Washington Insider -- Monday

By DTN's Washington Insider

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

Trump Officials Now Talking Additional Aid for Farmers

Vice President Mike Pence said in Minnesota Thursday that the Trump administration is mulling another round of help for farmers similar to what was provided via the Market Facilitation Payment (MFP) program.

"Make no mistake about it: We have already had preliminary discussions in the White House for additional support for farmers if this impasse with China continues," Pence said. While noting trade talks with China continue, Pence said the administration was ready to "continue to expand on the tariffs" that have been put in place.

But should that take place, Pence said farmers can be "very confident that President Trump and I and our entire administration are going to look for ways to provide additional support to American farmers that would be impacted by the negotiations or uncertainty in our relationship with China."

Meanwhile, President Donald Trump tweeted a defense of new tariffs on China that went into effect Friday morning on $200 billion in Chinese goods and suggested purchasing commodities from farmers, "more than China buys now," as a way to offset the impact of the duties.

Trump said the reserves could be used to help feed "starving nations." It appears Trump likely has not run the idea past USDA Secretary Sonny Perdue, who as noted has maintained there would not be another round of trade aid this year through the MFP.

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Farmers Tell Lawmakers More Trade Aid May Be Needed

More trade assistance is needed to offset the negative impacts trade policy turbulence is having on U.S. agriculture. The aid could take the form of a second Market Facilitation Program (MFP) or something similar, farmers told a House Agriculture subcommittee Thursday. Subcommittee Chairman Filemon Vela, D-Texas, said, "The farm economy is better off because the farm bill passed. But is that enough to fix the downturn in the agricultural economy?"

Ranking Member Glenn Thompson, R-Pa., agreed and noted that "despite the successes" he saw in the new farm bill, the current ag sector recession is a reminder that good policy alone "does not make our farmers and ranchers whole."

As trade turbulence continues along with the associated impacts, Texas Farmer Mike Huie told lawmakers, "I think additional action will be required" in the form of a second MFP program. "Even if the trade war ends tomorrow," the distress in the ag sector will not be resolved, he argued.

An expanded MFP program might not be enough, said Mike Peterson, a farmer from Minnesota. "We may have to look at some sort of supply management," he observed. For his own farm, Peterson said, "If our markets don’t come back and we don’t have any additional support, we'd be better off not producing."

However, he pointed out that the "bottom line is there is no way to make a profit if we don’t have a market for our product."

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Washington Insider: Collapse of China Talks

There is widespread concern this week about last week’s collapse of the U.S.-China trade talks. Markets are watching for “China blowback” as the administration turns up the heat on trade. Bloomberg says, and observers should “forget all the optimism that briefly reverberated through markets over trade on Friday. The weekend’s events have reshuffled the deck again.”

It points to recent tweets from President Donald Trump and threats of retaliation from China that mean investors can expect that the end-of-week gains triggered by the U.S. government’s characterization of the negotiations as "constructive" are likely to evaporate quickly as trading resumes in Asia this week.”

“In little over a week we have gone from trade-news euphoria to total misery,” Stephen Innes, head of trading at SPI Asset Management in Hong Kong, wrote Saturday. “But by all accounts markets are less about the immediate economic fallout and more about just how much damage has been done to the trade process and whether a compromise can be reached.”

Exactly what has been priced into markets from the escalation of trade tensions – and what still needs to be priced in – is a riddle that investors the world over are urgently trying to solve. And, frustratingly, attempts at answers tend to come in three parts, depending on whether this latest escalation manages to trigger a trade agreement in the near term; a longer period of back-and-forth brinkmanship; or a full-blown trade war.

For now, traders are taking the word volleys as signs that the standoff will endure, at the very least. After raising tariffs on $200 billion worth of Chinese goods and threatening more on Friday, President Trump said Saturday it would be wise for China to “act now” to complete a trade deal with the U.S.

“I think that China felt they were being beaten so badly in the recent negotiation that they may as well wait around for the next election, 2020, to see if they could get lucky & have a Democrat win - in which case they would continue to rip-off the USA for $500 billion a year,” the President said.

Larry Kudlow, Trump’s top economic adviser, tempered those remarks later, suggesting that the US is still in a negotiation, not a “war” with China.

Earlier, in an interview with Chinese media after the talks in Washington on Friday, Vice Premier Liu He said that to reach an agreement the U.S. must remove all extra tariffs, set targets for Chinese purchases of goods in line with real demand, and ensure that the text of the deal is “balanced” to ensure the “dignity” of both nations.

“The FX market is pricing trade tensions but not a trade war,” Bank of America economists led by Ethan Harris wrote last week. The chance of a prolonged period of tensions, though, has strategists conjuring up a wide variety of investment ideas.

A recent central thesis in markets was that a trade deal and economic stimulus in China would boost riskier assets at the expense of havens, causing Treasury yields to rise in the second half of the year, Jim Caron, fixed-income portfolio manager at Morgan Stanley Investment Management in New York, said.

Now the thesis is that China has backed out of a deal and why that’s significant is that this isn’t just something that can be fixed by a tweet,” Caron said. “I’d argue that we have to believe that the surprises in the market are going to be more toward the downside than the upside.”

Miller Tabak & Co. equity strategist Matt Maley sounded a similar note of caution and said that a 10% drop in the S&P 500 Index from its recent high would not be out of the question. So far, the gauge has fallen less than 3% from its record high close at the end of April.

“The stock market was already ripe for a pull-back,” Maley wrote to clients. “Now that it’s getting some negative news – materially negative news – it’s even more ripe for a larger decline. Therefore, we believe investors should not be trying to figure out whether the market will decline or not. They should be trying to figure out how much it will fall.”

Meanwhile, although U.S.-China scenario analyses dominated the past week, the focus could quickly shift. Janelle Woodward, head of fixed income at BMO Global Asset Management, has an eye on the next potential target for tariffs: European automakers. The Trump administration was expected to make a decision on the findings of a probe into the national security risks of European auto imports by May 18.

“We think there are a lot of options as far as extension or asking for a new investigation, but this does seem something that hasn’t gotten a lot of press given the situation with China,” she said.

The administration has been talking of a new program to protect producers from impacts of the intensified trade fight. Still, the unexpected collapse of the China talks certainly will be disappointing to producers who are an important administration political support group, but who may increasingly question both the effectiveness of trade policies and proposed efforts to offset market losses, Washington Insider believes.

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(GH\SK)

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