UPDATED: U.S. Wants China to Lift Tariffs on U.S. Farm Products in Return for Truce on U.S. Tariffs

Posted on 11/30/2018 7:16 AM

USMCA signed | Canada dairy producers unhappy | Farm bill update | RFS | Biodiesel

Markets are focusing on trade developments between the world's two largest economies. President Trump and China's Xi Jinping are expected to meet on the sidelines of the G20 summit in Argentina and the two leaders will have a dinner meeting with staff on Saturday evening. Some possible hints of a truce and perhaps a Chinese commitment to lift tariffs on U.S. farm products are being discussed if the U.S. puts a hold on increasing and expanding tariffs through spring 2019, while the two sides continue to talk, according to the Wall Street Journal.
     The USMCA (NAFTA 2.0) was signed by the three leaders from the U.S., Canada and Mexico.
     Canadian dairy producers are complaining (again) about some potential glitches in the USMCA dairy provisions.
     More farm bill details are known as the ag sector await the official unveiling of the conference report likely next week. Congressional leaders would want a vote on the final measure next week, but it could go into the following.
     House leaders suspended a vote today on a tax extenders package. Leaders gave no explanation, but the fear was there were enough GOP leaders going home early to suggest the measure may not have had the votes for passage.
     Ho-hum... EPA to announce final RFS details. Most of the details have been known for a while. Late change: EPA is expected to release a final level of 19.92 billion gallons for biofuels in 2019, up slightly from their proposed level of 19.88 billion gallons, according to a report from Reuters. The increase comes in the advanced biofuel category via an increase expected for cellulosic ethanol. The report said the 2019 cellulosic biofuel total would be 418 million gallons, up from 381 million proposed by the agency in June.
     Discomfort inn... Marriott says 500 million customers had their data hacked. The hotel chain announced today that 500 million customers who stayed at hotels including W, Sheraton, and Westin as far back as 2014 had their information accessed, including an unspecified number who had their credit-card details taken.


G20 update:

  • Trump open to making trade detail with China. Asked about his intent for a trade deal with China at the G20 summit, where he will meet Chinese President Xi Jinping on Saturday, President Trump said, “I think we’re very close to doing something with China, but I don’t know that I want to do it, because what we have right now is billions and billions of dollars coming into the United States in the form of tariffs or taxes, so I really don’t know, but I will tell you that, I think China wants to make a deal. I’m open to making a deal, but frankly, I like the deal we have right now.”
  • U.S. and China officials are exploring a deal in which the U.S. holds off on more tariffs into spring 2019 in exchange for talks on changes in Chinese economic policy, according to the Wall Street Journal. One offer, according to Chinese officials: in return for the suspension of U.S. tariffs, Beijing would agree to lift restrictions on China’s purchases of U.S. farm and energy products. Reports note that officials in China have begun to plan for follow-up negotiations in case there is a G20 deal. A trade delegation would travel to Washington in mid-December, say people briefed on the Chinese plans.
  • China said it hopes for "positive results" out of the meeting, with commerce ministry spokesman Gao Feng saying Thursday the two sides have been in contact to implement a consensus that Trump and Xi reached via a telephone call to open the month. "I hope that the United States and China could move towards each other and work hard to achieve positive results in the meeting," Gao said.
  • China's Xi will stop in Panama while he’s in the area for the summit, a visit that’s seen as part of China’s effort to expand its influence abroad.
  • The USMCA was signed this morning; U.S. tariffs on steel and aluminum are still in place. Representatives from the U.S., Mexico and Canada signed the new trade pact at the G20 summit. Legislators from the three countries still have to approve the pact, before it goes into effect. All three leaders appeared for the photo opp signing — President Donald Trump, Mexican President Enrique Peña Nieto and Canadian Prime Minister Justin Trudeau. Meanwhile, Canada's Trudeau told Trump that, “We need to keep working to remove tariffs on steel and aluminum.”
  • There was a last-minute flareup in Canada over the USMCA's dairy provisions. Canadian dairy industry leaders sent a letter to Trudeau on Wednesday saying the Canadian government assured it hadn’t agreed to provisions that would grant the U.S. oversight of their industry’s administrative decisions. The Canadian farmers said Trudeau shouldn’t sign the deal until it was clear the language was out of the final agreement. U.S. dairy producers say that provision is necessary to prevent a recurrence of a dairy ingredient pricing scheme the U.S. industry had fought hard to eliminate through the trade talks.
  • Tariffs collected in the latest fiscal year ended Sept. 30 rose by less than $7 billion from fiscal 2017, according to the Treasury. That is less than 0.2% of the $3.3 trillion the Treasury took in during the latest fiscal year. Link to a New York Times account on how U.S. tariffs work.
  • U.S. trade restrictions have hit a total of $369 billion of Chinese exports this year, much higher than the $278 billion of goods impacted by tariffs alone, according to the Global Trade Alert, a regular monitoring report of G20 trade restrictions.
  • Trump cancels planned G20 meeting with Putin. After his remarks to the press on the guilty plea by former attorney Michael Cohen for lying to Congress about the Russia investigation, President Trump said that he was canceling his planned meeting with Russian President Vladimir Putin. Via his @realDonaldTrump handle, Trump tweeted: “Based on the fact that the ships and sailors have not been returned to Ukraine from Russia, I have decided it would be best for all parties concerned to cancel my previously scheduled meeting in Argentina with President Vladimir Putin. I look forward to a meaningful Summit again as soon as this situation is resolved!”
  • White House trade policy advisor and China hawk Peter Navarro will be attending the Trump/Xi meeting Saturday. The South China Morning Post first reported Navarro's attendance, which sent the Dow briefly to its low of the day. Navarro is known for his aggressive stance toward changes in the U.S. trade relationship with China.
  • Oil confab in Argentina? The presence of three top crude producers — Saudi Arabia, Russia and the U.S. — have also raised expectations that oil policy will be discussed in Buenos Aires.
  • Germany's Angela Merkel is finally on her way to Argentina, but will likely miss the first day of the summit, after her plane was forced to land in Cologne because of a technical defect.

