House Select Panel on China Issues Recommendations; Trade War is Possible Ahead

FOMC | Big changes in Argentina | Sugar tariffs | COP28 agreement… with loopholes | SAF

MARKET FOCUS

• Traders await FOMC announcement, presser and Fed projections
• COP28 agreement includes transition away from fossil fuels but some see loopholes
• In November, U.S. producer prices remained unchanged
• New Argentine President Milei takes initial steps to tackle economic challenges
• $3.987: Avg. per-gallon price in U.S. for diesel fuel, down 10.5 cents from week before
• U.S. solar and wind energy to surpass coal in electricity generation next year
• Ag markets today
• USDA daily export sale: 125,000 MT soybeans to unknown destinations, 2024-25 MY
• Ag trade update
• NWS weather outlook
• Pro Farmer First Thing Today items

CONGRESS

• Schumer mulls Senate session extension for to-do list and generals’ confirmation
• Congressional Republicans rebuff Ukraine’s pleas for more aid
• House preparing to vote on initiating formal impeachment inquiry into President Biden

ISRAEL/HAMAS CONFLICT 

• Biden and Israel’s PM clash over who should govern Gaza after war
   

RUSSIA & UKRAINE

• War in Ukraine devastates Russia’s preinvasion military machine
• Treasury & State Depts. sanctioned more than 250 companies and individuals
   

CHINA

• China's top leaders say industrial policy primary focus for upcoming year
• Select House panel does not call for repeal of PNTR for China, but…
• China approves three Australian meat plants for exports
   

TRADE POLICY

• Decision to lift long-standing ban on Paraguayan beef imports could be overturned
• USTR notice sets allowable sugar imports under tariff preferences
   

ENERGY & CLIMATE CHANGE

• Anticipated guidance re: SAF credits may lack essential details
   

LIVESTOCK, NUTRITION & FOOD INDUSTRY

• USDA delays Organic Livestock and Poultry Standards effective date to Jan. 12, 2024
• Cal-Maine Foods temporarily shuts Kansas facility hit by HPAI
   

POLITICS & ELECTIONS

• New York’s top court ordered state to draw new congressional district boundaries
   

— Equities today: The Dow is currently doen around 40 points. Asian and European stocks. In Asia, Japan +0.3%. Hong Kong -0.9%. China -1.2%. India +0.1%. In Europe, at midday, London +0.3%. Paris +0.3%. Frankfurt +0.1%.

     U.S. equities yesterday: All three major indices ended with solid gains after some initial pressure right after the open as traders assessed the CPI data. The Dow ended up 173.01 points, 0.48%, at 26,577.94, for its highest finish of the year and third highest close on record. The Nasdaq gained 100.91 points, 0.70%, at 14,533.40. The S&P 500 gained 21.26 points, 0.46%, at 4,643.70. (The Dow and the S&P 500 reached their highest intraday levels since January 2022, and the Nasdaq hit its highest point since April 2022.)

— Agriculture markets yesterday:

• Corn: March corn futures rose 3 3/4 cents at $4.85 1/4 and near mid-range.
• Soy complex: The soy complex featured low range closes across the board, with soyoil leading the way lower amid sharply lower crude oil futures, while meal gains ultimately faded to losses. March soybeans fell 12 1/4 cents to $13.23 3/4, while January soymeal fell $2.90 to $410.30. January soyoil fell 69 points to 50.42 cents.  
• Wheat: March SRW wheat closed up 16 cents at $6.25 1/2 and nearer the session high. March HRW wheat rose 24 1/2 cents to $6.56 3/4 and nearer the session high. March spring wheat futures ended the day at $7.00 1/4, up $12.50 on the day and nearer the daily high.
• Cotton: March cotton fell 95 points to 81.05 cents, a low-range close.
• Cattle: Cattle reversed early losses and closed significantly higher today. The expiring December live cattle contract rallied 72.5 cents to $167.70 and most-active February futures gained 70 cents to $168.60. January feeder futures advanced $1.30 to $219.25.
• Hogs: Hog futures traded mixed Tuesday, with the expiring December contract slipping 42.5 cents to $67.825 and most-active February climbing 92.5 cents to $68.25.
   

— Ag markets today: Corn, soybeans and wheat all traded solidly to the downside during overnight trade. As of 7:30 a.m. ET, corn futures were trading 2 to 3 cents lower, soybeans were 8 to 9 cents lower and wheat futures were 8 to 10 cents lower. Front-month crude oil futures and the U.S. dollar index were both modestly higher.

