Are USDA analysts saying they don't believe China will fulfill Phase 1 commitments?
Analysis and perspective by Jim Wiesemeyer, Pro Farmer Washington Policy Analyst
It doesn't take much for U.S. farmers and some private commodity analysts to complain about USDA forecasts. But the 2020-21 forecasts USDA released this morning should give the complainers ample ammo against the agency, including USDA Secretary Sonny Perdue, with farmers saying the analysts punting on China's commitment to buy billions of dollars’ worth of U.S. farm products could cost them a price rally at least near term, notably for the 2020-21 marketing year.
Point one: February is the price discovery period when crop insurance price elections are determined. So, for example, it would determine the price per unit a farmer will be indemnified at should the producer's crop be negatively impacted. If commodity prices rise during the month, that increases a farmer's crop revenue assurance protection should prices fall later in the crop year.
Point two: USDA Secretary Sonny Perdue again said farmers should not count on another Market Facilitation Program (MFP 3) because of recent trade deals with China and other countries. But he cannot have it both ways. Perdue's analysts have basically punted (some use the word blocked punt) regarding China's commitment in writing to purchase $80 billion in U.S. farm products over calendar years 2020 and 2021. What Perdue should be asked is what would the ag sector financial balance sheet look like without another trade mitigation program, until those China commitments are either realized or found to be a false commitment. Farmers already hope too much regarding their dreams after putting seed “in a hole” as Mike Bloomberg would say. They can't count on how long it may take China to fulfill the Phase 1 agreement. Simply, a transition to stepped-up Chinese purchases should be ample enough reason for a transition payment program until the China buys are significant enough to help put the U.S. ag sector in a more profitable position. President Trump will likely tweet such a program once he is made aware of the delicate financial position farmers face.
Disbelief in non belief. USDA analysts are basically saying they either do not believe China will fulfill the purchase commitment terms of the Phase 1 accord, or they simply are saying they do not have the information to assess the impact. One could ask what those analysts are getting paid to do. USDA analysts: Welcome to what the private industry has to assess on a regular basis. It is called research and analysis.
USDA Chief Economist Rob Johansson said the forecasts “reflect public information available right now on Phase 1.” Perdue remarked on the U.S./China trade deal during a press conference following his keynote address to the outlook conference on Thursday. Asked why updated forecasts unveiled by Johansson only expect a $3 billion increase in ag exports to China (fiscal year 2020 which ends Sept. 30, 2020) despite their commitment to purchase tens of billons of dollars more under the Phase 1 trade deal, Perdue emphasized that details of the accord were “not included” in those forecasts. USDA economists had to put the estimates together “based on what they knew at that particular time,” and so they did not include prospective China ag buys or impacts from the coronavirus outbreak in their calculations. “I think if you read the preamble [of the reports]… you’ll read that the contemplation of the Phase 1 was not included,” he added. On China, the report said, “The current outlook for exports to China is tempered by significant uncertainties surrounding the COVID-19 outbreak, which may affect the timing of China’s purchases under the Phase One Agreement during the calendar year.”
The have-it-both-ways Perdue then said he expects “exports to be much greater” than those seen in USDA’s top-line numbers. Oh? So if that occurs, would prices rally then? As to when Chinese ag purchases may begin surfacing in USDA reports, Perdue said “I'm hoping certainly by the spring,” but he emphasized he had no additional specific information to share on that front. Perdue said he remains confident that China will live up to its purchase commitments. “They have some [hardline numbers] that are unilaterally enforceable” he observed, noting that China will face more tariffs if it fails to hold up its end of the bargain. This is why some say when it comes to USDA, it's a Haze 1 agreement.
Bottom line: USDA failed the ag industry and particularly farmers and ranchers with their mostly punted look ahead relative to the impacts of the Phase 1 accord. Note the Phase 1 agreement is on a calendar year basis. USDA crop demand forecasts are on a marketing year. For 2020-21 that should have given ample time for USDA to assess China following through on its signed commitments. As for USDA's FY 2020 export forecasts, China's likely purchases will start in great numbers likely beginning this fall, so it will be interesting to see what USDA eventually forecasts for FY 2021 (which ends Sept. 30, 2021). At least USDA analysts at that time will have more proof one way or another whether China is fulfilling the Phase 1 accord, rather than apparently assuming they will not at this time. The "confusion" on this front was attempted to be headed off by USDA via the report issued by the Office of the Chief Economist ahead of the Feb 11 WASDE. But as evidenced by the questions arising at the Outlook Forum, that document only further muddied what are already very murky waters on the U.S./China trade front from an impact perspective at USDA.