— Farm bill update... tentative subject to last-minute changes:

  • As expected, it looks like release of the official farm bill conference report will be early next week. It simply takes time to get final agreements into legislative form, double-check for mistakes, and then have final budget scoring from the Congressional Budget Office (CBO).
  • Sen. Chuck Grassley (R-Iowa) will not like the final language on farm program payment eligibility and the AGI test. It appears the House-pushed language prevailed, whereby nephews, nieces, and cousins are treated as family members. Contrary to what a lot of the anti-farm groups are saying, that provision does not make family members automatically eligible, it simply means that farms that are wholly owned by family are exempt from the additional one manager regulation added in the 2014 Farm Bill. There will be no decrease in the Adjusted Gross Income (AGI) test for such payments (the AGI limit will stay at $900,000 a year).
  • All producers will be able to update yields beginning with the 2020 crop year, but not base. It appears that the House was able to rework its drought-based yield update to be available nationwide. And, trend adjusted yields from the Senate farm bill will be used for the ARC program, rather than just the Olympic average. There will be an increased t-yield plug under ARC and a new cascade for determining yields beginning with RMA yields, along the lines of what was proposed by Rep. Cramer (R-N.D.) in HR 4654.
  • Base acres in grass will qualify for new conservation incentives. Farmers who lose payments on unplanted base acres over a designated timeframe will qualify for conservation incentives if they keep the acres in grass.
  • Farmers will be able to elect annually going into the ARC or PLC program beginning with the 2021 crop, rather than having the initial selection hold for the life of the farm bill. Because the bill won’t be implemented by USDA until well into 2019, USDA sources say that for simplicity (and for scoring), it made sense to make the decision for 2019 and 2020.
  • Increases to loan rates are expected to be included in the conference agreement.
  • The Conservation Stewardship Program (CSP) remains as a solo program. While CSP is not phased out as was the case in the House farm bill, it will see significant reductions, with savings being used to make key improvements to EQIP (including the stewardship provisions envisioned in the House farm bill) and to permanently fund the Regional Conservation Partnership Program (RCPP), the Agricultural Conservation Easement Program (ACEP), and Watershed Protection and Flood Prevention (PL-566).
  • The Conservation Reserve Program (CRP) will see maximum acres go from the current 24 million acres to 27 million acres by 2023, with a portion of those acres earmarked for the Grasslands Reserve Program. New CRP rates vs prevailing rental rates: the rate can be up to 90% on continuous and 85% on general signups.
  • $300 million in mandatory funding is included for FMD and other vaccine funding. The Senate bill had only discretionary funding.
  • Reference price for temperate japonica rice is the same as the House-passed farm bill.  
  • The nutrition title aligns with the food stamp provisions in the Senate bill, but also has some reforms included in the House measure. House Republicans’ efforts to impose stricter work requirements on millions of food stamp recipients fell short.
  • The farm bill would legalize commercial cultivation and distribution of hemp, a top priority of Majority Leader Mitch McConnell (R-Ky.). Industrial hemp would be removed from the federal list of controlled substances, allowing hemp farmers and researchers to apply for federal agriculture programs.

