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.

Administration Exploring Limits of Presidential Actions Regarding Immigration

President Barack Obama has said that since the House so far has been unable to agree on legislation to reform the nation's broken immigration system, he plans to act on his own. However, before taking any steps in that direction, the White House has asked Attorney General Eric Holder and Homeland Security Secretary Jeh Johnson to review his options for taking executive action on immigration in the absence of legislation from Congress. Holder and Johnson will report back to the president by "the end of summer," according to White House Press Secretary Josh Earnest.

Among the actions being considered is granting work permits to some of the 12 million immigrants in the United States illegally that would allow them to stay in the country. That likely would further irritate Republicans and give them another issue with which to beat on the president during the final few months of this year's election season. It also could result in another lawsuit against the president similar to the one being prepared by House Republicans for the president's earlier actions on Obamacare.

As a lame duck, the president has some freedom to act without having to worry about his own re-election prospects, although he needs to be careful not to harm the campaigns of other Democrats. From a congressional relations standpoint, it is difficult to see how things can become much worse than they have been for the past six years, regardless of any action he takes.

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Federal Reserve Survey Finds Widespread Signs of Economic Stress

Nearly four in 10 Americans said they were suffering financial stress in September 2013 and more than a third said they were worse off than they were five years earlier, a new Federal Reserve report on U.S. household finances shows.

Overall, the survey found that as of September 2013 many households were faring well, but that sizable fractions of the population were at the same time displaying signs of financial stress. Over 60% of respondents reported that their families were either "doing okay" or "living comfortably" financially; although one-fourth said that they were "just getting by" financially and another 13% said they were struggling to do so.

Overall, according to the Fed, the country's households appear to be in Goldilocks territory, with 34% saying they were worse off financially than in 2008, 34% about the same, and 30% better off.

The survey results also suggest that many households are not adequately prepared for retirement. According to the Fed, 31% of non-retired respondents reported having no retirement savings or pension, including a shocking 19% of those ages 55 to 64.

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Democrat John Walsh drops Senate bid in Montana

Senate Agriculture Committee member John Walsh, D-Mont., will not be running to retain his seat this November, he said last week. Walsh appointed to the Senate in February after Montana Democratic Sen. Max Baucus resigned to become ambassador to China.

Republicans already were likely to win the seat and Walsh's decision, coming fewer than 90 days before the Nov. 4 election, cannot be helpful to whoever becomes the Democratic candidate. Instead, his decision simply increases the odds of an election victory for Montana's at-large freshman Republican Rep. Steve Daines.

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Washington Insider: Effects of Russian Import Ban

Well, Russia has struck back against the global financial sanctions it is facing and exporters worldwide are trying to guess what the immediate and longer-term effects will be. In the process, they are learning a lot about Russia. The import ban is partial –– aimed only at the United States, European Union, Australia, Canada and Norway –– and it is for one year. It does not cover Brazil and Belarus.

What does it mean? Overall, Russia is both an importer and exporter of food and relatively self-sufficient. Still, its imports are large –– perhaps 35% of total food consumption. Much of this trade is to augment domestic production and provide specialty products and year-round availability for seasonal products.

On global markets, Russia accounts for 13% of the beef trade, for example; 20% of dairy; and 22% of fruits and vegetables. Brazil already was the largest source of imported beef and Belarus for dairy, and both those will continue to ship.

The United States was by far the largest supplier of poultry, with sales of $337 million in 2013.

In implementing its "punitive" import controls, Russia has a problem with the economic role of its food. The average Russian consumer spends 40% to 60% of disposable income on food (in the United States that figure is 9%) so food security is a huge, ongoing political concern.

Even this effect is complicated, however. Much of the imports are consumed by the higher income elites, mostly around Moscow and St. Petersburg, who are not the Putin government's most important political base. Consumers in other areas still rely largely on traditional diets and likely will feel little immediate effect.

In the course of announcing the bans, the government trumpeted its intent to build domestic supplies to replace the banned imports. Observers are skeptical that this can succeed because of the very low levels of farm efficiency and poor product quality, as well as the still rudimentary supply chain from farmer to consumer. However, the system has enormous potential for growth. For example, grain yields significantly lag the world averages and those of similar producing countries such as Canada.

So, the success of the Russian gambit will depend heavily on how responsive the domestic agriculture sector will be. Inflation already is a problem for the domestic economy and has been running at 6.8%, above the government target of 5% to 6%. The central bank has boosted its target rate recently following earlier sanctions after annexation of Crimea.

Observers also suggest that most households shop for food frequently, so price changes are highly visible.

And, if new farm subsidies result in higher inflationary pressures, they could force the bank to raise rates again, which would boost the cost of credit and capital and dampen overall economic growth, job creation and investment across the domestic sector.

The question is, to what extent these bans will affect total global commodity supply and demand as markets adjust. Many of these commodities are quite fungible, so if the United States doesn't sell its poultry to Russia, it may be able to ship to markets Brazil formerly supplied. Experience in earlier export and import embargoes suggests that trade patterns tend to be disrupted initially but that overall trade and even prices may be disrupted less if total demand and supply are little changed.

While it is too early to define the gainers and losers from the Russian import ban, some patterns are clear. European fruit and vegetable producers who supplied as much as 32 percent of Russia's imports are experiencing short-term difficulties, as will numerous U.S. exporters.

However, U.S. exports of banned products to Russia amount to less than 1% of total exports. In fact, total U.S. export sales Russia were $1.3 billion out of $147 billion total exports last year. Still, for poultry and meat producers the losses are significant ($337 million and $359 million, respectively).

Brazilian producers of meat and poultry clearly stand to gain since they are already familiar with the market and likely can boost output somewhat in the near and medium term.

Longer term consequences are much harder to estimate. Government investment in Russia's backward farms could boost crop and livestock yields enormously and investment in rural infrastructure such as roads and storage could mean huge output increases, with expanded exports and significant increases in domestic food security. But for these investments to mature, it likely would require more than one year, experts note.

However, it is likely that Russia would need to look outside for farm modernization technology such as advanced machinery highly suitable to Russian conditions. But whether Russia will do that is uncertain. Discouraging advanced technology machinery would be a major detriment to further sector development.

It is clear that Russian expansionism and its new domestic protections are one of the greatest threats to the global economic growth in recent years. In addition, greater protections in Russia are likely to be met with greater protections elsewhere, which would mount yet another threat to the recovering global trade system, and weigh down ongoing trade negotiations.

Whether this trend can be reversed or not in the near future is a serious question, and should be watched carefully as policies and counter-policies continue to emerge, Washington Insider believes.

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