Powell: Fed Will 'Act as Appropriate to Sustain the Expansion'
— Key question U.S. ag sector stakeholders are asking: Is there any economic analysis of the delayed/prevented planting for this year? Impact on farmers, input dealers, crop insurance system, lenders (such as the FCS)?
The negative hits on the ag sector have clearly started to have an impact. The potential “black swan” events include a host of trade spats with China, Mexico and other countries. The record slow pace of corn and soybean plantings are expected to force some key changes in the June 10 USDA WASDE report. But if for example USDA cuts corn planting and yield forecasts, history shows USDA takes a significant percentage reduction from corn usage, of at least 35% to 40% of the production cut. Some analysts say that percentage could even be higher because of ethanol, corn imports and other implications.
With the importance of seed corn production in the now-drenched Eastern Corn Belt, talks with seed company contacts signal a concern, but most believe there will be adequate seed available for 2020, especially tapping South American seed.
— U.S. farmers on drenched land confront a tough choice. Millions of farm acres are set to go unplanted with corn this spring as persistent wet weather leaves U.S. farmers facing an agonizing choice: whether or not to risk trying to raise a crop. Link to Wall Street Journal article on the topic.
Meanwhile, seed, fertilizer and chemical ag dealers are concerned about potential disaster payments that will encourage farmers to skip planting some crops this spring. In a letter (link) to USDA, the Agricultural Retailers Association says if farmers choose not to plant a crop, “the retailer who positioned to provide seed, seed treatment, fertilizer and crop protection for that crop will be left holding product which will either drop in value, or worse, as in the case of treated seed, be of no value at all.”
— Clouds are forming over ship operators’ prospects for the peak shipping season. Global ship operators that normally begin the summer girding for the rush toward the third quarter instead have been slimming capacity, the Wall Street Journal reports (link), as they brace for a surge in trans-Pacific tariffs.
Executives at several big container lines told the WSJ they are concerned that recent weakness in shipping rates sends an ominous signal just as some major economies are starting to stumble and trade tensions are rising. Some officials say they fear the escalating row between the U.S. and China will spread to Europe, triggering a downward spiral in demand. Example: Braemer ACM recently scaled back its forecasts for container growth this year, and the World Bank just slashed its forecast for global trade growth from 3.6% to 2.6%. That may leave carriers with few options for preserving margins beyond pulling ships from service, the article concludes.
— GOP lawmakers warn White House they’re prepared to block Mexico tariffs. Senators told Trump administration officials on Tuesday that there could be a disapproval vote — and opponents of President Trump’s tariffs could have enough support to override a veto. Trump has vowed to use broad emergency powers to impose a 5% beginning on Monday and to increase the rate to 25% by October if Mexico doesn’t stem the flow of migrants to the U.S.
“There is not much support in my conference for tariffs,” Senate Majority Leader Mitch McConnell (R-Ky.) said. “Our hope is that the tariffs will be avoided, and we will not have to answer any hypotheticals.” But Trump said lawmakers would be making a mistake if they try to stop him.
Senators said on Tuesday that they were almost uniformly opposed to Trump’s plans to tax Mexican imports. “You didn’t hear a single yes,” warned Sen. Ted Cruz (R-Texas). “I will yield to nobody in passion and seriousness and commitment for securing the border,” Cruz later told reporters. “But there’s no reason for Texas farmers and ranchers and manufacturers and small businesses to pay the price of massive new taxes.” Sen. Kevin Cramer (R-N.D.) predicted that about 20 Republicans might challenge Trump and vote to reject his tariffs if the issue reached the Senate floor. “The administration ought to be concerned about another vote of disapproval on another national emergency act, this time trying to implement tariffs. Tariffs are not real popular in the Republican conference,” Sen. Ron Johnson (R-Wis.) told reporters.
Republican senators emerged from a closed-door lunch at the Capitol Tuesday, angered by the briefing they received from a deputy White House counsel and an assistant attorney general on the legal basis for Trump to impose new tariffs by declaring a national emergency at the southern border.
Meanwhile, Fed Chairman Jerome Powell said the central bank was watching Trump’s trade disputes and hinted that interest rates could be cut to ease the economic repercussions — details below.
— Split views on avoiding U.S. tariffs on Mexico. Mexican Foreign Minister Marcelo Ebrard Tuesday said he is confident that Mexico’s plan will succeed in meeting President Trump’s demand that the country halt Central American migrants from crossing through Mexico to the U.S. “Common sense says that it doesn’t make sense to have a tariff discussion right now when an agreement about migration can be reached in the next days,” he said. Ebrard put the chances of a successful outcome at 80%. “I am always optimistic,” he said.