Reuters: EPA expected to slightly boost RFS total volume requirement. EPA is expected to release a final level of 19.92 billion gallons for biofuels in 2019, up slightly from their proposed level of 19.88 billion gallons, according to a report from Reuters. The increase comes in the advanced biofuel category via an increase expected for cellulosic ethanol. The report said the 2019 cellulosic biofuel total would be 418 million gallons, up from 381 million proposed by the agency in June. That also increased the expected advanced biofuel level to 4.92 billion gallons compared with a proposed level of 4.88 billion gallons. No other changes to the proposed levels are expected, the report noted, with conventional ethanol held at 15 billion gallons and the 2020 biomass-based biodiesel mark maintained at 2.43 billion gallons.

EPA official mum on prospects for small refiner exemption approvals. EPA official Bill Wehrum told Reuters in an interview the agency not expecting to get the bulk of small refiner exemption requests until 2019, but did not comment on the prospects for how many the agency would approve. "For calendar year 2018, I think we are only now starting to get applications, and the bulk of them we are not going to see until probably early next year," Wehrum, assistant administrator at the EPA Air and Radiation Department, said. "I am not going to predict what we may or may not do. Each waiver decision is based on an individual application filed by an affected entity."

As for the Trump administration's direction to EPA to prepare a plan for year-round sales of E15, Wehrum signaled the agency is aiming to complete the work by June 1. "We will get it done by then," he said. "I think there is a virtual certainty that we're going to get challenged in court. I think we gave a good legal argument."

House will not vote today on a GOP-pushed tax incentive/corrections bill even though that was game-plan on Thursday. Reason for the pullback was not given but it could signal the votes are not there to approve the measure. Congressional Quarterly reported that, “There were 15 Republicans absent for the Thursday evening vote, indicating that perhaps GOP leaders couldn't count on those members showing up Friday morning in the current lame-duck atmosphere. There was no initial indication from leadership offices as to why the vote had been pulled, but members are usually in a hurry to leave after a Friday vote and early departures could have endangered passage.” Also, sources say disagreements remain over revenue-raising offsets and technical corrections to last year's tax law.

The bill includes a multiyear extension and phaseout of the $1-a-gallon tax credit for biodiesel. The biodiesel incentive program would be retroactively provided for 2018 and then extended for three years 2019-2021, and then reduced over three years (75 cents in 2022, 50 cents in 2023 and to 33 cents in 2024), before being eliminated in 2025. The legislation also includes one-year extensions of tax subsidies for second-generation biofuels and alternative fuel pumps and electric recharging stations.

The House Thursday evening approved the rule for debating the tax bill on a party-line vote. The bill’s future in the Senate faces hurdles and the likely result will be either a pared down extension for biodiesel added to a must-pass spending measure, or the topic will face higher odds of passage in the new Congress in 2019, sources advise.

China trade dents U.S. ag trade export outlook. As expected, the U.S.-China trade tensions and tariffs deployed on U.S. products like soybeans are showing up in more USDA outlooks, with forecast US ag exports for fiscal year (FY) 2019 now put at $141.5 billion, down from an August outlook for $144.5 billion. "Soybean export volumes are down because of declining Chinese purchases from the United States as a result of trade tensions, and as a record U.S. crop continues to pressure soybean prices lower," USDA said in its Outlook for US Agricultural Trade.

China's economic situation is also downgraded in the USDA outlook, with the agency stating, "Chinese income growth of 6.2% in 2018 is expected to slow to 6.0% in 2019 with declining investment and domestic demand, as well as from effects of China’s trade conflict with the United States."

