Evening Report | April 3, 2024

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Talk of more Chinese corn cancellations... AgriCensus reported potential cancellations or defaults on Ukrainian corn sold to China, with some noting the tonnage could be up to 1 MMT. As we highlighted in “First Thing Today” on Tuesday, Bloomberg reported Chinese customs authorities asked some traders to limit deliveries of foreign corn into bonded areas, in a move aimed at easing domestic oversupply and supporting prices for farmers before the planting season.

Russia widens grain export curbs... Russian authorities have halted grain exports on some ships belonging to Aston, one of the biggest local grain trading houses, two industry sources told Reuters, widening a quality probe which has already curbed the exports of another major trader. According to the sources, Russia’s agricultural watchdog Rosselkhoznadzor has not provided some of the company’s vessels with phytosanitary certificates. One of the sources said two Aston vessels were not given clearance.

According to data cited by the newspaper Kommersant, Aston exported more than 2.7 MMT of grain in the first half of 2023-24, the third-largest volume after Grain Gates and TD RIF.

Mexico postpones glyphosate ban... Mexico has postponed the ban on glyphosate, which was initially set for April 1. The government cited concerns about potential disruption to crop production and the absence of viable alternatives to the herbicide. Conditions outlined in the February 2023 decree have not been fulfilled. However, this delay is not expected to affect the portion of the decree regarding the cessation of Mexican imports of GMO corn for food use. The U.S. has challenged this decision under the U.S.-Mexico-Canada Agreement (USMCA), with a hearing scheduled for June and a final decision expected by year-end.

E15 sales set record... Nationwide sales of E15 rose 8% to a record 1.1 billion gallons in 2023, thanks to competitive prices and the growing number of stations that sell the fuel, according to a Renewable Fuels Association (RFA) analysis of data released by state agencies in Minnesota and Iowa. It said a key reason why the average E15 volume per station has increased over the last five years is that sales have been allowed during the summer months in conventional gasoline areas.

RFA noted there are no official statistics on U.S. E15 volumes, but national sales can be estimated using Minnesota and Iowa data, given those two states account for nearly 30% of all U.S. stations offering E15. RFA estimated national sales by multiplying its count of U.S. E15 stations by the average estimated volume per station in the two states. More than 3,000 stations offered E15 on average over the course of 2023, compared to 2,700 in 2022.

How China could respond to U.S. sanctions in a Taiwan crisis... New research from the GeoEconomics Center and Rhodium Group examines China’s ability to address potential U.S. and broader G7 sanctions, focusing on its possible retaliatory measures and its means of sanctions circumvention. The study analyzes Beijing’s response to potential economic sanctions, particularly in the context of a crisis related to Taiwan. Here are the key findings:

• China has significantly broadened its range of statecraft tools over the past five years, including tariffs, import bans, boycotts and inspections. This expansion makes China’s response to potential sanctions more formidable compared to Russia.
• China’s statecraft toolkit primarily revolves around trade and investment rather than financial measures. This includes potential risks to US exports worth $79 billion in a moderate scenario and $358 billion in G7 exports in a severe scenario, along with significant G7 direct investment assets in China.
• If China deploys economic statecraft tools, it would face substantial economic and reputational costs, particularly in terms of job losses and reduced foreign investment.
• China is unlikely to engage in tit-for-tat retaliation due to the significant costs involved. Instead, it may target sectors where it can inflict disproportionate damage, such as export controls on critical goods.
• China may attempt to divide the G7 to mitigate the impact of sanctions, leveraging varying relations and commitments to Taiwan among G7 members. Positive inducements and bilateral lending to other countries could also be used to circumvent or reduce the implementation of G7 sanctions.
• China is working to create alternatives to the dollar-based financial system, including yuan-denominated transaction networks. While not likely to replace the global financial system, these networks can provide alternative mechanisms for financing and trade transactions, enhancing China's resilience to sanctions.
• The timing of any crisis significantly affects the effectiveness of statecraft tools for both the G7 and China. Efforts to de-risk and shift supply chains may reduce China’s capacity for retaliation over time, while the expansion of renminbi-based financial networks provides China with more options to mitigate Western sanctions.

 As for U.S. ag-related trade with China, the report says: “China could target areas based on how much the United States depends on China as an export market. In 2022, over half of U.S. exported soybeans went to China, as did 83% of its exported sorghum. U.S. dependence on China for its agricultural goods informed China’s decision to target these goods in response to the Section 301 tariffs. Yet the costs to China for imposing tariffs on these products would also be high: the United States supplied 31% of China’s imported soybeans and 64% of its imported sorghum. China would likely tailor the strength of its import restrictions depending on global agricultural conditions and whether alternative supply could be found elsewhere. Tariffs or bans on U.S. imports could also provide China with an opportunity to drive wedges between the United States and other countries. Sustained demand from Chinese consumers amid higher restrictions on U.S. imports would increase demand for imported goods elsewhere. As a group of advanced industrial economies, the G7’s exports overlap substantially with U.S. exports that could be at risk from Chinese trade barriers.”

Yellen embarks on another China trip... U.S. Treasury Secretary Janet Yellen is embarking on her second trip to China in nine months, aiming to address concerns about the country’s industrial overcapacity, which poses threats to global economies. Yellen will spend two days in Guangzhou before heading to Beijing for talks with high-ranking Chinese officials, including Vice Premier He Lifeng and Finance Minister Lan Fo’an. Despite ongoing differences, bilateral engagement has increased since President Biden’s meeting with Xi Jinping in November, including a telephone call between the two leaders this week, which covered a range of topics, including cooperation on counter-narcotics, AI safety, the restoration of military communication channels and climate issues.

Yellen has previously criticized China’s industrial policies, particularly subsidies benefiting key industries, and will advocate for fair treatment of American workers and businesses. The agenda also includes discussions on American manufacturing support, debt restructuring, combating money laundering, financial stability, China’s economic growth targets and the property sector. Additionally, Yellen will engage with Guangdong officials and participate in events hosted by the American Chamber of Commerce in China and Peking University during her visit.

Report: Trump’s tariff plan could drive inflation, pressure Fed... Former President Donald Trump has proposed a tariff plan, which includes imposing 60% tariffs on imports from China and 10% tariffs on imports from the rest of the world. According to Bloomberg Economics, implementing such tariffs would likely lead to inflation exceeding the Federal Reserve’s target and could prompt the central bank to raise interest rates. Bloomberg Economics utilized a model to estimate the impact of Trump’s tariff plan on the U.S. economy. The model suggests that implementing the proposed tariffs would negatively affect U.S. economic growth and increase the cost of living for Americans. Specifically, it projects that the core personal consumption expenditures price index, the Fed’s preferred measure of inflation, could rise to 3.7% by the end of the following year, well above the 2% target. Economists surveyed by Bloomberg, on average, expect 2.1% inflation in 2025.

According to the model, Trump's tariffs would result in consumer prices being 2.5% higher and gross domestic product (GDP) being 0.5% lower after two years. This situation could force the Fed to decide between raising interest rates to combat inflation or cutting them to stimulate economic growth.

However, there is uncertainty surrounding these projections. Tom Orlik, chief economist and one of the report's authors, acknowledges the difficulty in forecasting the impact due to various variables and the lack of recent precedent for tariffs at such high levels. Nonetheless, he suggests that significant tariffs could have a substantial impact, emphasizing the associated risks.

Regarding Trump’s previous trade war with China during his first term, a study by the U.S. International Trade Commission found limited inflationary effects from the tariffs imposed on Chinese goods. But Trump’s current tariff proposal is broader in scope compared to his previous actions, which included tariffs of up to 25% on Chinese goods.