Washington Insider -- Friday

After the Shutdown

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

Ag Groups Call For End to Government Shutdown

It is critical to farmers already grappling with other economic challenges that the ongoing partial government shutdown of USDA and other government agencies is resolved as soon as possible, the nation's top agriculture groups said.

The American Farm Bureau Federation and National Farmers Union (NFU) are both urging the Trump administration and Congress to resolve their disagreements and promptly reopen the federal government. The groups noted the negative impacts the shutdown is having on farmers already dealing with low commodity prices and trade turbulence.

"Like the rest of the country, though, farmers and ranchers are ready for this shutdown finally to end," Farm Bureau President Zippy Duvall wrote in his column this week. He noted that "Farm Bureau’s closing order of business at our delegate session this year was to pass a statement urging Congress and the Administration to work together to do just that and bring an end to this shutdown as soon as possible."

Duvall pointed to the bipartisan passage of the 2018 Farm Bill as "a prime example of the work our lawmakers can get done for rural America when they find common ground."

Both organizations cited the need for USDA to begin work implementing the 2018 Farm Bill, currently on hold due to the shutdown, as a top priority. "Farm bill programs and updates, signed into law just a day before the shutdown, are very important to family farmers and ranchers of all sizes and operation types," the NFU Board of Directors wrote in a resolution adopted late last week.

North Dakota Considers Plan to Label Cell-Based Meat

Add North Dakota to the growing list of states keen to regulate labeling of cell-based meat products.

Legislation introduced in the North Dakota House of Representatives would define meat as "flesh of an animal born, nurtured and processed for the purpose of human consumption" and would bar food companies from advertising cell-based meat as a "meat food product." The text of the bill says a “nonmeat” product must be labeled as a “cultured food product” and may not contain the word “beef” on the label.

The legislation has strong backing from North Dakota’s beef industry and will be considered this week by the state House Agriculture Committee.

Dwight Keller, president of the Independent Beef Association of North Dakota, says the bill needed to help inform consumers by defining “traditional meat” such as beef.

“Deceptive labeling could mislead reasonable people to believe cultured or lab-grown meat is produced in the traditional manner and it is not,” he added. “This is about truth in advertising."

The measure is similar to proposals under consideration in several other states, including Montana, Nebraska, Tennessee, Virginia and Wyoming, and shows a growing trend of state legislatures wading into the regulatory debate over cell-based meat.

Washington Insider: After the Shutdown

Most people are worried that the government shutdown won’t end as soon as they would like — and Bloomberg notes that it risks putting a dent in both the dollar and Treasuries if it drags on. However, it also thinks a “quick resolution could do the same.”

Bloomberg is pointing out this week that a drawn-out spending battle may collide with the looming debate over America’s borrowing limit, potentially raising the odds of a U.S. credit rating downgrade, as occurred in 2011.

In addition, some observers reckon the market reaction this time around would be different: Instead of driving a haven trade into Treasuries, concerns about the growing U.S. debt burden could reverse that flow, pushing sovereign yields higher and the dollar lower.

And the consequences of a near-term fix may be much the same, if it enables even more federal spending, Bloomberg thinks.

The government has been partially closed for more than a month, it notes, but U.S. stocks are up around 9 percent over that period, while the greenback has softened only slightly. The 10-year Treasury yield reversed a dip from early in the new year and is around 2.72%.

However, as the political deadlock stretches into a record fifth week with no clear sign of resolution, growth concerns are mounting and investors are starting to draw lines in the sand. “The more this lingers on, the more that investors are losing patience with their dollar positions,” said Mark McCormick, North American head of foreign-exchange strategy at TD Securities. “There’s risk of a downgrade, there’s room for people to cut exposure to U.S. Treasuries.”

He’s describing a scenario in which the shutdown drags into March, inflaming the debate over the country’s debt ceiling. For some, that prospect is reminiscent of the market upheaval surrounding the debt-limit impasse under the administration of President Barack Obama, when S&P Global Ratings cut the U.S. AAA score.

That action fueled a global sell-off in stocks, widened credit spreads and, ironically, spurred a flight-to-quality trade into U.S. debt.

While S&P, Moody’s Investors Service and Fitch Ratings have each flagged risks of the current shutdown, none says that a downgrade is imminent. But the “brutal brinkmanship” of another debt-ceiling standoff could drive volatility in government bond markets similar to that of 2011, according to David Woo, head of global interest rates and economic research at Bank of America Corp. Except this time rates could rise, he said, given the “very large funding requirements of the U.S. government" and waning demand among foreign official buyers.

The situation doesn’t have to get that bad to worry investors, who are already concerned about how the public sector’s pain may ripple across the economy. For example, White House Council of Economic Advisers Chairman Kevin Hassett said that if the partial government shutdown extends through March, the economy could flatline this quarter.

“The longer it lasts the bigger the impact it has on growth for the U.S. overall, in an environment where you’re already seeing slower growth,’’ said Chuck Tomes, a portfolio strategist at Manulife Asset Management.

If the shutdown were to start hitting consumer or business confidence, that would be a signal to cut back on credit exposure, he said. In this event, Tomes expects that Treasuries could still benefit from flight-to-quality trades.

But Tomes says even if the shutdown is resolved this month, he doubts it would be “a significant positive that would unlock another leg higher in risk assets overall.” Moreover, in his view, a near-term solution may be detrimental for Treasuries and the dollar if it unleashes more government spending.

“To get foreign investors to continue to purchase that issuance then you’d either need higher yields or lower valuations for the dollar,” he said.

For his part, TD’s McCormick sees potential for a “knee-jerk dollar bounce” on a shutdown resolution but he expects the U.S. currency to weaken in 2019 as the market focus shifts to other political challenges. The debt ceiling is only one concern in a list ranging from Special Counsel Robert Mueller’s investigation of President Donald Trump, to the U.S.-China trade war, the ratification of the new North American trade deal and a weaker growth environment.

That said, the shutdown has allayed at least one problem for markets—strangely--according to Gautam Khanna, senior portfolio manager at Insight Investments in New York. Certain economic indicators are delayed, and a lack of new data may give the Federal Reserve cover to skip an interest-rate hike in March.

It “could be a good reason for them to pause without spooking the market regarding growth.”

These bitter battles over government policies are likely to be damaging to most of those involved, including investors in agriculture. Thus, they need to be watched closely as they intensify, Washington Insider believes.

Want to keep up with events in Washington and elsewhere throughout the day? See DTN Top Stories, our frequently updated summary of news developments of interest to producers. You can find DTN Top Stories in DTN Ag News, which is on the Main Menu on classic DTN products and on the News and Analysis Menu of DTN’s Professional and Producer products. DTN Top Stories is also on the home page and news home page of online.dtn.com. Subscribers of MyDTN.com should check out the US Ag Policy, US Farm Bill and DTN Ag News sections on their News Homepage.

If you have questions for DTN Washington Insider, please email edit@dtn.com