     Critical day(s) for cattle futures. Live cattle and feeder cattle futures have posted three consecutive days of gains, which is a typical correction. Additional buying this week would go a long way toward signaling lows have been posted. But if fresh selling shows up, it suggests futures will make near-term moves to new lows.

     February hogs move above cash index. February lean hog futures firmed 92.5 cents on Tuesday to $68.25, moving to a 55-cent premium to today’s cash index quote (as of Dec. 11). That implies traders expect the cash index to post a seasonal bottom and then rise slightly before the February contract expires in mid-February. Traders probably expect continued cash market weakness into the end of the year, followed by a modest recovery in early 2024.  

— Quotes of note:

• SEC swing and miss. “They’ve been trying to take a lot of swings. And that means more losses than you might expect.”— David Zaring, a professor of legal studies at the University of Pennsylvania’s Wharton School, on the growing number of legal challenges faced by the Securities and Exchange Commission.
   
• “When you look at the value of Macy’s, the real estate is the jewel.” — GlobalData Managing Director Neil Saunders, on the premium price for a buyout of the department-store chain despite faltering retail sales.
   

— The Federal Reserve is planning to maintain its current interest rates without any changes for the third consecutive meeting. This decision coming this afternoon is expected to counter the increasing speculation that there will be interest rate cuts next year. A recent inflation report, which indicated an increase in consumer prices, has made it less likely that the Federal Reserve will adopt a more accommodating monetary policy stance. The majority of major banks monitoring the situation anticipate that the Federal Reserve will choose to keep rates steady. Chair Jerome Powell has emphasized that it's premature to predict when rate cuts might become a reality. Instead, policymakers are likely to stress their intention to maintain the status quo and continue monitoring how higher borrowing costs affect the overall economy.

     Of note: In September's Summary of Economic Projections (SEP), the median projection for the fed funds rate was 5.1% at the end of 2024, implying one rate cut. Markets are expecting four or five 25-bp rate cuts in 2024, a significant disconnect from the Fed's last SEP.

— In November, U.S. producer prices remained unchanged, marking a contrast to the 0.4% decline observed in October and falling short of market expectations for a 0.1% increase. This stability was driven by unchanged goods prices, with higher food costs offsetting a decrease in energy prices. The core rate, which excludes volatile food and energy components, also remained steady, missing predictions of a 0.2% increase. In comparison to the previous year, the headline Producer Price Index (PPI) rose by 0.9%, while the core PPI increased by 2%, representing the slowest growth since January 2021.

— New Argentine President Milei takes initial steps to tackle economic challenges. Argentina's newly elected President, Javier Milei, introduced a series of initial measures aimed at addressing the country's economic challenges. These measures include a significant devaluation of the currency, which has been devalued by 54%, and extensive spending cuts with the goal of eliminating the primary fiscal deficit in the next year. The Economy chief, Luis Caputo, emphasized the urgency of these measures, repeatedly stating that there is "no more money" to sustain the current economic situation. However, despite these drastic actions, some investors may remain skeptical about whether these measures will be sufficient to stabilize the economy. Milei's election had initially led to a rally in Argentina's assets, but it seems that there is still uncertainty among investors about the effectiveness of the proposed shock treatment in addressing the country's economic challenges.

Market perspectives:

— Outside markets: The U.S. dollar index was higher, with the euro and British pound weaker against the greenback. The yield on the 10-year U.S. Treasury note was lower, trading around 4.18%, with a lower tone in global government bond yields. Crude oil futures were higher ahead of U.S. gov’t inventory data, with U.S. crude at around $68.90 per barrel and Brent at around $73.45 per barrel. Gold and silver futures were narrowly mixed ahead of US wholesale inflation data, with gold firmer around $1,995 per troy ounce, and silver weaker around $22.97 per troy ounce.         

— $3.987: Average per-gallon price in the U.S. for diesel fuel, down 10.5 cents from the week before in the seventh straight weekly contraction and the lowest level since the week of July 24, according to the Energy Information Administration.

— Energy prices: Traders are weighing softer yet persistent inflation and weakening demand from China. The West Texas Intermediate crude contract for January fell nearly 4% Tuesday, settling at $68.61 a barrel, while the Brent contract for February slipped more than 3.5% to $73.24.

