Washington Insider -- Tuesday

TPP Fight Begins

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

USDA Maintains Prior Food Price Inflation Outlook for 2016

US food price inflation is still expected a range of 2% to 3%, according to USDA’s Economic Research Service (ERS), in line with the historical average of 2.5% and slightly higher than the 1.9% level registered for 2015.

With the data published for food prices in December, USDA now put the increase in food price inflation at 1.9% for 2015 compared to the range of 1.5% to 2.5% they issued last month. The level of increase for food away from home in 2015 is 2.7%, the same as the mid-point of their December forecast. Food at home posted a 1.2% increase compared to 2014.

As for 2016, USDA economists held their forecasts steady from the prior month at a 2% to 3% increase overall with food away from seen rising 2.5% to 3.5% and food at home costs rising 2% to 3% compared to 2015. Within the specific commodities, USDA economists now expect beef prices to rise up to 1%. That is down from a 1% to 2% outlook in December, and cereals and bakery products are seen rising 0.5% to 1.5%, down from a December outlook that these prices would increase 1.5% to 2.5% in 2016.

USDA economists also included their usual caveats for 2016 food prices – that weather could impact prices; oil prices could further lower costs at the retail level and the inclusion that they first noted in December of the potential for higher U.S. interest rates to increase the U.S. dollar value, hampering U.S. food exports and making imported foods less expensive.

As for beef, USDA noted that prices for beef and veal were down 2.4% from November to December and are down 4.3% versus year-ago levels. “December price changes were affected by declining U.S. beef exports, helping to place downward pressure on retail beef prices by increasing the supply of beef on the U.S. market,” ERS said. “Additionally, favorable pasture conditions in some areas in 2015 and lower feed prices have allowed cattle producers to feed cattle longer and to hold cattle for herd expansion.”

After the barrage of changes made in December and November outlooks by USDA economists, this relatively calm update still signals that food price inflation will remain near the 20-year average overall, will be potentially slightly above average for food away from home and be spot on the 20-year average relative to grocery-store prices. At early point in the year, it would seem most of the risk on food prices remains to the downside given the strength in the U.S. dollar. The shift from El Nino to neutral or La Nina conditions looms over the commodity sector, but any impacts there are not going to unfold until later this year.


IMF’s Lagarde: Markets Need Clarity on China Currency

Financial markets need more clarity on how Chinese authorities are managing their currency, particularly the relationship of the yuan to the U.S. dollar, IMF Managing Director Christine Lagarde said on Jan. 23. Sharp swings in the yuan have contributed, along with a dramatic fall in the price of oil, to global market volatility since the beginning of 2016.

Bank of Japan Governor Haruhiko Kuroda, speaking on the same panel at the World Economic Forum in Davos, said he believed China should use capital controls to stabilize its currency while keeping domestic monetary policy loose.

Asked whether she would back capital controls by China for a period, Lagarde avoided a direct reply but said: “Certainly a massive use of reserves would not be a particularly good idea...Some of it was already used.” She said that the market needed “clarity and certainty” about China’s exchange rate basket “in particular with reference to the dollar, which has always been the reference... That would be the right move to make,” she added.

Kuroda said China was right to keep monetary policy accommodative to help cushion the country’s transition from an export-led industrial economy to a demand-driven consumer economy without excessive depreciation of the yuan. “This is my personal view and may not be shared by Chinese authorities, but in this kind of contradictory situation, capital control could be useful to manage exchange rate as well as domestic monetary policy in a consistent, appropriate way.” He said Beijing was struggling to avoid either an excessive depreciation or an excessive appreciation of its currency.


Washington Insider: TPP Fight Begins

Both sides in the debate over approval of the Trans-Pacific Partnership (TPP) agreement are hard at work now and an early view of potential economic impacts by a respected think tank is ready on the street. It concludes that the expansive Asia-Pacific deal would boost the paychecks of US workers, increase exports and grow the economy.

The well-known and respected Peterson Institute for International Economics published a report last week that estimates that implementation of the Trans-Pacific Partnership deal will raise U.S. annual incomes by $131 billion and annual exports by $357 billion, 9.1%, in 2030, with similar gains to follow. Estimates for the U.S. growth under TPP are 35% higher than those reported by Peterson in 2012, primarily because of the inclusion of new data such as the effects of non-tariff barriers on trade in existing agreements.

Officials were quick to point to these results. “This independent analysis shows that TPP will raise wages for American workers, grow our economy, and help farmers and businesses export more American products, according to US Trade Representative Michael Froman. The new economic report was described and discussed by The Hill last week.

In addition, the report says that delaying enactment one year from the expected implementation date of 2017 would mean a damaging blow to the economy to the tune of an estimated one-time loss of $77 billion, or about a $600 loss on average for every household.

Froman said the analysis “offers clear evidence that TPP is an answer to challenges on how middle-class workers will compete at home and how our nation’s economy will compete abroad. Importantly, it also shows that sitting on the sideline and delaying TPP, even for a short time, will cost us dearly,” he said.

President Obama says he wants Congress to pass the agreement this year but is encountering pushback on the deal from members of his own party. Many congressional Democrats argue that the deal hurts U.S. workers and lowers their wages.

The Peterson report disputes such claims and concluded that, “while the TPP is not likely to affect overall employment in the United States, it will involve adjustment costs as U.S. workers and capital move from less to more productive firms and industries,” the report said.

The report estimates are that 53,700 U.S. jobs will be affected each year during implementation of the TPP. In 2014, 55.5 million American workers changed jobs in that manner “so the transition effects of the TPP would represent less than 0.1% increase in labor market churn in a typical year,” it said.

But the report notes that “some workers may face more difficult transitions” and that the costs to them could be higher than for others, so U.S. policymakers would need to step in to make sure programs are available to help them during the process.

Overall, the report concludes that the TPP appears to have met its two most important negotiating objectives: it will substantially benefit the 12 trading partners and it sets out an ambitious set of global trade rules that have “raced far ahead of the WTO rulebook, including services, investment, telecommunications, the digital economy and other critical industries.”

“If the TPP is ratified and implemented smoothly, these rules will renew progress, now stalled for more than two decades, in strengthening the world trading system,” the report said.

While the United States will be the TPP’s largest beneficiary “in absolute terms,” “the agreement will generate substantial gains for Japan, Malaysia and Vietnam as well, and solid benefits for other members.”

The Peterson report is the first of several expected out on the trade agreement and it plans a second report in early February. The ITC is working on its own economic report that is due by mid-May, setting a firmer timeline for when Congress would consider the deal.

House leaders such as Speaker Paul Ryan, R-Wis., and House Ways and Means Committee Chairman Kevin Brady, R-Texas, have touted the potential benefits of the agreement and have sounded eager to take a vote but believe that a thorough evaluation is needed first. Senate Majority Leader Mitch McConnell is holding fast to his estimate that a vote likely won’t happen until after the elections or possibly next year.

In addition, the coming fight is expected to align both powerful trade advocates on the Republican side and the administration and trade-oriented Democrats, against more protection- oriented groups who are skeptical of the beneficiaries of trade.

In fact, it likely will not be the reams of numbers assembled on trade issues that make or break this deal. Rather, the geopolitical considerations involved in the administration’s “pivot” toward Asia, along with considerations about U.S. relations with China, which is not now a member of the negotiations and the reactions by the long list of Asian partners who are already participating may well turn the tide.

So, for now the prospect is an incredibly complex fight and an effort to focus on whether the next step in the globalization trend will be an inward turn, as many want, or continues efforts to open important new markets. This is, of course, very important to U.S. producers, and should be watched very carefully as it proceeds, Washington Insider believes.

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