North Korea | Harvey update | EPA audits administrator | Food companies urge steel trade exemption | Brazil ethanol | U.S. delays ruling on Canada lumber duties | Lawsuit over biotech labeling law study deadline | Trump comments on NAFTA 2.0 | Mexico seeks trade relationship with China | Trump, Mexico and wall funding | Sept. 12 public meeting on CSX rail service issues | Tyson Foods clears SEC investigation on poultry pricing | India sugar policy
— North Korea fires ballistic missile over Japan. North Korea launched a missile toward the northern end of Japan, the Japanese government announced Monday afternoon. It was an aggressive step the country has rarely taken in the past 20 years and which observers said will undermine U.S. efforts to bring the nuclear aspirant to the negotiating table. The test was the first North Korean missile to fly over Japan’s main islands since 2009, and is the 18th missile test this year by Pyongyang. The launch took place as the U.S. and South Korea are conducting annual joint military drills.
The Japanese government issued an alert in its second largest island, Hokkaido, to take cover, putting residents on alarm and marking a significant escalation in tensions. Japanese Chief Cabinet Secretary Yoshihide Suga said the projectile flew over Erimo Misaki and fell into the Pacific Ocean.
The Pentagon confirmed the missile launch and its flight path, adding that it did not pose a threat to North America.
Prime Minister Shinzo Abe said that he had spoken with President Trump and that the two countries’ stances “are completely matched.” After an emergency national security council meeting, Abe said, “A missile launch across Japan is an outrageous act that poses an unprecedented, grave and serious threat, and significantly undermines the peace and security of the region.” Describing the test as an "unprecedented, grave threat," Abe called for an emergency meeting of the United Nations Security Council.
Trump comments. In a statement early today, President Trump said, "The world has received North Korea’s latest message loud and clear: this regime has signaled its contempt for its neighbors, for all members of the United Nations, and for minimum standards of acceptable international behavior." He added, "Threatening and destabilizing actions only increase the North Korean regime’s isolation in the region and among all nations of the world. All options are on the table."
U.S. Treasury prices jumped, driving yields early today to their lowest levels since late 2016 as renewed market fears escalated following the North Korean development. The yield on the 10-year Treasury note was down 4.6 basis points to 2.113%, and had hit a low around 2.09% earlier today. That’s the lowest since Nov. 11, just days after Donald Trump’s presidential election victory sparked a Treasury selloff that sent yields soaring. Bond prices and yields move inversely.
Stock markets are sliding in response to the North Korean launch. Stocks fell across Europe and Asia, and safety assets like gold jumped.
— Rainfall totals in some parts of southeast Texas could top 50 inches by week’s end. Officials continue to grapple with the effects of Harvey, one of the most destructive storms in U.S. history. At least 10 people have been killed, and more than 30,000 have taken refuge in shelters. “We need to recognize it will be a new normal, a new and different normal for this entire region,” Texas Gov. Greg Abbott said.
The storm is generating an amount of rain that would normally be seen only once in more than 1,000 years, said Edmond Russo, a deputy district engineer for the Army Corps of Engineers, which was concerned that floodwater would spill around a pair of 70-year-old reservoir dams that protect downtown Houston. Today’s Houston Chronicle reports that "Tropical Storm Harvey was producing 1 to 2 inches of rain per hour Tuesday morning, which would ultimately worsen the city's flooding problem, according to the National Weather Service." ... "The amount of water expected to hit Fort Bend County by late Tuesday could reach levels seen only about once every 800 years."
Damages for homeowners could cost as much as $30 billion.
President Trump and the first lady are scheduled to visit the area today. Trump will arrive in Corpus Christi, receive a briefing, and then head to Austin for a tour of the Emergency Operations Center and a meeting with the state's leaders.
— Louisiana being prepped for Harvey impacts as deluge in Houston continues. Rainfall totals of up to 35 inches have been reported in Houston and the National Hurricane Center (NHC) is sticking with its forecast for storm totals to be around 50 inches. The weather service has also had to deploy a new color on its rainfall accumulation maps to account for the heavy, historic amounts falling on the Texas coast.