— U.S. solar and wind energy to surpass coal in electricity generation next year. In the coming year, electricity generated from solar and wind systems in the U.S. is projected to exceed the power produced by burning coal for the first time. This shift is driven by a significant increase in solar panel installations. According to government data, in 2024, fossil fuels are expected to generate approximately 599 billion kilowatt-hours, down from 669 billion kilowatt-hours in the current year, as coal-burning power plants continue to close. In contrast, wind and solar energy combined will provide around 688 billion kilowatt-hours of electricity in the upcoming year, compared to 595 billion kilowatt-hours this year, signaling the increasing prominence of renewable energy sources in the nation's power generation landscape.

— USDA daily export sale: 125,000 MT soybeans to unknown destinations, 2024-25 marketing year.

— Ag trade update: Algeria purchased between 910,000 and 930,000 MT of optional origin milling wheat, with most of it expected to be sourced from the Black Sea region. Jordan tendered to buy up to 120,000 MT of optional origin milling wheat. South Korea purchased 60,000 MT of optional origin feed wheat, excluding India, Pakistan, Argentina and Russia. Japan received no offers in its tender to buy 60,000 MT of feed wheat and 20,000 MT of feed barley.
— NWS weather outlook: Moderate to heavy snow and below average temperatures likely over portions of the Southern Rockies/High Plains through early Friday morning... ...Excessive Rainfall concerns over southeastern Florida for the next few days... ...Northern tier and West warm up.

Items in Pro Farmer's First Thing Today include:

     • Grains under pressure overnight
     • France raises non-EU wheat export forecast
     • Fitch calls China’s 2024 outlook neutral even as challenges mount
     • China’s Nov. bank loans rise less than expected
     • Eurozone industrial production continues to contract

— Schumer mulls Senate session extension for to-do list and generals’ confirmation. Senate Majority Leader Chuck Schumer (D-N.Y.) is currently faced with a decision on whether to follow through on his threat to keep the Senate in session until he addresses his extensive to-do list. The Senate is on track to complete work on the annual Pentagon policy bill, and there are efforts to reach an agreement for confirming the 11 remaining four-star generals that Senator Tommy Tuberville (R-Ala.) is blocking. Once these items are resolved, the only remaining issue will be the Ukraine-border talks. However, there is a sense of urgency in the Senate, with lawmakers showing signs of wanting to adjourn for the year. Schumer may find it challenging to keep members in session if there's no significant progress, especially if Republican negotiators are not enthusiastic about the Ukraine-border discussions, which are unlikely to yield immediate results.

— Congressional Republicans rebuff Ukraine’s pleas for more aid. Despite personal lobbying by Volodymyr Zelenskyy and President Biden, Republican lawmakers continue to insist that additional money and weapons to combat Russian forces must be paired with changes to U.S. border security. It’s unlikely that aid will come by year end.

— House is preparing to vote on initiating a formal impeachment inquiry into President Biden. Republicans are escalating their controversial investigation as they head into an election year. They argue that launching a formal inquiry into the president's and his family members' international business activities would provide them with greater access to information. However, they emphasize that this move doesn't necessarily mean they will impeach President Biden. The White House has countered by stating that Republicans have been unable to uncover any evidence of wrongdoing by Biden and are using allegations of obstruction to justify their investigation.

— President Biden and Israel’s Prime Minister Benjamin Netanyahu clashed Tuesday over who should govern Gaza after the war, in a public display of differences emerging between the two leaders over the conflict. The United Arab Emirates is pushing for an international effort to resolve the Israeli/Palestinian conflict, as discussions gain momentum about how to rebuild and govern Gaza after the war between Israel and Hamas ends.

     Israel’s military has begun pumping seawater into Hamas’s vast complex of tunnels in Gaza, according to U.S. officials, part of an intensive effort to destroy the underground infrastructure that has underpinned the group’s operations.

— The war in Ukraine has devastated Russia’s preinvasion military machine, with nearly 90% of its prewar army lost to death or injury, according to a newly declassified U.S. intelligence assessment shared with Congress.

— The Treasury and State Departments sanctioned more than 250 companies and individuals in China, Turkey, and the United Arab Emirates, alleging that their continuing support for Russia has been crucial to sustaining its invasion of Ukraine.

— China's top leaders declared that industrial policy will be their primary focus for the upcoming year. This announcement has left investors disappointed, as they were anticipating a more substantial stimulus package for the country's economy. The annual economic work conference of the ruling Communist Party outlined goals that were viewed as conventional, lacking any innovative solutions for the troubled property sector. However, outside of this conference, one of China's leading housing officials has made a strong commitment to preventing a series of defaults by property developers, signaling a determination to address the liquidity crisis within the industry.

