Washington Insider -- Tuesday

On the Ag Trade Front

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

Biodiesel Tax Credit Change Supported by Treasury Secretary

Treasury Secretary Steven Mnuchin said he would support a plan backed by Sens. Chuck Grassley, R-Iowa, and Maria Cantwell, D-Wash., that would provide a tax credit to biodiesel producers rather than to the fuel blenders.

“Sounds like a good plan and I look forward to working with you on the details of that,” Mnuchin said May 25 at a Senate Finance Committee hearing about President Donald Trump's proposed Fiscal Year 2018 budget.

The plan would boost domestic production of biofuels, rather than subsidize imports, Grassley said. The amount of fuel imported in 2016 doubled from the previous year, he said. During the hearing, Mnuchin largely declined to give specifics about what types of tax policies the administration is interested in, beyond those included in a one-page plan released in April. He said the administration is reviewing all tax ideas and will give more details in the future, after reaching consensus with lawmakers in the House and Senate.

The bipartisan bill, the American Renewable Fuel and Job Creation Act of 2017, extends the “clean-fuel incentive” for three years and reforms the incentive by transferring the credit from the blenders to the producers of biofuels. The switch ensures that the tax credit incentivizes domestic production and taxpayers are not subsidizing imported fuel.

Grassley told Mnuchin the legislative proposal is “very much aligned with the president's America First agenda.” With biofuel imports nearly doubling from 510 million gallons to almost one billion gallons in 2016, Grassley said “this change is critical to ensure the credit is supporting the domestic industry rather than subsidizing foreign imports that often already receive favorable treatment from their home country.” He told Mnuchin that, “So, it's not really a question, but for you to understand that from Argentina we're getting all this biofuel and the taxpayers of the U.S. are subsidizing that import just like we're – we're attempting to incentivize domestic production. And so, we want to change it so that we don't subsidize that import.”

USDA Ups Fiscal 2017 Ag Export Forecast

U.S. agricultural exports are now forecast at $137 billion for Fiscal 2017, up $1 billion from the prior forecast, with the forecast for imports held steady at $114.5 billion, leaving a $1 billion higher trade surplus of $22.5 billion compared to the February outlook, according to USDA's Economic Research Service (ERS).

Value of the U.S. dollar previously has been a factor cited by ERS as tempering U.S. agricultural exports. But in the update, ERS noted, "After strengthening 4% between October 2016 and January 2017, the dollar has begun to weaken in recent weeks. It is expected to trend weaker by almost 2% in 2017, but to remain strong relative to the period before the dollar’s dramatic strengthening at the end of 2015." U.S. dollar weakness reflects improved economic conditions in U.S. trading partners and "reduced expectations for fiscal stimulus in the United States."

Exports are forecast higher as increases are expected in livestock, grain/feed, and cotton exports, ERS noted. Livestock, poultry, and dairy exports are raised $600 million to $28.7 billion while grain and feed exports are forecast at $29.0 billion, up $400 million. Cotton exports are also forecast at $5.4 billion, up $400 million from the prior outlook and oilseed and product exports are seen up $100 million.

Horticultural product exports are seen down $500 million, to $33.5 billion, "lower unit values of tree nuts."

The steady import forecast of $114.5 billion comes as expected increases in imports of oilseeds and sugar/tropical products are offset by lower imports of horticultural and livestock/dairy products. "Horticultural product imports are expected to reach a new record of $54.1 billion in Fiscal 2017, though this represents a downward adjustment of $300 million from the previous forecast. Fresh vegetable imports are reduced $300 million, as falling average import unit values drag down total values despite higher expected volumes."

Washington Insider: On the Ag Trade Front

There has been quite a bit of happy talk about ag trade recently, with observations that the administration understands the importance of NAFTA markets and that the NAFTA negotiations will focus on modest tweaks rather than wholesale changes.

For example, Bloomberg is reporting this week that the president and Vietnam’s prime minister will talk about the bilateral relationship and regional cooperation during their May 31 meeting. This is expected even though Bloomberg also says that the Vietnamese leader may be “looking for a bilateral trade agreement with the U.S. now that the U.S. has pulled out of the Trans-Pacific Partnership.” In such discussions with Vietnam, it is expected that the administration will raise concerns about the $32 billion deficit in goods trade the U.S. experienced with Vietnam last year.

Analysts also say they are searching for indications of how Vietnam will proceed in the now 11-member TPP negotiations. Bloomberg says it expects that close attention will be paid to the Vietnamese prime minister's remarks after U.S. Trade Representative (USTR) Robert Lighthizer introduces him at this week’s dinner hosted by the U.S. Chamber of Commerce and the U.S.-ASEAN Business Council.

Vietnam is the most vocal critic of a “minimalist” approach of making only minor changes to the existing TPP agreement. It has said that the deal needs more concessions now that the U.S. has pulled out.

The issue is that if negotiated changes are made to placate Vietnam, it could make it harder for the U.S. to later rejoin the TPP, industry representatives told Bloomberg. While a meeting is not yet scheduled, the trade ministers from the TPP 11 countries are planning to meet in Japan in July to package options and scenarios they could present to their leaders, a TPP diplomat told Bloomberg.

Vietnam is this year's host of the Asia Pacific Economic Cooperation forum and the White House has said Trump will attend the APEC leaders’ summit in November — events that could offer opportunities to focus at least briefly on other issues, Bloomberg says.

Also on the current trade front, Bloomberg points out what it calls a new “threat of retaliation hanging over U.S. agriculture” arising from the U.S.-Mexican dispute on sugar. If the current talks are not successful, Bloomberg says it expects the Mexican sugar industry to push hard to block the million metric tons or more of U.S. corn syrup from entering Mexico. The Commerce Department has warned that it will hit Mexican sugar imports with dumping and anti-subsidy duties if no resolution is reached by June 5.

However, corn likely is not the only ag industry watching the dispute, which has the potential to sour agricultural trade relations with Mexico and spill over into NAFTA renegotiations. “People are taking the threats of retaliation by Mexico very seriously,” Bloomberg said.

“Corn versus sugar may be a standoff but corn plus soybeans plus pork versus sugar—that's no standoff,” he said, adding that such a cycle of retaliation would wreck the NAFTA talks. “The corn people are convinced that Mexico is going to retaliate [if the U.S. moves ahead with duties],” Bloomberg added. “This is serious stuff.”

So, trade seems to be an increasingly dangerous mine field that Secretary Perdue and USTR Lighthizer must negotiate. A key problem could turn out to be the fact that many of the administration officials with at least some role in ag trade policy issues have far-ranging agendas, such as shifting trade deals from multi-national agreements to bi-lateral ones, an objective that trade policy professionals have little interest in pursuing, but which Lighthizer and others have promoted actively.

Thus, even as ag supporters believe there is growing understanding of the importance of NAFTA markets there also is concern that officials increase their appreciation of the vulnerability of those markets and their need for active political support across the U.S. government. This is an important issue and a debate that producers should watch closely as it proceeds, Washington Insider believes.

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