Washington Insider-- Monday

By DTN's Washington Insider

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

Dow-DuPont Deal Faces In-Depth EU Probe

Dow Chemical Co. and DuPont Co. face months of talks with European Union antitrust regulators who opened an in-depth probe into the two firms’ plans to create the world’s biggest chemicals company.

The European Commission said it needs to further probe "whether the deal may reduce competition in areas such as crop protection, seeds and certain petrochemicals." The Brussels-based authority extended its deadline to rule on the linkage until Dec. 20.

"The livelihood of farmers depends on access to seeds and crop protection at competitive prices," Margrethe Vestager, the EU’s competition commissioner, said in an e-mailed statement. "We need to make sure that the proposed merger does not lead to higher prices or less innovation for these products."

In response, the chemical makers said they continue to expect the deal to be completed by the end of the year after winning regulatory approval and other customary closing conditions.

DuPont Chairman and Chief Executive Officer Ed Breen will serve as CEO of DowDuPont Inc., the name of the combined entity. His counterpart at Dow, Andrew Liveris, will be chairman. Both companies are eliminating thousands of jobs as they cut billions of dollars in expenses, with another $3 billion of cost savings promised after the deal closes. DowDuPont is supposed to split into three by the end of 2018, creating separate companies focused on agriculture, specialty products and materials science.

"Dow and DuPont will continue to work constructively with the commission to address their concerns and to obtain clearance for the merger," the companies said in a joint statement.

The historic deal “would create the world’s largest integrated crop protection and seeds company,” and “would combine two competitors with leading herbicides and insecticides portfolios and with a strong track record of bringing innovative crop protection and seeds products to the market,” the EU authority said.

Dow and DuPont shareholders approved the 50-50 merger last month. The companies still must clear other global antitrust hurdles. The U.S. Justice Department in February issued a second request for information on the combination, launching an in-depth probe. Dow and DuPont notified China’s competition agency of the deal in May and filed with the EU for approval in June.

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St Louis, KC Fed Banks Note Land Value Downturns

Lower commodity prices have impacted farm incomes but now they are translating back through to lower land values and cash rents, according to updates from the Kansas City and St Louis Federal Reserve banks.

Lower farm incomes "continue to place downward pressure on land values and cash rents," according to the St Louis Fed's second quarter 2016 Agricultural Finance Monitor. "During the second quarter of 2016, cash rents for ranch and pastureland experienced significant deterioration as reported by survey respondents. Cash rents for ranch and pastureland declined 20.7% from last year compared with a relatively small decline of 2.2% reported for the first quarter of 2016.

As for cash rents, the report noted rents on quality farmland decreased 10%, the third consecutive quarter, and fifth in the past six quarters with a decline reported. Interestingly, the report noted, "Quality farmland value, however, demonstrated something that could be interpreted as a rebound by reflecting a decline of less than 1% compared with a 6.4% year-over-year decline reported the past quarter. However, a majority of bankers expect values to continue to trend downward for the next 3 months for both quality farmland and ranch and pastureland."

Persistent declines in farm income in the District have continued to affect agricultural credit conditions, according to the latest update from the Kansas City Fed. "Demand for non-real estate farm loans and loan renewals continued to climb in the second quarter with additional increases expected in the third quarter." The report noted that the rise in loan demand has been "driven primarily by the need to finance short-term operating expenses as profit margins have remained weak."

Loan repayment rates are also suffering, with the report detailing, "Almost half of all respondents reported that loan repayment rates in the second quarter were lower than a year ago. In addition, the severity of repayment rate problems has increased slightly over the past year."

As for the outlook, the report indicated borrowers "without sufficient liquidity, substantial net worth or large borrowing bases may find it increasingly more difficult to attain financing if their creditworthiness continues to decline. Moderating farmland values may also add pressure to borrowers and banks that rely on highly leveraged farmland as collateral."

