Washington Insider-- Wednesday

Canadian Retaliation for COOL Nears

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

USDA: 2015 Net Farm Income to Drop Most in One Year Since 1983

U.S. net cash farm income is forecast at $93 billion for 2015, down 27.7% from 2014 levels, while net farm income is forecast at $55.9 billion, down 38.2% from 2014’s estimate of $90.4 billion, according to USDA’s updated Farm Income forecasts. USDA in August forecast net cash income at $100.3 billion and net farm income at $58.3 billion.

Net farm income would be the lowest since 2002 (in both real and nominal terms) and reflect a drop of 55% from the recent high of $123.3 billion in 2013 if USDA’s updated forecasts are correct. The smaller change in net cash farm income relative to the broader net farm income measure is to be expected – producers can exercise greater control on the timing of cash receipts and expenses and thereby moderate large swings from year to year.

The drop in net farm income would be the largest single-year decline since 1983 (in both nominal and inflation-adjusted terms).

Lower crop and livestock receipts are the main drivers of the decline in 2015, while cash production expenses are projected down by 2.3%, USDA noted.

Cash receipts for all commodities are expected to fall by nearly $41.5 billion in 2015. This decline largely reflects falling commodity prices, which are lower for a broad set of agricultural commodities in 2015 relative to recent years.

“The reduction in crop and livestock receipts is largely driven by changes in price rather than changes in output,” USDA said. “Crop receipts are expected to decrease by $18.2 billion (8.7%) in 2015, led by projected declines of $8.6-billion in corn receipts, $5.7 billion in soybean receipts, and $2.7 billion in wheat receipts, as prices for all three commodities declined.”

Livestock receipts are also seen down, USDA noted, forecast to forecast to decrease by $25.4 billion (12%) in 2015. As with crop receipts, the primary driver is lower commodity prices, in this case for milk, hogs, broilers, and cattle/calves. Government payments are projected to rise $1.0 billion (10.4%) to $10.8 billion in 2015.

Farm asset values are forecast to decline by 2.8% compared to 2014, and farm debt is forecast to increase by 6.3%. The farm sector equity measure combines both of these, and is down by $104.2 billion (4%) compared to 2014.

The primary driver of the drop in asset values is farm real estate, down $36.9 billion (1.6%). Debt is driven by increases in both real estate debt (up 6.1%) and non-real estate debt (up 6.5%). While the movements in the balance sheet show an increasingly leveraged farm sector, risk measured at the sector level remains low.

Government payments are on the rise. “Government payments are projected to rise 10.4% ($1.0 billion) to $10.8 billion in 2015.” New commodity-based programs introduced as part of the 2014 farm bill and implemented for the first time in 2015—such as the Price Loss Coverage and Agricultural Risk Coverage programs—are now the largest source of government payments to the farm sector,” USDA observed. “Payments on corn base acres are expected to account for over 80% of all 2015 ARC program payments. PLC payments in 2015 are expected to go mainly to long-grain rice, peanuts, and canola base acres.”

USDA still indicates the financial conditions overall are solid. The biggest increase on the debt side is in the non-real estate debt – operating capital. But this steep drop in farm income is also why some groups are urging a new look at some farm program provisions like those for cotton.


USDA Now Signaling South Korea Has Reopened Market to US Poultry

USDA is now confirming reports from earlier this month in South Korea that the Asian country was removing its restrictions linked to bird flu on imports of U.S. poultry.

The Yonhap news service Nov. 4 reported South Korea planned to resume importing chickens from North America this month after no new outbreaks of bird flu were reported in the U.S. The news service cited the South Korea government as the source of its report.

The farm ministry said it has revised regions subject to restrictions and took both the United States and Canada off its import ban list. Imports should resume around the middle of the month following a due administrative process, Yonhap reported.

The country started to ban imports of meat from chickens and ducks, as well as other birds in December 2014 after the U.S. and Canada reported outbreaks of the virulent H5N8 and H5N2 strains of avian influenza in late 2014. It has also barred live chickens, ducks, turkeys and parrots raised in these countries from entering South Korea.

USDA is currently working on a health certificate to allow poultry and poultry meat to begin shipping under Korea’s recently revised import health requirements.