Focus on Louisiana. While the storm has strengthened somewhat as it has moved over the Gulf, it is again expected to move onshore. But now the focus for the NHC is on Louisiana as Harvey's next target. "The flood threat is spreading farther east into Louisiana," NHC said. "Additional rainfall amounts of 15 to 25 inches are expected in southwestern Louisiana, with rainfall amounts of 5 to 15 inches expected in south-central Louisiana and 5 to 10 inches in southeastern Louisiana."
The NHC labels the event "catastrophic," detailing "rainfall totals exceeding 40 inches have been observed at several locations in the Greater Houston area and southeastern Texas. Storm totals could reach 50 inches in some locations, which would be historic for the area." Further, the agency cautions that the track for the center storm is not necessarily what should be focused on as "heavy rain and flooding, can and will occur well removed from the track of the center."
— Trump comments on dealing with Harvey. President Donald Trump said FEMA has ample funds to immediately deal with the storm in Texas and Louisiana, but said he is waiting on "the real number" in terms of total federal dollars that will come after a full damage assessment and requests for federal help once the storm passes.
The president said he expects a Hurricane Harvey aid package, and for it to move "quickly" through Congress to his desk. He added it will "have nothing to do" with the other items on Congress' fall agenda, and should not be part of a debate about a government shutdown. Trump said he is making "every asset at my command" available to leaders in Texas and Louisiana as they deal with Hurricane Harvey and its massive floods. The federal government is "ready, willing and able to support" efforts to respond to Hurricane Harvey, Trump said. He announced his intention to make a second trip to Texas, possibly on Saturday, as well as Louisiana.
— Energy markets' impacts continue re: Harvey. U.S. fuel prices continue to rise as more Gulf Coast refiners cut output, leaving more than 13% of the country's refining capacity offline. Gasoline for September delivery climbed as much as 2.77 cents to $1.74 a gallon, while crude prices dipped slightly to $46.50/bbl. "Data available so far point to sizably larger refining than production disruptions," Goldman Sachs said in a research note.
Around two million to three million barrels per day (bpd) of U.S. refining capacity remains offline as a result of the storm/inundation in Texas. Total U.S. refining capacity is put at 18.6 million bpd at 141 refineries, according to Energy Information Administration (EIA) data, with Texas having 30 of those facilities with a capacity of 5.7 million bpd.
Ten refineries in the Corpus Christi and Houston area are offline, with a combined capacity of roughly 2.2 million barrels per day. Also, the Department of Energy reports that three Houston-region refineries and one in the Beaumont/Port Arthur region are operating at reduced levels, while two others in that Beaumont region are weighing a shutdown.
Crude and natural gas production in the Gulf is starting to come back, with the Bureau of Safety and Environmental Enforcement reporting that as of August 28, approximately 18.94 percent of the current oil production of 1,750,000 bpd in the Gulf of Mexico has been shut-in, which equates to 331,370 bpd.
It is also estimated that approximately 18.12% of the natural gas production of 3,220 million cubic feet per day, or 583.39 million cubic feet per day in the Gulf of Mexico has been shut-in. Those percentages had approached 25% as the storm hit the Texas coast.
— Texas cotton industry may lose $150 million from Harvey: Commissioner. While the majority of Texas' cotton crop was harvested along the southern Texas coast, modules storing crops in fields have “pretty much been destroyed” by Hurricane Harvey, Sid Miller, state’s agriculture commissioner, said in a telephone interview with Bloomberg. “If they didn’t have the cotton to the gin, they probably lost it, even though it had been harvested.” Best estimate to date is around $150 million damage in the coastal plains region, he said.
“This is two years in a row. Last year, 20 inches of rain fell on open cotton in a couple of weeks. It ruined the seed and the quality and they took a big financial hit there last year,” said Jeff Nunley executive director of the South Texas Cotton and Grain Association, which represents farmers in a 36-county area in South Texas. “We’ll have to find a way to deliver some disaster relief.” Approximately 95% of the crop from Victoria, Texas (about 50 miles inland from the Gulf of Mexico) south was harvested and much of the cotton was sitting in giant cylindrical, covered “modules,” waiting to be ginned. Meanwhile, about 35% of the cotton belt from Victoria to Houston was harvested, Nunley said.
Cotton futures rose 2.5% to end at 69.83 cents a pound on the ICE Futures U.S. exchange Monday.