But President Trump, in London, said “it’s more likely that the tariffs go on and we’ll probably be talking during the time that the tariffs are on and they’re going to be paid.”
Today, Mexican officials will tell Vice President Mike Pence that they have already taken action, aiming to reach a negotiated solution. Meanwhile, Ebrard is scheduled to meet with Secretary of State Mike Pompeo today, following Tuesday’s meeting between U.S. Trade Representative Bob Lighthizer and Mexico’s trade negotiator Jesús Seade.
Mexico is also prepared to hit back with “forceful measures,” said Seade, who added Lighthizer is “extremely worried” that an immigration deal will prove elusive.
“This is a solution that requires a common vision. It’s impossible to have different or opposite decision in Mexico than the United States,” Ebrard said after meeting with House Speaker Nancy Pelosi (D-Calif.) on Tuesday. “The people coming here are not Mexicans mainly, 85% are from Central America. So that’s why we need to share a vision about the issue. Mexico is doing a lot of things in Mexico.”
Ebrard said his meeting with Pelosi was “very productive … for the future of North American economic cooperation.” He said he presented the “roadmap” Mexico is using to implement a new law that overhauls the country’s labor system, which was a prerequisite for U.S. approval of the U.S.-Mexico-Canada Agreement (USMCA). House Democrats want to see how Mexico makes good on its promise to strengthen independent unions. Ebrard downplayed fears that the law could be rolled back or amended. “It’s not possible because it has been approved,” he said. “We have the support of the majority in both chambers and there is no indication there is going to be any further reform or change.” He said Mexico will send Mexican Secretary of Labor Luisa María Alcalde Luján to Washington for a follow-up meeting with Pelosi and other Democratic lawmakers. The half-hour meeting included Ways and Means Chairman Richard Neal (D-Mass.) and Reps. Earl Blumenauer (D-Ore.), Henry Cuellar (D-Texas) and Joaquín Castro (D-Texas).
— President Trump pushes U.K. trade deal despite Brexit impasse. The president promised Britain a broad free-trade accord once it leaves the European Union, an offer that would require the U.K. to secure the decisive break with the bloc advocated by prominent Brexit backers.
“As the U.K. makes preparations to exit the European Union, the United States is committed to a phenomenal trade deal between the U.S. and the U.K.,” Trump said during a joint press conference with outgoing Prime Minister Theresa May. “There is tremendous potential in that trade deal.”
— Reuters: China boosting inspections on Canadian meat. Chinese customs agents are now opening all containers of Canadian meat and meat products and there could be inspections of all the contents, according to a report from Reuters citing a Canadian customs document. China indicated the action was due to "recent cases of non-compliance of pork shipments" and is linked to their efforts to stem the spread of African swine fever (ASF).
The Canadian Meat Council called on its members to comply with all the requirements for shipping product to China. Canadian Agriculture Minister Marie-Claude Bibeau said in a statement that the government was working with producers to "underscore the importance of heightened quality assurance efforts to ensure there are no trade disruptions due to administrative errors."
— FY 2020 ag spending plan includes limits on USDA actions. The House Appropriations Committee Tuesday approved their version of the Fiscal Year (FY) 2020 appropriations package for Agriculture and FDA, sending it forward on a 29-to-21 vote.
The plan includes provisions to prevent USDA from spending funds to move the Economic Research Service (ERS) and National Institute for Food and Agriculture (NIFA) out of the Washington, DC, metro area.
The panel also approved amendments to freeze funding for USDA relative to finalizing its swine slaughter inspection rule, to prevent USDA closing nine facilities under A Forest Service program for at-risk youths and would prevent FDA from approving research involving gene-editing of human embryos.
The panel rejected an effort to raise the minimum age for tobacco sales to 21 from the current 18.
The package would provide $24.3 billion in discretionary spending for USDA, FDA and the Commodity Futures Trading Commission, above $1 billion more than the FY 2019 enacted mark.
— Lawmakers push USDA to put strict 'actively engaged' requirements in for expanded farm program eligibility. USDA should make sure that it applies a strict requirement relative to what is considered actively engaged in farming as it implements 2018 Farm Bill provisions that added first cousins, nieces and nephews to the definition of family members, according to Sen. Chuck Grassley (R-Iowa) and Rep. Jeff Fortenberry (R-Neb.).
In a letter (link) to USDA Secretary Sonny Perdue, the lawmakers labeled the expanded family definition in the farm bill as "highly controversial" even as the bill won approval by a wide margin. They called on USDA to make sure that expanding the definition of family members does "not turn into an even larger loophole that increases payments to passive investors and mega-farms." The rule adopted in 2015 on actively engaged was applied to a very small percentage of farming operations, the two said, and USDA needs to "effectively administer the law."
