Policy Updates: Sept. 1, 2017

Posted on 09/01/2017 5:43 AM

Harvey update | Shipping & Harvey | MPP opt out | Aug. jobs report | Brazil corn to Japan | Cotton AWP | More E15 waivers | NAFTA 2.0 talks resume | Debt-limit hike | SPR tapped | Tax reform | Fed meeting | Border wall | DACA change? | North Korea

Harvey shifts the winds in Washington. “They don’t need money to build a wall in Texas, but to rebuild the shoreline in Texas,” is a quote in the New York Times from a longtime Republican budget adviser, as Congress is set to return next week. Promises of federal aid for areas of Texas and Louisiana hit by Harvey are mounting. President Trump pledged on Thursday to donate $1 million of his personal fortune to storm victims. Link to NYT article.

The White House and Congress are discussing a plan that would authorize roughly $6 billion in emergency assistance to deal with the devastation caused by Hurricane Harvey, and President Trump could send a specific request for the funding as soon as today, the Washington Post reported.

Harvey now a tropical depression. The storm has weakened considerably as it moves to the northeast through the Tennessee Valley and will head Ohio Valley states Friday night and Saturday, by which time it is forecast to be a post-tropical low. However, it is still packing plenty of rain. Forecasters see two to five inches from western to central Tennessee and western to central Kentucky and extreme southeastern Indian. Locally higher amounts of six to eight inches are possible from western Tennessee to west-central Kentucky, according to the National Hurricane Center.

The death toll from Tropical Storm Harvey has risen to 44, and the storm could wind up being the most expensive natural disaster in American history. It could cost the economy about $190 billion, according to AccuWeather, which predicts it will total more than Katrina and Sandy combined. "You had the greatest rainfall ever measured in the continental U.S... damage to the supply chain across the country, jobs lost and health problems."

Travelers and fuel suppliers across the U.S. braced for higher prices and shortages ahead of the Labor Day holiday as the country's biggest fuel pipelines and refineries curb operations after Hurricane Harvey. Link to Reuters article.

Shipping operations are moving again along the Texas coast. Port Houston is reopening its container terminals today and the Port of Galveston will also resume normal operations, the Wall Street Journal reported. Workers are starting to repair the supply chains broken by Harvey and its historic flooding.

No visible damage. The Port of Houston, the sixth-busiest container port in the U.S., came through the storm without much evidence of flooding on terminals and no visible damage to containers, cranes or refrigeration equipment. Parcel carriers are restoring flights and delivery services, and vessel schedules show seven ships arriving at the port today, although the larger networks to move goods are still recovering.

BNSF Railway says its idled system is moving in parts of the region and that repairs are being made as floodwaters recede.

Trucking networks are feeling the impact, with spot prices for shipping into Texas soaring 25%, according to Truckstop.com economist Noel Perry, because the region is producing very little that can be transported out and pay for the return trips. That will change as cargo starts flowing through ports, however, and commerce starts moving through the region.

Link to WSJ article.

USDA allows producers to opt out of MPP. Dairy farmers can enroll for 2018 coverage in the Margin Protection Program (MPP) or they can choose to opt out of the program for 2018.

USDA Secretary Sonny Perdue decided dairy farmers should be able to withdraw from the MPP Dairy Program and not pay the $100 administration fee for 2018 if they do not wish to continue in the program. "The decision is in response to requests by the dairy industry and a number of MPP-Dairy program participants," said Rob Johansson, acting USDA deputy undersecretary for farm production and conservation. To opt out, a producer should not sign up during the annual registration period. By opting out, a producer would not receive any MPP-Dairy benefits if payments are triggered for 2018. Enrollment for MPP coverage in 2018 begins today (Sept. 1) and runs through Dec. 15, 2017. The decision to opt out is for 2018 only and is not retroactive. Link for more details.

August jobs report this morning will be closely monitored... Traders are watching for several key factors in the employment report, including: New jobs: Expectations were bested last month and pre-report estimates again see a slowing down of the new job openings pace. Anything above 200,000 would show an accelerating U.S. economy and perhaps some inflation ahead on the wage front. Wall Street analysts expect that 180,000 jobs were created in August, less than the previous month’s unexpectedly strong 209,000 gain. August has historically been a soft month for job creation. In four of the last five years, the August payroll figure has come in below expectations, only to be revised up in subsequent months.

Average hourly earnings advanced 2.5% from a year earlier each month from April through July. Traders expect the same in this morning's report. Average hourly earnings are expected to rise by 0.2% from July. If that is realized, that would leave the 12-month increase at 2.6%.

