices, Dallas Fed President Robert Kaplan told CNBC in an interview Thursday. “A correction in the market, by itself, would not necessarily concern me,” Kaplan said. Instead, he noted he is watching a buildup of excess debt and those liabilities have not yet gotten out of hand. In a separate interview Thursday, Kansas City Fed President Esther George said it's possible asset prices could fall as the Fed starts to taper its $4.5 trillion balance sheet since those purchases helped bolster asset prices. She said there could be a “symmetric reaction” once the asset sales start, but "it is hard to know because we don’t have experience."

— New England lawmakers press for better dairy insurance program. New England lawmakers are pressing USDA Secretary Sonny Perdue to make milk a commodity eligible for federal crop insurance. The legislators are also asking him to work with the Risk Management Agency (RMA) to develop more insurance products for dairy farmers who are getting low prices for their products, according to a recent bipartisan letter.

“We believe it's imperative that the USDA take action to address issues created by” the failure of the Margin Protection Program (MPP),” the letter said.

MPP was added to the 2014 Farm Bill as an insurance policy that was meant to allow farmers to choose a protection level that fit their farm's needs. However, last-minute changes reduced the price of three feeds that make up a formula MPP uses to determine payments, making profit difficult for farmers.

The fiscal 2018 Agriculture appropriations bill will include provisions to improve the MPP, Senate Appropriations Committee ranking member Patrick Leahy (D-Vt.) said in a news release. But others note several problems remain relative to getting an effective dairy safety net program.

GAO recommends shifts on crop insurance that would take law change. Reducing the rate of return to crop insurance companies and reducing the portion of farmer premiums that insurance companies can retain would cut costs for the program, according to the Government Accountability Office (GAO). But, to make the changes suggested by GAO, it would require changing a provision in the 2014 Farm Bill that requires any new agreement between USDA and crop insurance providers has to be budget-neutral.

GAO suggested the 14.5% rate of return for companies selling crop insurance could be trimmed to 9.6%, saving $364 million per year. Reducing the percent of farmer premiums by five percentage points from the current 77% would cut costs up to $100 million per year.

If this sounds familiar, it is – the administration proposed similar shifts in its fiscal 2018 budget.

Link to report.

Crop insurance payouts

Senate Ag panel chairman says no cuts for crop insurance. “Let me emphasize that crop insurance is, for many, the most valuable tool in the risk management toolbox,” said chairman Pat Roberts (R-Kan.) at a farm policy summit in Manhattan, Kansas. “Now is not the time for additional cuts to a program that producers rely on as a risk management foundation,” said Roberts, who said he fully expects to see “outside groups and members of Congress looking to gut the crop insurance program and cut billions of dollars in the name of ‘reform.’” The chairman listed three other steps that would be important for the agriculture sector: “Reduce regulatory burdens that hurt producers’ bottom lines,” expand farm exports, and pass a tax reform package that reduces tax rates.

— Canada would sue U.S. on lumber if trade negotiations falter. Canada, the world’s largest softwood-lumber exporter, noted its willingness to take the U.S. to the WTO if trade talks on the homebuilding material fail.

The U.S. has “mischaracterized” what Canada has proposed in terms of defined market share, Canada’s Ambassador to the U.S., David MacNaughton, said. The only qualification Canada wants for defined market share is that the country can supply excess lumber to the U.S. in the event that American suppliers can’t meet domestic demand fully, he said. “What we can’t understand is why is it that some elements of the U.S. lumber industry would rather see imports from countries like Russia rather than their closest ally and friend, Canada,” MacNaughton said. “We’re going to try really hard in the next little while to get a fair and balanced agreement. If that is not possible, we have all agreed that we will take all necessary steps to litigate this matter.”

The U.S. is importing more after imposing tariffs on Canadian supplies, making them more expensive. Russian shipments are 42% higher in 2017, according to U.S. government data. In October, Chrystia Freeland, Canada’s trade minister, said the country will bring the U.S. tariffs before the World Trade Organization (WTO) if negotiations fail.

U.S.-Canada trade tensions escalated in April when the Trump administration imposed countervailing duties of as much as 24% on Canadian imports. Additional duties of as much as 7.7% followed in June.

— Trump wades into debt-limit debate. President Donald Trump has voiced his views on the upcoming decision by Congress on raising the U.S. debt limit, labeling the situation Congress faces as a "mess." Trump took to Twitter and said, "I requested that Mitch M & Paul R tie the Debt Ceiling legislation into the popular V.A. Bill (which just passed) for easy approval. They didn’t do it so now we have a big deal with Dems holding them up (as usual) on Debt Ceiling approval. Could have been so easy-now a mess!” The Mitch M is Senate Majority Leader Mitch McConnell (R-Ky.) and the Paul R is House Speaker Paul Ryan (R-Wis.). However, the Wall Street Journal reported that it was lawmakers that suggested tying the VA measure and the debt limit together contrary to Trump's tweet; the White House has not commented on that report. Ryan on Thursday insisted the U.S. will raise the debt ceiling to avoid a default. Ryan's comments echoed McConnell, who on Monday said "there is zero chance" that the U.S. will fail to raise the debt ceiling.

Tax reform big focus next week. “Starting next week,” the president's agenda and calendar is going to revolve around tax reform," National Economic Council Director Gary Cohn told the Financial Times. Cohn said the speech, planned for Wednesday, would be the first in a series of addresses designed to convince the U.S. public about the need to revamp a tax system that has remained largely unchanged for three decades.

Stocks of major food retailers collapsed yesterday, erasing nearly $12 billion in market value, after Amazon said Whole Foods will cut prices on many of its best-selling grocery products starting Monday. Prime members will also receive additional savings and in-store benefits once Amazon and Whole Foods' technologies are fully integrated.

— China now inspecting egg producers for fipronil use. Chinese authorities are going to undertake spot checks of egg producers in the country to make sure that fipronil, the chemical at the heart of egg contamination in Europe and South Korea, is not being used as a cleaning product or in animal drugs and feed. Local governments are also being called on to boost safety checks on feed manufacturers and animal-drug producers. However, JCI Intelligence analysts say the government is "just emphasizing the ban on using fipronil in feed, animal drugs or cleaning products, because it is a food safety issue."

— Argentina says it may take legal action on U.S. biodiesel duties. Argentina's government said it could take legal action over the U.S. preliminary countervailing duties on shipments of Argentine biodiesel into the United States. A statement issued by the Argentine foreign ministry said the duties imposed by the US do not match any methodology accepted by the WTO. "The Argentine government, along with the private sector, is cooperating with the investigation," the statement said. "It has been established that Argentina does not award subsidies to biodiesel producers," a reference to a WTO ruling issued last year that fund antidumping duties put in place by the European Union ran counter to WTO rules. "Argentina will seek to revert this preliminary decision defending the interest of our country, will evaluate all available options and reserves the right to bring forward pertinent legal action," the statement said.


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