     Trivium China notes that the readout repeated a key phrase from Friday’s Politburo meeting, saying: “Next year, we must adhere to the principles of seeking progress while maintaining stability, promoting stability through progress, and implementing policies that are conducive to stabilizing expectations, growth, and employment.” The emphasis on “progress” to “stability” is important, the China watcher says. “This is the first time in 11 years that top officials have explicitly emphasized economic progress over economic stability.”

     Additionally, officials closed the readout by expressing a sense of urgency about boosting the economy, saying: “We must…effectively enhance the sense of responsibility and mission to do a good job in economic work, seize all favorable opportunities, make use of all favorable conditions, work quickly when we see it, and do as much as we can.”

     Bottom line: Trivium China concludes that “market reaction to the meeting readout has largely been bearish, but we see top officials gearing up to fight harder to support growth next year.”

— Select House panel does not call for repeal of PNTR for China, but… A special House committee focused on China is recommending a significant shift in the way the U.S. treats Chinese-made goods, potentially subjecting them to higher tariffs, even if it means escalating tensions between the two economic superpowers, the Associated Press reports. Link to report.

     The committee's report does not explicitly call for the repeal of China's preferential trade status (permanent normal trade relations/PNTR) but suggests placing China into a new trading category that would effectively lead to its repeal. This recommendation is endorsed by lawmakers from both parties, indicating a growing willingness in Congress to build upon the tariffs implemented during Donald Trump's presidency, even though it may risk retaliation from China, which could adversely affect American farmers, ranchers, and exporters. Link for report details.

     The committee crafted these recommendations after months of deliberation and hearings, with hopes of adapting them into legislation that Congress could pass before the next year's elections. The proposed shift would phase out China's preferential trade treatment, which was granted two decades ago, and would raise tariffs on Chinese goods, aiming to protect American businesses from unfair competition. The revenue generated from increased tariffs would be used to expand market opportunities for U.S. producers and enhance national security.

     In the event of Chinese retaliation, the committee suggests that Congress should consider additional spending to mitigate the damage to U.S. workers and industries, adding the government should look for alternative markets for U.S. food and ag exports, and Congress should consider a new round of trade-war assistance for farmers and ranchers. Biden administration officials said the newly created Regional Agricultural Promotion Program will focus on developing nontraditional and growth markets as a way to diversify and stabilize farm exports.

     China is the No. 1 market for U.S. food and ag exports. This year, its purchases would account for 17 cents of each $1 in overseas sales. Beijing targeted U.S. ag exports for high tariffs during the Trump-era trade war and slashed its purchases to $10.1 billion in fiscal year 2019, equal to 7 cents of each $1 of ag export revenue. The White House sent $23 billion to farmers in aid during the trade war.

     Key remarks from report: “For a generation, the United States bet that robust economic engagement would lead the Chinese Communist Party (CCP) to open its economy and financial markets and in turn to liberalize its political system and abide by the rule of law,” said the select committee in a report. “Those reforms did not occur….In response, the United States must now chart a new path that puts its national security, economic security, and values at the core of the U.S./PRC [People’s Republic of China] relationship.”

     Additionally, the committee recommends lowering the threshold for duty-free imports into the U.S., with a focus on reducing it from the current $800, potentially impacting foreign adversaries like China. The current threshold was raised to $800 in 2016, and proponents argue that it benefits small U.S. businesses and consumers, while opponents contend that it's not worth the government's expense and effort to collect duties on low-value shipments.

     If enacted, the committee’s recommendations “will reset the terms of our relationship” with China and “prevent the flow of American capital and technology from supporting its military advances and human rights abuses,” Rep. Mike Gallagher (R-Wis.), the committee’s chairman, and Rep. Raja Krishnamoorthi (D-Ill.), its top Democrat, said in a statement.

     China is not willing to play by free-market rules, so the United States should adopt a new, tougher strategy that allows higher import tariffs and other measures to prevent reliance on Beijing, the select committee said.

     USDA should become a voting member of the powerful Treasury-led Committee on Foreign Investment in the United States that decides whether to allow foreign investment in America, the panel recommended. USDA’s role would be limited to transactions involving farmland and agricultural technology. Legislation has been proposed to ban ownership of U.S. agricultural land and companies by China.

     The report recommends that U.S. companies disclose their investments in sensitive areas of the Chinese economy and mentions its investigations into BlackRock Inc. and MSCI Inc. for allegedly facilitating flows of capital to Chinese army contractors, human rights abusers and companies tied to the country’s surveillance state. The investigations into BlackRock and MSCI continue, Gallagher said in a phone call following the report’s release.