Unemployment rate: Many expect the unemployment rate held steady, but if the rate falls, a sub-4% level could be in the making ahead for the first time since 1999. Unemployment is expected to remain flat, at 4.3%. If it falls, it’ll be at the lowest rate since February 2001.

Harvey a no show. One thing traders are not expecting is for the report to include any impacts from Hurricane Harvey. By the time Harvey made landfall last Friday evening, nearly all data contributing to the August jobs report had been collected.

The market isn't expecting another rate hike this year. Ahead of the jobs report, there's a 33.8% chance the Federal Reserve hikes interest rates again in 2017, according to Bloomberg's World Interest Rate Probability data.

Brazil corn bought by Japan as cheaper option vs U.S... Corn buyers in Japan increased purchases from Brazil to around 600,000 tons for shipment next quarter as South American supplies are cheaper than the U.S. due to record harvest, according to industry report. Japan may buy additional Brazilian corn, boosting total purchases for next quarter to 800,000 tons.

Cotton AWP rises; upland cotton import quota #19 announced... The Adjusted World Price (AWP) for cotton will be 61.85 cents per pound, effective today (Sept. 1), back above 60 cents per pound for the first time since August 11.

Meanwhile, USDA announced special import quota #19 for upland cotton to allow the importation of 12,751,474 kilograms (58,566 bales) of upland cotton. The quota will be established as of September 7, 2017, and will apply to upland cotton purchased not later than December 5, 2017, and entered into the US not later than March 05, 2018.

EPA adds 26 states to Harvey-linked E15 waiver... Impacts to Gulf Coast-area refineries and disruptions in the fuel-distribution system has prompted the EPA to add 26 states to the waiver allowing sales of gasoline containing up to 15% ethanol. EPA Wednesday, announced the waiver for 12 states.

The requirements for reformulated gasoline (RFG) and low volatility conventional gasoline through September 15 now includes the following: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont, Delaware, the District of Columbia, Maryland, New Jersey, New York, Pennsylvania, Florida, Georgia, North Carolina, South Carolina, Virginia, West Virginia, Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, South Dakota, Ohio, Oklahoma, Tennessee, Wisconsin, Alabama, Arkansas, Louisiana, Mississippi, New Mexico, and Texas.

The announcement by EPA supersedes and expands the areas covered by the waiver issued on August 30. The sale of E15 must continue to comply with federal rules, which are designed to minimize the potential for E15 being used in vehicles that are not designed to use this fuel. The waiver authority was exercised under the Clean Air Act and was granted by EPA Administrator Scott Pruitt in coordination with the Energy Secretary Rick Perry.

NAFTA 2.0 talks resume today as Trump comments again... The latest round of NAFTA renegotiation talks begin today through Sept. 5 in Mexico amid new tension with the U.S. after President Donald Trump’s renewed threats to withdraw the U.S. from the trade pact that generated $1.2 trillion each year in trade between the three countries. Canada and Mexico were respectively the number two and number three U.S. trading partners in 2016.

We've got to change this deal,” Trump said Wednesday in Missouri. ”And hopefully, we can renegotiate it, but if we can't, we'll terminate it. And we'll start all over again with a real deal.”

Mexico's Foreign Affairs Minister Luis Videgaray Caso responded with a simple “no” Wednesday when asked if his country would continue NAFTA talks if Trump triggers the required six-month notification for termination, the Mexican publication Reforma and the Wall Street Journal reported.

Mexico and Canada would remain in NAFTA even if the Trump administration abandoned the deal, Mexican Economy Minister Ildefonso Guajardo declared, noting that only the U.S. might consider leaving the accord.

Sen. Chuck Grassley (R-Iowa) told the Iowa Agribusiness Radio Network he thinks the withdrawal threat is “posturing on the president’s part, which is probably a good strategy early in the debate. You’re going to get the same posturing from Mexico and Canada.” Grassley is advising people not to worry at this point.

The implementing legislation for NAFTA that Congress approved would allow Trump to rescind the tariff-free status accorded to Mexico and Canada. The U.S. could then apply the World Trade Organization tariff rates it uses for countries that are not part of a U.S. trade agreement.

Trump called Canada and Mexico “very difficult” in negotiations. He targeted Mexico in another tweet, calling the country “one of the highest-crime nations in the world” and predicting that Mexico would pay for a new wall along the U.S.-Mexico border. The Mexican Ministry of Foreign Affairs responded by noting, “As the Mexican government has always stated, our country will not pay, under any circumstances, for a wall or physical barrier on U.S. territory along the Mexican border,” the ministry said. The payment issue “is an issue of national sovereignty and dignity,” the ministry added.