— Shipping companies are scrambling to reroute cargo and set up alternate supply lines due to Harvey. The impact on transport runs from package carriers to freight railroads and big shipping lines, and one analyst told the Wall Street Journal that the storm has affected up to 10% of the nation’s trucking capacity. Truckstop.com economist Noel Perry said shipping costs will likely rise across a wide area far from Houston, based on the market’s response to previous natural disasters. In the meantime, freight operators say they expect an onslaught of demand, both from relief supplies and commercial freight that’s been held back, once waters recede and shipping channels and roads are cleared for traffic.
— IEA: no need at this time to release emergency fuel. The International Energy Agency said there was no need at this time to release emergency fuel from stockpiles following disruption from Tropical Storm Harvey since global oil markets are sufficiently supplied. The storm, which was a Category 4 hurricane Friday when it made landfall in Texas near key international export hubs for U.S. fuel supplies, prompted shipping delays and shut several refineries.
— EPA administrator's trips back home being audited... EPA Inspector General Arthur A. Elkins Jr. announced an audit of EPA Administrator Scott Pruitt's use of taxpayer funds for "frequent" trips to Oklahoma. The audit comes in response to the concerns of House Democrats about reports that Pruitt abused his agency's travel policies to visit his home state.
— Food companies urge tariff exemption of steel to make food cans. Steel imports used for canned foods should be exempt from any duties that the Trump administration may put on steel imports via a Section 232 investigation, several food companies told President Donald Trump in a letter. "Since tinplate steel makes up approximately 60% of the cost of a can, a tariff as low as 5% would result in increased can costs of approximately $1 billion/year," a coalition of major food companies and can makers said in a letter. "Given the industry's thin margins, manufacturers cannot absorb this cost and will be forced to pass it on to consumers." The companies, including Conagra, Del Monte and other canned food manufacturers, warned that it will costs consumers more if the tariffs were imposed.
The Commerce Department has not yet given Trump two reports on the investigation — one on steel and one on aluminum — even though two weeks ago they indicated the reports were in the final stages of review at that point.
Meanwhile, a report surfaced that President Trump rejected a China steel offer his team backed. The Financial Times reported that one week after the July G20 summit in Hamburg — where Donald Trump criticized China for flooding the world market with cheap steel — Beijing proposed cutting steel overcapacity by 150 million tonnes by 2022. But Trump twice rejected the deal because he wanted tariffs on imports from China instead. U.S. Commerce Secretary Wilbur Ross endorsed the deal and brought it to Trump, but the president rejected the proposal. FT reported that Ross, a long-time friend of the president, floated the deal again the following week during the two-day meetings with Chinese vice-premier Wang Yang, but Trump once again refused to accept it. Ross and Chinese officials went into a July Comprehensive Economic Dialogue meeting thinking they had a deal to announce, and sources note the Chinese were shocked to learn that day that Trump had killed it, for being too small.
— Brazil's sugar industry shifting toward ethanol production. Brazilian mills increased the amount of sugarcane they process into ethanol during the first half of August, according to data from the cane industry group Unica. Mills in Brazil's center-south region earmarked 50.04% of cane in the first half of August to sugar production, the smallest share in the last two months, according to reports. About 40% of plants able to produce both sugar and ethanol have shifted toward ethanol this month, Unica said. "That is happening due to a more favorable arbitrage toward ethanol," Unica told Reuters in an email statement. "It is normal that mills opt for the product that is giving them better returns."
This comes as Brazil has decided to put import duties on ethanol beyond a level of 600 million liters (159 million gallons).
— U.S. delays ruling on Canada lumber duties. The U.S. has delayed a decision about duties on softwood lumber imports from Canada as the two nations remain at an impasse in the lengthy dispute. The U.S. Department of Commerce will postpone its final determination for antidumping and countervailing duties on Canadian softwood lumber until Nov. 14, the department said. The decision was initially expected in the first week of September. “I remain hopeful that we can reach a negotiated solution that satisfies the concerns of all parties,” Commerce Secretary Wilbur Ross said in a statement. “This extension could provide the time needed to address the complex issues at hand and to reach an equitable and durable suspension agreement.”
Tensions escalated in April when the Trump administration imposed preliminary countervailing duties of as much as 24% on Canadian imports. Additional duties of as much as 7.7% followed in June. Last week, Canada’s Ambassador to the U.S., David MacNaughton, said the country is prepared to sue the U.S. if trade negotiations fail.
