Washington Insider - Friday

Ag and Trade Retaliation

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

IRS Provides Guidance on Biodiesel Credit, White House RFS Meeting Still In the Air

The IRS on Wednesday issued guidance to help companies that blended biodiesel into diesel last year collect on their one-time $1-per-gallon tax credit, and for paying a nine-cent-per-barrel tax into the oil spill trust fund taxes. Both the credit and the tax were inserted into a continuing resolution passed by Congress in February. Biodiesel blenders are hoping to get a credit for 2018 in the upcoming omnibus but nothing has been finalized.

Meanwhile, another White House meeting still to discuss changes to the Renewable Fuel Standard (RFS) is still pending, though no date has been set. Rumors swirled Wednesday that President Trump would host another meeting on biofuels, but the tentative confab was called off. Sen. Chuck Grassley, R-Iowa, had not been invited to any meeting, as well as Sen. Joni Ernst, R-Iowa. Sources continue to signal that Trump and his officials want to see analysis of various options under review before the next session on this topic.

Several studies have been released as the focus on biofuels continues in Washington, with a study funded by Valero Energy indicating that a cap on Renewable Identification Numbers (RINs) would remove financial pressures on refiners, while an Iowa State University study said that a cap on RIN prices would temper demand for ethanol. Further, a study by ClearView Energy Partners said that capping RIN prices could be done without trimming ethanol demand if the cap price is set high enough.

Trump Wants $1 Billion Cut In U.S./China Trade Deficit

President Donald Trump is pushing for a $1-billion reduction in China’s trade deficit with the United States. “China has been asked to develop a plan for the year of a One Billion Dollar reduction in their massive Trade Deficit with the United States,” Trump tweeted Wednesday morning.

In 2017, the deficit between Chinese goods imported to the U.S. and American goods exported to China reached $375.2 billion — an 8 percent jump from $347 billion in 2016.

Washington Insider: Ag and Trade Retaliation

The buzz over the administration’s new tariffs has peaked and it is interesting that agriculture is often the example chosen to indicate the danger and cost of downstream retaliation. For example, The Hill ran a column that said “while no farmer seeks ill-will upon those in the domestic aluminum and steel industries, or those trying to protect intellectual property, the current Washington rhetoric sounds a bit like violin strains to ears in the Midwest."

It says things are really tough in the ag sector these days, but “the bright spot in the 12-year period since 2006 has been Chinese global soybean imports which have grown more than three-fold from less than 29 million metric tons to an expected 97 million tons this year.” That equates to 65% of total global soybean imports.

Now, however, U.S. farmers are preparing to plant their crops under a cloud of potential Chinese retaliation. The Hill article highlights that global demand for soybean imports could increase by 3.2% in 2018, based almost entirely on more demand from China. U.S. farmers are expected to fulfill just 37% of the total bushels needed, but Brazil could see its share increase to 45% of the larger year-over-year total of 152 million metric tons.

Providing China with 82% of its soybean imports is a seasonal business for Brazil and the United States. In a typical year China buys a majority of its soybeans from U.S. suppliers during the six-month post-harvest period from September through February. Brazil picks up the slack around this time of year, in early March, as farmers begin harvesting new supplies in the Southern Hemisphere.

However, this season the trend turned counter-seasonal as China stuck with Brazilian suppliers long after the typical September switch to U.S. supplies. Brazilian soybean farmers produced a record crop of 114 million metric tons last year, something they are looking to duplicate this year, giving them adequate supplies to meet this additional demand from the world’s largest buyer.

Last year U.S. farmers sent more than half of their total production overseas. This year that number was expected to increase by 3.5%, reflective of increased Chinese demand, as recently as this past November.

However, total U.S. export sales, bushels that have been sold but not shipped yet, and total export shipments are currently running 13% behind last year’s pace, suggesting a cut in export demand versus the expected 3.5% gain.

Drilling down into the China data, the number of bushels already shipped there is down by 20% for the end of February as compared to last year while the number of sold, but not yet shipped, bushels is down by almost 50%. With China targeting 6.5% in domestic growth for the second year in a row, losing market share from the world’s largest buyer of soybeans is a topic of conversation in many of the coffee shops where President Trump’s farm constituency convene for coffee.

For its part, the United States Department of Agriculture has “walked down” its monthly assessment of U.S. soybean exports. The 2.25 billion bushel export target posted late last year has shrunk by almost 7% to 2.06 billion bushels.

However, while the current 2.06 billion bushel monthly estimate is 5.3% percent below last year’s total, overall demand appears to be declining significantly due in large part to China backing away from U.S. supplies.

With the end of China’s seasonal buying period upon us, continued reductions in U.S. demand are all but a foregone conclusion at this point, along with negative financial ramifications for U.S. farmers. The main hope would seem to be counter-seasonal buying program from China, as it did with Brazil--but the possibility of such a program likely will be weakened given the timing of expected steel and aluminum tariffs announced by the president recently.

So, The Hill suggests that the fragile U.S. farm economy cannot afford a trade war with China. “Trade wars are never easy,” it says and argues that “it can take years to cultivate a single customer in agriculture and only a few months to permanently damage that relationship.” Soybean exports were already “in a precarious state” before the latest blast of rhetoric from the shores of the Potomac.

Any sort of misstep at this point will result in fewer cargoes of soybeans leaving the Midwest for Chinese ports. In fact, The Hill says, “no one should legitimately believe that political promises made in one area will not have an effect in another.”

So, we will see. Administration top trade officials have frequently insisted that there will be no significant retaliation against U.S. exports—a claim many farmers simply do not believe. Thus, the implementation of the proposed new trade policy should be watched closely by producers as it evolves and markets react, Washington Insider believes.

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