Trump, Trudeau committed to NAFTA 2.0 wrap-up by year-end. President Donald Trump and Canadian Prime Minister Justin Trudeau spoke on the phone Thursday, pledging to work toward wrapping up NAFTA 2.0 talks by the end of 2017. A readout of the call said that Trudeau offered Canadian assistance for Hurricane Harvey. The two "also discussed the ongoing NAFTA renegotiation and stressed their hope to reach an agreement by the end of this year," the readout said.

Mnuchin: Sept. 29 debt deadline may move 'a couple of days'. Treasury Secretary Steven Mnuchin said Thursday he remained confident Congress would vote on a debt limit bill before the government runs out of money to pay the nation's bills, but he suggested Congress needs to act sooner than the Sept. 29 date he has previously cited.

"The next big cash day for us is obviously Sept. 15 — that's when we get corporate taxes, so the projections could move around a little bit,” Mnuchin said on CNBC. “We obviously have now the hurricane spending, which is an issue. So that is going to have some impact on our September spending. But, more importantly, we are going to have to go to Congress and get authorization to spend more, because it's absolutely critical that we spend money to help the state.” When asked how the deadline could change, Mnuchin said, "I think there could be some impact of a couple of days.” He did not give a date, but additional costs to fund hurricane recovery measures and lower-than-expected tax receipts suggest the deadline would come sooner than Sept. 29.

DOE taps oil reserve to slow gas price hikes after Harvey. The Energy Department said Thursday that it will draw down 1 million barrels of crude oil from the nation’s emergency stockpile (Security Petroleum Reserve/SPR) in an effort to steady domestic gasoline prices after the devastating flooding in the Houston region.

The administration actually announced two drawdowns, both for 500,000 barrels and both in the form of an emergency exchange agreement with Houston-based Phillips 66. The oil will move via pipeline from the SPR's West Hackberry site, near Lake Charles, La., to the company’s nearby refinery. The second announcement came after the company realized it needed more crude oil and chose to submit a second, separate request instead of amending the one that had already been approved.

Additional drawdown authorizations are possible, according to a DOE spokeswoman.

Background. The SPR drawdown would represent the first emergency use of the 679 million barrels of crude oil, as of Aug. 25, stored in salt caverns in Texas and Louisiana since Hurricane Isaac in 2012 disrupted Gulf oil operations. That drawdown involved an exchange of 1 million barrels with Houston-based Marathon Oil. The SPR has drawdown capability of 4.4 million barrels per day. It would take 13 days for that oil to enter the U.S. market after a presidential decision, according to DOE’s website. The department maintains the separate Northeast Gasoline Supply Reserve that holds 1 million barrels of gasoline to address refinery disruptions in that region.

— The Trump administration has a "very detailed" tax plan ready and "couldn't be more excited" about its prospects, according to Treasury Secretary Steven Mnuchin, who added that the debt ceiling issue won't hold America back. "Details will come out later this month, it's going to go through a committee process, and we expect the House and the Senate will get this to the president to sign this year."

— Federal Reserve’s board of governors will conduct an open meeting today to discuss the "final rule establishing restrictions on qualified financial contracts of systemically important U.S. banking organizations" and the "U.S. operations of systemically important foreign banking organizations." It will take place in Washington, D.C.

— More than 200 companies are believed to have submitted designs for the proposed border wall, but the Trump administration has selected only four private firms to build initial prototypes. They include Caddell Construction, Fisher Sand & Gravel, Texas Sterling Construction and W.G. Yates & Sons. The models will be 30 feet tall, about 30 feet wide and will be tested in San Diego.

— Trump expected to announce DACA change. The CEOs of Apple, Amazon, Facebook and Google joined around 300 business leaders urging President Trump to continue protecting children brought illegally to the U.S. from being deported. Trump today is expected to eliminate that legal shield entirely for those so-called "dreamers."

Since 2012, the U.S. government has allowed those children — young adults now known as Dreamers — to continue living in the country as long as they obtain and renew work permits under a program called Deferred Action for Childhood Arrivals, or DACA.

— North Korea update. Russian President Vladimir Putin urged today the U.S. and others to avoid going down a “dead-end road” with North Korea, adding that dialogue without pre-conditions could resolve the crisis. Last week, the U.S. and Japan imposed fresh sanctions on entities and organizations that support North Korea.


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