— Biotech labeling law draws lawsuit over study deadline. Environmental advocates launched the first legal challenge to USDA's implementation of last year's legislation mandating the labeling of genetically engineered food, saying the USDA missed a deadline to complete a required study.
The Center for Food Safety, in a suit filed Aug. 25, claimed that USDA failed to complete a study by July on digital disclosure of ingredients made via genetic modification. Legislation signed into law directs the department to carry out a study on the efficacy of digital means of alerting consumers, such as a QR code on food packaging. Lawmakers agreed to require labeling of genetically engineered food but allow companies to label with a code read only by a smart phone, or other less-direct forms of labeling, such as calling a phone number to gain more information. Congress mandated that the USDA study how well this type of disclosure would work to alert consumers and the effect on retailers. USDA also must propose a rule that will lay out how the statute will be implemented.
— Trump threatens to use termination clause in NAFTA talks. President Donald Trump said Monday he might have to use the threat of withdrawing from NAFTA to get Canada and Mexico to agree to U.S. demands for revisions to the pact. "I believe you will probably have to at least start the termination process before a fair deal can be arrived at," Trump said during a joint press conference with the president of Finland, who is visiting the White House. "Because it's been a one-side deal for Canada and for Mexico. ... It's been unfair for too long."
The U.S., Canada and Mexico will hold a second round of talks on renegotiating NAFTA, starting this Friday in Mexico City. A USTR official said US Trade Representative Robert Lighthizer would go to Mexico City for the end of the second round. A Canadian government official said he expected Canadian Foreign Minister Chrystia Freeland would also attend.
Article 2205 of NAFTA allows any party to withdraw from the agreement six months after notifying the other two countries in writing that it intends to do so. Some observers believe Trump would need congressional approval to terminate the agreement since the U.S. Constitution gives Congress jurisdiction over trade.
— Mexico continues to look beyond U.S. for trade relationships. Mexican President Enrique Pena Nieto is scheduled to hold a bilateral meeting with China's President Xi Jinping at the BRICS summit next week as it looks to decrease its dependence on NAFTA. He'll also visit the offices of Alibaba. It comes as Mexico takes part in three days of talks in Australia aimed at reviving the Trans-Pacific Partnership (TPP) trade agreement.
— President Trump continues his effort to make Mexico pay for his proposed border wall despite his request for federal funding for the structure and threat to shut down the government over the money. "It may be through reimbursement, but one way or the other Mexico is going to pay for the wall. It's needed from the standpoint of security, for the drugs that are pouring in... and the tremendous crime problem,” Trump said.
— STB schedules Sept. 12 public meeting on CSX rail service issues. The Surface Transportation Board (STB), which has been monitoring CSX Transportation ever since the railroad experienced widespread service problems relative to changes in the company’s operating plan, scheduled a public listening session for Sept. 12 at the agency’s headquarters in Washington, D.C. The session is also expected to “give rail shippers and other stakeholders the opportunity to report on the repercussions of these rail service problems and their experiences with CSX’s actions to restore its service to acceptable levels,” according to the STB. All three STB Board members have written to CSX to express their concerns and request information about CSX’s service recovery plans. At least one CSX representative is expected to appear at the listening session, and the STB is encouraging impacted shippers and other railroads to also appear.
— Tyson Foods says it has cleared SEC investigation on poultry pricing. U.S. regulators are not recommending any enforcement action after concluding an investigation relative to allegations Tyson fixed chicken prices along with other companies, Tyson Foods announced Monday. The Securities and Exchange Commission (SEC) had subpoenaed the company after a lawsuit was filed by U.S. poultry buyers. Tyson said it has received a letter from the SEC which stated their staff has wrapped up their investigation and does not intend to recommend any enforcement action against Tyson Foods.
— India puts limits on sugar stocks to control prices ahead of festive season. Sugar mills in India will not be allowed to hold more than 21% of output in stocks by the end of September and have to bring stocks down to 8% of output by the end of October, according to India Food Minister Ram Vilas Paswan via Twitter. The action is aimed at preventing sugar mills withholding sugar from the market to drive prices higher during the festive season in September and October.