Trump Threatens Escalation of Trade War with China After Saying Phase 1 Deal ‘Soon’

Posted on 11/13/2019 7:00 AM

Senate minority paper says MFP programs ‘pick winners and losers’


In today's updates:


* Trump says Phase 1 deal ‘soon’ but then threatens more tariffs on China

* China’s Foreign Ministry: two sides have agreed to remove tariffs in stages
* U.S. mfg group hacked by China as trade talks intensified: Reuters
* Moody's Analytics estimates gov’t propped up U.S. farmers with about $50 billion
* OPEC chief says U.S./China trade deal would remove market uncertainty
* Senate Dems slam ‘flawed’ MFP trade aid approach in paper
* Trump says House votes are there for USMCA, but Pelosi must hold vote
* Public House impeachment inquiry hearings begin today
* Turkish President Recep Tayyip Erdogan visits the White House today
* Kudlow hints at middle-class tax cut proposal
* Dean foods, biggest U.S. milk producer, files for bankruptcy
* Biofuels lawsuit against EPA tossed, but challenge could come again
* Trump again attacks the Federal Reserve


OPEC under pressure from U.S shale. The U.S. shale revolution will reshape global energy markets in the years to come, according to the IEA's annual World Energy Outlook. In fact, the country will account for 85% of the increase in global oil production to 2030, which will rise to 19 million barrels a day and push down the share of the global oil market held by OPEC members and Russia to 47% (from 55% in the mid 2000s). Countries whose economies are exclusively reliant on oil-and-gas reserves are facing serious challenges," said Fatih Birol, the IEA's executive director.



— U.S./China trade policy update:

  • Trump again gives conflicting signals regarding China. On Tuesday, President Donald Trump offered no specific hint on the timing of any Phase 1 deal with Beijing other than saying a “significant Phase 1 deal with China” remained “close” and “could happen soon,” as Beijing was “dying to make a deal”.  But he also warned that higher levies would follow if the talks faltered.. He declared that Washington had all the leverage in the talks with Beijing. “We’re the ones who are deciding whether we want to make a deal,” Trump said. And if talks fell apart, Trump warned that a new escalation would be in store, even if many of his advisers dread this scenario. “I tell it to everybody: If we don’t make a deal, we’re going to substantially raise those tariffs,” he said.
  • Trump accused China of having cheated the U.S. for years, and denied that his trade policy had created uncertainty for the economy. “We will only accept a deal if it’s good for the United States,” he said. If Beijing does not accede to America’s trade terms, he said, “we’re going to substantially raise those tariffs.”
  • China’s Foreign Ministry said that the two sides have agreed to remove tariffs in stages once an interim deal is signed, and both sides are working on finalizing the details of the agreement, according to the South China Morning Post. The report said once the deal is finalized, then the two sides would decide how many of the tariffs would be removed. Differences center on whether the U.S. has agreed to remove existing tariffs in the Phase 1 deal — or whether it would only cancel tariffs set to take effect Dec. 15. Reports have surfaced that the U.S. wants to use the leverage from tariffs as part of an enforcement mechanism, where tariffs would only come down and stay down if China complied with its commitments under the deal.
  • Moody's Analytics economist Maria Cosma estimates the federal government propped up U.S. farmers with about $50 billion from the fourth quarter of 2018 through the third quarter of 2019. It hasn't been enough. Farm incomes in the Midwest have dropped by more than 30% between the first and second quarters of 2019 amid soft commodity prices, bad weather and the loss of what had been the top destination for U.S. farm exports — China. "Not only are farm incomes dropping, but farms are going out of business entirely. … Chapter 12 [bankruptcy] filings in Iowa, Illinois, Minnesota, Nebraska and Kansas are above their Great Recession highs and rising."
    Ag Exports to China
  • OPEC chief says U.S./China trade deal would remove market uncertainty. China and the U.S. are expected to reach a trade deal, a development that OPEC Secretary General Mohammad Barkindo said would remove a “dark cloud” over the oil market. He told reporters at a meeting in Abu Dhabi that OPEC and non-OPEC countries need to keep working together to get through market uncertainties. However, he said it was too early to know if there would be additional output cuts by the OPEC+ group relative to their December meeting.
  • Reuters reported that the National Association of Manufacturers (NAM) was hacked by the Chinese over the summer, based on findings by a cybersecurity firm the group hired to investigate the situation. The firm indicated they believed the hack came from China based on the tools and techniques used which have been previously associated with Chinese hackers. NAM spokeswoman Erin Streeter said that given NAM's high profile, "we know we are a target for cyber-attacks. We identified suspicious activity relating to certain company systems and investigated the matter." The report indicated that the attack was likely due to the role that NAM has played in helping to shape Trump’s trade policies.