     The panel also recommended that Congress work to secure access to critical minerals and reduce dependence on China for pharmaceutical and medical device supply chains. The committee said the U.S. should also safeguard its access to critical semiconductors by introducing tariffs on so-called legacy chips imported from China and work to shore up the domestic manufacturing of the devices.

     The U.S. should either force TikTok’s Chinese parent ByteDance to sell the popular social media app or ban it in the U.S., according to the panel. The app is already subject to a national security mitigation agreement negotiated between the company and the Committee on Foreign Investment in the U.S.

     The only person to vote against adopting the report was Rep. Jake Auchincloss, a Democrat from Massachusetts. He said he had concerns about the “threads of industrial policy and protectionism” that “run too strongly throughout it.” He said he would follow up with specific concerns in a written statement to the committee.

     Bottom line: Congress is under no obligation to adopt the recommendations, and is unlikely to do so given its long list of other priorities. But the report highlights how Republican and Democratic lawmakers alike want to unwind a relationship at the center of global trade even as President Joe Biden has sought to stabilize ties with Beijing and President Xi Jinping. Gallagher said that he and other members are continuing to work on restrictions on outbound investment and predicted the House would act on those proposals in the first quarter of 2024.

— China approves three Australian meat plants for exports. China’s customs authority updated its list of approved meat exporters, which included the re-listing of three Australian meat plants. That’s the latest sign of improving trade relations between the two countries.

— White House decision to lift a long-standing ban on Paraguayan beef imports would be overturned by a resolution that Sens. Jon Tester (D-Mont.) and Mike Rounds (R-S.D.) are crafting. The two lawmakers proposed a similar bill on Brazilian beef. “The Biden administration has this one backwards — resuming beef imports from a country with a recent history of foot and mouth disease is bad news for both Montana consumers and producers,” says Tester.

— USTR notice sets allowable sugar imports under tariff preferences. The Office of the U.S. Trade Representative (USTR) released a notice in the Federal Register (link), specifying the allowable levels of sugar, syrup goods, and sugar-containing products that can enter the U.S. under preferential tariff treatment through various trade agreements. This notice pertains to several countries, including Chile, Morocco, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, Peru, Colombia, and Panama. For some of these countries, none of the specified products can enter the U.S. duty-free, while specific quantities are outlined for other nations in the notice.

— Anticipated guidance regarding Sustainable Aviation Fuel (SAF) credits, under the Inflation Reduction Act (IRA), may lack essential details. Recent reports suggest that the Treasury Department is preparing to provide instructions on how to qualify for these credits. However, Bloomberg notes that even if the rules are released this week, crucial components may remain undisclosed until spring. One significant issue revolves around the model used to determine greenhouse gas emission reductions from the SAF feedstock. If the Department of Energy's (DOE) model (GREET) is adopted, it could potentially include corn-based ethanol for SAF credits. In contrast, using a model developed by the United Nations (UN) might exclude certain feedstocks like ethanol from eligibility.

     Of note: In late November, USDA Secretary Tom Vilsack told Reuters he was confident ethanol will become an SAF feedstock, when asked. "They (U.S. Treasury) will provide some direction and guidance, and I think the actual rules and regulations and so forth may take a little bit longer," he said.

— USDA delays Organic Livestock and Poultry Standards effective date to Jan. 12, 2024. USDA's Agricultural Marketing Service (AMS) postponed the effective date of its Organic Livestock and Poultry Standards to Jan. 12, 2024. Link for details. This delay of 10 days extends the original effective date of Jan. 2. The reason behind this delay is to ensure compliance with the Congressional Review Act (CRA), which mandates that Congress be given a minimum of 60 days to review significant rules before they come into effect. AMS notified Congress about the rule on Nov. 13, and as a result, the Jan. 2 effective date did not allow for the required 60-day review period by law. Additionally, there are technical corrections to other effective dates in 2029 for some parts of the rule.

— Cal-Maine Foods temporarily shuts Kansas facility hit by HPAI. Egg producer Cal-Maine Foods temporarily ceased production at a facility in Kansas after some of the flock tested positive for highly pathogenic avian influenza (HPAI). The company said HPAI had affected about 684,000 laying hens, or nearly 1.6% of its total flock. The company said there were no positive tests for HPAI at any other of its locations to date.

— New York’s top court ordered the state to draw new congressional district boundaries ahead of the 2024 elections, delivering a potential boost to Democrats in their effort to win a majority in the House of Representatives.
 

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