South Korea was a solid customer for U.S. poultry and poultry products even as they ranked outside the top 10 countries as a destination for the U.S. broilers in 2014. For perspective, USDA data shows Mexico imported 1.5 billion in U.S. broilers in 2014 compared to 141.9 million pounds for South Korea in 2014. However, reopening its market to U.S. poultry could result in increased demand from what has been previously see as South Korea itself is dealing with an outbreak of bird flu.


Washington Insider: Canadian Retaliation for COOL Nears

It has been generally assumed that Congress would terminate the COOL rules that the WTO has declared illegal before the Canadians impose the economic sanction. Now, however, that expectation seems more than a little shaky. This week, Bill Watson, a trade analyst for CATO wrote in the publication the Hill that Canada may soon impose billions of dollars in tariffs on a broad range of American products with broad, negative market effects.

He points out that the Canadian retaliation was authorized by the World Trade Organization against the U.S. mandatory country-of-origin labeling regulations that disadvantage Canadian cattle ranchers. The threated move has been on the way for some time, but now unless Congress repeals its law very soon, both Americans and Canadians will suffer.

Under current U.S. regulations, meat produced in the United States and sold in American grocery stores must carry a label indicating where the animal was born, raised, and slaughtered. In order to comply, American meat processors have to keep track of where each animal was born or raised and segregate meat from any border-crossing cattle to ensure accurate labels. To achieve the most desirable label, packers must be able to claim 100% domestic content, or that receiving the best label is from livestock born, raised, fed and slaughtered in the United States. No exceptions.

The WTO ruled against the law, Watson said, because it imposes a burden on processors who buy Canadian cattle without conferring any benefit on consumers. And, Watson says, Canadian ranchers are not the only victims. The inefficiencies imposed on U.S. meat processors hurt the beef industry and ultimately American consumers, who are forced to pay more for food.

The new Canadian government has made clear that it intends to continue its predecessor’s plans for retaliation. In December, a WTO panel is expected to set a dollar amount for authorized retaliation from both Canada and Mexico.

The retaliation is expected to come in the form of higher tariffs on numerous American products, including agricultural goods like beef, pork wine and cheese as well as manufactured goods like furniture, steel pipe, and machine parts. The severity of the tariffs will depend on the panel’s decision but Americans stands to lose as much as $3 billion per year in lost export trade.

Canadians have been reluctant to impose the sanctions because they hurt their consumers, as well. With less access to American products, Canadians will have to deal with higher prices and lower variety, particularly at the grocery store. Canadian consumers, through no fault of their own, will be denied the full benefits of open trade with the United States unless Congress repeals the law.

The intended victims of the tariffs include American businesses that export to Canada, and Canadian policymakers hope this pressure will lead them to press Congress to change its policies.

The threat of retaliation has mobilized the U.S. Chamber of Commerce, the National Association of Manufacturers, and numerous agricultural trade associations to coordinate lobbying repeal efforts. These groups are not arguing against the labeling law on its merits but solely on the consequences of retaliation.

In a sense, that’s how WTO dispute settlements are supposed to work, Watson notes. By changing the political dynamic, the threat of retaliation makes it easier for the offending government to change its policy. Canada’s list of products they will raise tariffs on is designed to put pressure on members of Congress who would otherwise not care about meat labels and Canadian cattle ranchers. They do that by threatening to harm local business interests in a member’s district.

And the strategy seems to be working, Watson says. Earlier, the House voted for full repeal of the labeling law. Some senators, however, say they hope to “salvage the law’s protectionist impact through a voluntary labeling scheme.” Watson says that won’t prevent retaliation and would embroil the United States in more trade litigation—and, with the threat of retaliation looming, “there’s just no more time for these sorts of games.”

Watson argues that Congress has the power to end the conflict as well as the incentive to do so, as well.” Still, he thinks there is an open question of whether “they will do it in time to rescue the American businesses and Canadian consumers who may now suffer.”

Increasingly, it is difficult to understand why the Senate is hanging back rather than following the House lead in ending the program that the WTO says violates U.S. trade commitments. Given the U.S. ambition to provide better access for U.S. producers to growing world markets, the continued uncertainty regarding the COOL program increasingly undercuts those efforts, a barrier to growth that needs to be clearly recognized and eliminated, Washington Insider believes.

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