— Trump says votes are in House to pass USMCA, if Pelosi holds vote. President Donald Trump, speaking Tuesday at the Economic Club of New York, said there are enough Democratic lawmakers in the House to pass the U.S.-Mexico-Canada Agreement (USMCA). "... most of them, if you had a vote today, I think most of them would actually vote for it," Trump said of Democrats relative to USMCA. He urged House Speaker Nancy Pelosi (D-Calif.) to hold the vote. But he said "nervous Nancy" and other House Democrats prefer to focus on "outrageous hoaxes and delusional witch hunts, which are going nowhere, don't worry about it."


— Senate Democrats slam ‘flawed’ MFP trade aid approach in paper, complaining the program picks ‘winners and losers.’ Link to report. Disparities between regions and crops seen in trade aid from USDA’s Market Facilitation Program (MFP) payments were criticized in a paper released Tuesday (Nov. 12) by Senate Agriculture Committee Ranking Member Debbie Stabenow (D-Mich.) and Minority Leader Chuck Schumer (D-N.Y.). The paper was compiled by the minority staff of the Senate Ag Committee and is sharply critical of the methodology used to determine aid payments in both the 2018 MFP program and the 2019 MFP program (MFP 2). The distribution of MFP 1 and MFP 2 payments across crops and regions was a key area of criticism in the report, echoing concerns Democrats on both the House and Senate Agriculture committees have previously voiced.


     Perspective on the minority paper: While the paper makes some valid points, such as highlighting the difference between counties with their “extreme neighbors” examples, those are otherwise lost in a steaming pile of partisan commentary, such as “the President’s chaotic trade agenda has thrown that all away…” As one source said, “It sounds more like a two-year-old temper tantrum than sound reasoning on the part of the U.S. Senate Ag Committee minority.”


     The chart below shows soybeans and cotton are the only real exports of substance to China. While China had imported some corn prior to 2014, they have largely moved away (with the coarse-grain imports since 2014 largely being accounted for by sorghum). So, when you look at the trade war (from a coarse grains standpoint), it’s sorghum that’s taken it on the chin… yet the paper dedicates a lot of space saying corn should be receiving more aid.  Ironically, they base their arguments on the 2018 aid package (not 2019)…which the Trump administration did much to rectify in 2019. Bottom line: soybeans, cotton, and sorghum were the primary crops going into China prior to the trade war, so it stands to reason they would get the bulk of the assistance.


China ag purchases


     As of November 12, USDA has paid out $6.8 billion via MFP 2 with the top five states receiving the payments being Iowa, Illinois, Minnesota, Texas and Kansas.

The fact remains that soybean growers are getting a big payment.


     As for the regional differences cited in the paper, the huge soybean payment is being reported across all soybean and corn acres, so the per-acre payment looks skewed. The fact remains that soybeans is getting a big payment, cotton is getting a big payment, and sorghum is getting a big payment because those are the crops that had access that is now being shut off or significantly hampered by the trade war with China.


     The Trump administration paid MFP 2 on a county basis in response to complaints from Congress on how 2018 was handled. And, administration officials appear to be working to maintain (or expand) access for soybeans, cotton, and sorghum while trying to expand access to MFP 2 payments for other crops.


     USDA Secretary Sonny Perdue has acknowledged county-to-county variations but has largely said they are unavoidable given the ad hoc nature of the program and associated constraints on the department.


     Meanwhile, the report also pointed out farmers who were prevented from planting crops due to this spring’s wet weather and flooding will not receive an MFP payment. USDA did offer farmers MFP payments at a $15 per acre rate but only if they planted harvestable cover crops on prevented plant acres. Perdue has also defended that aspect of MFP, saying USDA’s hands were largely tied. MFP 2 payments had to key off actual 2019 planted acreage because the program relies on Commodity Credit Corporation (CCC) funding which only allows payments for crops that were planted, he pointed out during the initial rollout of MFP 2.