— Other items of note:
The Trump administration on Tuesday imposed major new travel restrictions on visits to Cuba by U.S. citizens, banning stops by cruise ships and ending a heavily used form of educational travel as it seeks to further isolate the communist government. The Treasury Department announced that the U.S. will no longer allow cruises to Cuba or the group educational and cultural trips known as 'people to people' travel to the island. ... Along with the cruise ships, the U.S. will also now ban most private planes and boats from stopping in the island. ... Commercial airline flights appear to be unaffected and travel for university groups, academic research, journalism and professional meetings will continue to be allowed.
The U.S. and Japan will hold working-level talks on a possible bilateral trade deal, Jiji Press reports (link).
The House voted last night to give a path to citizenship for the young undocumented migrants known as Dreamers. It’s unlikely to pass the Senate. House Minority Whip Scalise (R-La.) said in a statement, “If Democrats were serious about immigration, they would do something about the humanitarian and national security crisis along our southern border, but Speaker Pelosi has chosen to spend the House’s time on HR 6, an expensive, partisan show vote.”
Analysis shows that President Trump’s tariffs would more than wipe out gains from the recent tax cut, the New York Times reports (link).
Imitation meat manufacturers have created a big market for their food with surprising speed. Now they just need to build supply chains to match the demand. The vegetarian substitutes made by Beyond Meat Inc. and Impossible Foods Inc. are on sale at nearly 20,000 restaurants across the U.S., the Wall Street Journal reports (link), showing that the products are rapidly gaining traction with diners and that chains are scrambling to compete for the business. That growth is straining the ability of Beyond Meat and Impossible Foods to fill the demand. Some restaurants are reporting they’re running short of Impossible’s meatless burgers, and a Minneapolis chain says it hasn’t received scheduled shipments in weeks from its distributor. Impossible Foods and Beyond Meat both are stepping up production, and “they say the bigger scale will eventually cut hefty prices that may give restaurants and their diners heartburn.”
— Markets. The Dow on Tuesday shot up 512.40 points, 2.0%, at 25,332.18. The Nasdaq moved up 194.10 points, 2.65%, at 7,527.12. The S&P 500 gained 58.82 points, 2.14%, at 2,803.27. If the S&P 500 and Nasdaq can finish higher today, they would have their first back-to-back advances in nearly three weeks. The Dow has been up for two straight days and three of the past four. Tuesday's big rally also ended the Nasdaq's very brief stay in correction territory.
Powell, eyeing trade war, says Fed will act to sustain expansion. "'We do not know how or when these issues will be resolved,” Fed Chairman Jerome “Jay” Powell said of trade negotiations between the U.S. and other nations. “We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2% objective.” While Powell did not explicitly say that the Fed will cut interest rates, markets quickly interpreted his comments as a signal that the central bank is prepared to do so. Most forecasters don’t see the Fed taking action at its June 18-19 meeting, in part because they expect the central bank will want to see if global leaders can ease trade tensions, particularly at the G20 summit in Japan June 28-29 in Osaka. Federal-funds futures show markets pricing in a roughly 97% chance of at least one rate cut this year and about an 80% chance of at least two rate decreases, CME Group data show. Both figures are up sharply from a month ago.
Federal Reserve Vice Chairman Richard Clarida also added to the optimism, telling CNBC that while the economy is in a good place, he and fellow central bankers are willing to take action if conditions change. Though he was noncommittal about future interest rate decisions, Clarida said he would be watching the trade war in particular and an inverted yield curve in the bond market for clues about the Fed’s next move.
Is President Trump using threats of trade tariffs to lower U.S. interest rates? Afsaneh M. Beschloss, founder and CEO of asset management firm RockCreek, said Tuesday at the Bloomberg Invest conference in New York that Wall Street is starting to wonder aloud about the president's intentions. "Looking at what's going on with trade, one question some people are asking is why are there so many tweets and why so much attention to trade at this particular moment. Because we know the president is one of the smartest when it comes to politics... We're out of fiscal policy options, since it's unlikely Congress can come to an agreement, and we know that the Fed is independent. So is the causal effect here to push the news on trade to a point that it might impact interest rate decisions? Some people are starting to talk that way."
The World Bank lowered its global economic forecasts because of the trade fights. With nearly half a year of data under its belt, the World Bank lowered its global growth forecast to 2.6% from 2.9% in January — and cut its forecast for growth in trade to 2.6% from 3.6%. “There’s been a tumble in business confidence, a deepening slowdown in global trade, and sluggish investment in emerging and developing economies,” World Bank President David Malpass told reporters. “This is worrisome because subdued investment weakens the foundations for sustained growth.” The global economy’s growth will be the weakest since 2016, while trade growth is on track to be the weakest since the global financial crisis more than a decade ago, according to the bank.