USDA said oilseed and product exports are forecast at $27.9 billion, down $2.3 billion from August on lower soybean export volume and value. "Declining China soybean purchases from the United States have pushed U.S. export volumes lower, and China is expected to source its soybean imports primarily from South America," USDA said.

But soybeans are not the only crop where China is tabbed, as USDA noted sorghum exports are lowered $300 million to $500 million "on a slower export pace with the loss of the Chinese market."

The outlook for cotton exports is at $5.9 billion, down $1.0 billion from August. Global demand has tapered off, but again, China is mentioned as USDA said "retaliatory tariffs have limited U.S. export opportunities to China." Cotton export volumes are lowered to 3.3 million tonnes, down 200,000 tonnes previously.

Despite various trade challenges on the livestock side, USDA said the outlook for livestock, dairy and poultry exports is down just $200 million at a mark of $30.1 billion. Stronger exports for beef and pork nearly offset weaker demand for dairy, poultry and products and hides and skins.

As for imports, USDA raised its outlook for FY 2019 to $127 billion, up from their August forecast of $126.5 billion. The new mark, however, would not be a record. That set in FY 2018. "The expected increases in imports of horticultural products, sugar and tropical products, and grains and feed more than offset the expected decreases in livestock, dairy, and poultry products and in oilseeds and oilseed products," USDA said.

The result is a forecast trade surplus of just $14.5 billion, down from $18.0 billion forecast in August and the FY 2018 result of $15.8 billion. That would be the smallest U.S. ag trade surplus since $12.2 billion registered in FY 2007.

FY 2018 U.S. ag exports finished at $143.4 billion, up slightly from $140.2 billion in FY 2017 and still shy of the 2014 record of $152.3 billion. Imports registered a record mark of $127.6 billion in FY 2018, leaving an ag trade surplus of $15.8 billion.

Other items of note:

  • Ukrainian President Petro Poroshenko has accused Vladimir Putin of wanting to annex his entire country and called for NATO to deploy warships to the Sea of Azov, which is shared by the two nations. Poroshenko has also barred Russian men between 16 and 60 from traveling to his country, in order to prevent the Russians from forming "private armies" fighting on Ukrainian soil.

  • The U.S. government closed the 2018 fiscal year $779 billion in the red, its highest deficit in six years, according to the latest Treasury Department financial statements.

  • White House will hold a roundtable with tech executives. The panel, to be held next Thursday, will discuss “bold, transformational ideas” that can "help ensure U.S. leadership in industries of the future,” according to a White House email.

  • USDA issued a final rule formally abolishing the Grain Inspection, Packers and Stockyards Service (GIPSA) and implementing other items in Secretary Sonny Perdue’s USDA reorganization plan GIPSA has been moved under the Agricultural Marketing Service.

  • Cotton AWP edges higher. The cotton Adjusted World Price (AWP) is at 67.92 cents per pound, effective today, up slightly from the prior week's 67.89 cents per pound. The AWP has been under 70-cent mark for 10 weeks in a row.

Markets. The Dow on Thursday declined 27.59 points, 0.11%, at 25,338.84. The Nasdaq lost 18.51 points, 0.25%, at 7,273.08. The S&P 500 lost 6.03 points, 0.22%, 2,737.76.

Growth in China's manufacturing sector stalled for the first time in over two years in November, heaping pressure on Beijing ahead of trade talks between Xi Jinping and President Trump. The official Purchasing Managers' Index fell to 50, indicating no growth in activity or contraction on a monthly basis. The survey also showed further weakness in new orders from at home and abroad.

German retail sales edged lower for a fourth straight month in October, dipping 0.3%, in a sign of weak consumer spending in the eurozone's largest economy.

The Securities and Exchange Commission (SEC) will vote next week on asking companies and investors for feedback on the "nature and content of quarterly reports and earnings releases," following President Trump's request to take up the issue. SEC Chairman Jay Clayton doesn't expect quarterly reporting to change for most firms, particularly large ones, but he has expressed openness to possible changes for firms with revenue under $1 billion.

Pakistan's rupee plunged 5% overnight in what traders suspect was a currency devaluation amid bailout talks with the IMF. A delegation from the fund visited Islamabad earlier this month but left without an agreement on a new loan expected to be worth at least $7 billion. The two sides are expected to meet by mid-January for further discussions.


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