     MFP payments to larger farms were another point of contention in the paper. It also took issue with USDA’s move to double the payment limit for row crops from $125,000 to $250,000 per operator, which it called “a significant departure from the $125,000 payment limit and prohibition on millionaires from collecting payments agreed to in the bipartisan 2018 Farm Bill.”


     Besides MFP, the other two components of USDA’s 2018 and 2019 trade aid programs, commodity purchases through the Food Purchase and Distribution Program (FPDP) and market development through the Agricultural Trade Promotion Program (ATP), also drew fire in the paper. It was critical of FPDP purchases, saying for “certain commodity purchases, the aid intended for US farmers has flowed to foreign-owned corporations,” while other bids were withdrawn after such concerns were raised. “It is unacceptable that American taxpayers have subsidized foreign competitors through trade assistance,” the paper stated.


     Meanwhile, ATP payments are insufficient to offset the damage sustained to U.S. ag commodity market share caused by the current trade war, the paper argued. ATP market development efforts “have been exclusively short-term, with no long-term investments to help rebuild markets, which could be gone forever,” it said.


     The minority paper offers no solutions for addressing the problems they identify, leaving some to conclude it is just posturing for the election.


— Other items of note:

  • Public House impeachment inquiry hearings begin today. Millions are expected to watch the first open hearing of the impeachment investigation today, where Bill Taylor, the acting ambassador to Ukraine, and George Kent, a senior State Department official, will testify together.

  • Turkish President Recep Tayyip Erdogan visits the White House today after facing widespread condemnation of its campaign against U.S.-backed Kurdish fighters in northern Syria — including in the U.S. Congress, where lawmakers are still weighing sanctions against Turkey over the incursion. Reports note Trump is likely to focus on another point of tension: getting Turkey to drop its plans to use the Russian S-400 missile defense system, a move that U.S. officials say could eventually bring Turkey back to the U.S. F-35 fighter jet program. Trump is also expected to offer a $100 billion trade deal to push for a permanent cease-fire in Syria.

  • Top White House economic advisor Larry Kudlow hinted at a middle-class tax cut as the president searches for an edge in his 2020 reelection bid. While the Washington Post reported that Trump would propose a 15% middle-class tax rate, Kudlow told CNBC that it's "way too soon" to get into specifics of a plan.

  • Biggest U.S. milk producer files for bankruptcy. Dean Foods filed for Chapter 11 bankruptcy and is discussing a potential sale to the cooperative Dairy Farmers of America. The industry has grappled for years with consumers’ move away from traditional cow’s milk, as beverage sales shift toward bottled water, fruit juices and dairy-free milk alternatives. The company has secured financing to temporarily continue operations, and customers are expected to continue receiving their dairy products without interruption. Link to WSJ article.

  • Biofuels lawsuit against EPA tossed, but challenge could come again. The D.C. Circuit Court of Appeals tossed the Advanced Biofuels Association’s challenge to the EPA’s wide use of blending exemptions to oil refiners. The three-judge panel said the lawsuit failed to identify a “final agency action” that can be challenged in court. However, the judges warned the EPA that it could be vulnerable to a future lawsuit: “The EPA’s briefing and oral argument paint a troubling picture of intentionally shrouded and hidden agency law that could have left those aggrieved by the agency’s actions without a viable avenue for judicial review,” the court wrote.

— Markets. The Dow on Tuesday finished steady at 27,691.49. The Nasdaq rose 21.81 points, 0.26%, at 8,486.09. The S&P 500 gained 4.83 points, 0.16%, at 3,091.84.


     Trump again attacks the Federal Reserve. In his speech to the Economic Club of New York yesterday President Trump renewed his assault on the Federal Reserve,  saying the bank was hurting the U.S. by not cutting rates into negative territory. Trump said the U.S. was at a “competitive disadvantage” because it had not followed the Eurozone into the land of negative rates. “Give some of that money, I want some of that money,” he said. The Fed has cut interest rates three times this year, after raising them last year, but has since suggested it will pause easing for the time being. Fed Chairman Jerome Powell will get a chance to give his views in Washington when he appears before Congress’s Joint Economic Committee this morning.


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