USDA will update its farm income forecast Aug. 30, an update that looms large and is likely to show further erosion as signaled by these regional updates.

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Washington Insider: President Tells Congress TPP is Coming

In a routine administrative announcement, the President gave Congress notice last week that the proposed Trans-Pacific Partnership (TPP) agreement is on its way, Politico is reporting. However, the move has a much more than routine purpose; it is intended to "infuse new energy into efforts to ratify the flat-lining trade pact," Politico says.

Last week’s notification is the clearest signal yet that the White House is serious about getting the proposal for the biggest in trade deal in US history passed by the end of the year, as he has vowed to do despite the misgivings of Republican leaders and the outright opposition of a majority of Democrats in Congress, Politico says.

The article characterizes the President’s tone as "defiant" as he predicted that the economic centerpiece of his strategic pivot to Asia would pass in the lame-duck session. He said he’d like to sit down with lawmakers after the election to discuss the "actual facts" behind the deal, rather than toss it around like a "political football."

"We are part of a global economy. We're not reversing that," Obama said, describing the necessity of international supply chains and the importance of the export sector to US jobs and the economy. "The notion that we're going to pull that up root and branch is unrealistic."

The notification is “meant to ensure early consultations between the administration and Congress,” Matt McAlvanah, a spokesman for the Office of the U.S. Trade Representative (USTR), told the press.

The White House's draft document describes the major steps the administration will take to implement any changes to U.S. law required by the deal which range from the mundane, such as designating points of contact for communications to establishing procedures to stop harmful surges of agricultural or textile imports.

Still, progress on the deal itself likely will depend on the administration’s ability to addresses concerns of lawmakers, including Senate Finance Committee Chairman Orrin Hatch, R-Utah, and others who worry about protections for a new class of drugs known as biologics, among a number of other issues. Democrats, meanwhile, have largely opposed the deal on the basis of concerns about the enforceability of labor and environmental standards and the need for protections against currency manipulation.

The administration claims it is making progress on these issues, Politico says, and has resolved others. Still, the political reality now is the serious "down-ballot drag that candidates are facing as they campaign back home." Politico thinks this is a reversal from years past, with many Republicans are on the defensive about their support for free trade because of Donald Trump’s daily tirades about what he sees as "economic damage wrought by trade agreements as well as his complaints that China is flouting international trade rules."

In addition, the small band of Democrats the administration hopes will support the TPP are facing increased pressure within their own party from Sens. Bernie Sanders, I-Vt., and Elizabeth Warren, D-Mass., who continue to press Hillary Clinton to reject the pact to appease the liberal wing.

Still, the administration appears to be counting on pressure from business interests for support in congressional districts, especially those of Democrats who supported the trade promotion authority bill last year, as well as increasing emphasis on arguments about the importance of the geopolitical implications of the TPP.

As the political fight plays out, the nuts-and-bolts process of moving the deal forward will continue. Once Congress reviews the draft notification that the White House submitted on Friday, the administration can move forward by sending lawmakers a final statement and the draft of the implementing bill itself that highlights actual changes to U.S. law to comply with the rules of the trade agreement.

After that, the Senate Finance and House Ways and Means committees could hold "mock markups" of the bill (because under Trade Promotion Authority the Congress is not actually allowed to tinker with the agreement or its implementing legislation itself, but it can ask the administration to do so).

However, given the tenor of the elections, the entire process seems likely to be pushed into a crowded lame-duck legislation session, which would mean no time for the mock markups, Politico says. Instead, there could be a lot of deal-making between the White House and congressional leadership to work to move the bill before Clinton or Trump takes over on Jan. 20.

And, in the meantime, the President emphasizes that he is willing and ready to press his case. Right now, he says, he’s still for the deal. "And I think I've got the better argument," he said.

Clearly, this is a high-stakes fight for producers that should be watched closely as it proceeds, Washington Insider believes.

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(GH/CZ)

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