Washington Insider -- Monday

Trade Fights Ramp Up

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

EPA Clears Year-Round E15 Sales But Tempers RIN Reforms

EPA has released the final rule to allow sales of E15 year-round via a waiver of the Reid Vapor Pressure (RVP) rules that have limited sales of the higher ethanol blend to eight months out of the year – not during the summer months.

EPA also announced it would undertake some reforms to the market for Renewable Identification Numbers (RINs), but would not do so to the degree it proposed originally.

EPA said it is now adopting a "new interpretation" of the Clean Air Act (CAA) relative the RVP waiver. "We find that E15 is “substantially similar” to Tier 3 E10 certification fuel for use in MY2001 and newer light-duty vehicles," EPA said. "In the second of these approaches, we maintain our interpretation of CAA sec. 211(f), making it clear that the conditions on the CAA sec. 211(f)(4) waivers granted to E15 in 2010 and 2011 do not restrict the application of the 1-psi waiver to downstream oxygenate blenders in most circumstances. "

The third change from EPA on this front would remove limitations in our regulations on the volatility of E15 promulgated in the E15 Misfueling Mitigation Rule (“MMR”).

Given the changes, EPA said, "parties will be able to make, distribute, and sell E15 made with the same conventional blendstock for oxygenate blending that is used to make E10 by oxygenate blenders during the summer."

Perdue Opens Door to Adjusting Farmer Aid for Unplanted Acres

In announcing the aid package for agriculture and farmer totaling $16 billion, USDA made clear that the plan would be based on 2019 planted acres. But USDA Secretary Sonny Perdue Thursday opened the possibility that the trade aid package could be adjusted to account for acres that do not get planted this year.

"If we see any opportunity to use the Market Facilitation Program (MFP) to enhance or to help that, we will consider that,” he stated. However, he also said no decision has been made yet on that front. “We want to encourage producers to plant for the market regardless of government programs,"

Perdue said at another stop Thursday. "Do not try to harvest a government program."

House Ag Committee Chairman Collin Peterson, D-Minn., noted his concern about the new MFP during a town hall meeting with farmers in southwest Minnesota Thursday morning. Peterson called USDA’s latest trade aid proposal misguided and said he told USDA if they just waited the problem would not exist relative to potentially impacting plantings.

"All you gotta do is wait three weeks, and planting will be over, and you won't have to go through all this," Peterson said he told USDA.

Washington Insider: Trade Fights Ramp Up

A new trade policy shock began on Thursday night as the President tweeted a pair of tweets warning that he will impose tariffs on Mexico starting at 5% on June 10 and ramping up in increments to 25% in October “unless Mexico stops immigrants from entering the U.S. illegally,” Bloomberg — and others — are reporting this weekend.

The announcement led to widespread speculation about the potential impacts, including the possibility that Mexican retaliation “would tear through battleground states that President Donald Trump needs to win re-election, hurting the auto industry in Michigan and Ohio, dairy farmers in Wisconsin and grain and hog farmers in Iowa and North Carolina.”

Industry groups, including manufacturers and various agricultural organizations, issued dire warnings about the fallout from any such tariff policy. The powerful U.S. Chamber of Commerce is considering a legal challenge, Bloomberg said.

Jay Timmons, president and chief executive officer of the National Association of Manufacturers, called the threats “a Molotov cocktail of policy” that would have “devastating consequences on manufacturers in America.”

A top Mexican official said the country won’t retaliate before discussing the matter with the U.S. Still, the potential tariffs, “if turned into reality, would be extremely serious,” said Jesus Seade, the country’s undersecretary of foreign relations for North America.

Retaliation by Mexico is virtually certain to strike Trump’s political base in rural America, Bloomberg said. Farmers are already under strain from ongoing trade wars, low commodity prices and natural disasters, including floods across the Midwest.

Agricultural groups had been relieved just two weeks ago when the administration moved to end tariffs on steel and aluminum imports from Mexico and Canada. Now, they face the prospect Mexico will resume punitive duties on U.S. agricultural goods.

The groups say they fear that a new trade dispute will hinder ratification of the U.S.-Mexico-Canada Agreement, which they consider crucial to maintaining trade with the nation’s two largest agricultural export markets.

Dairy and pork producers will be in cross-hairs if the President resumes a trade fight with Mexico, which hit both industries with punitive tariffs in the most recent trade dispute. The country is also the largest export market for U.S. corn and wheat, and the second-largest for soybeans, behind China.

Agricultural and industrial regions played an important role in the President’s election. He won an Electoral College majority and the presidency based on a combined margin of fewer than 80,000 votes in three states: Wisconsin, Michigan and Pennsylvania.

The largest agricultural sector in each of those three states is dairy. Mexico is “our number one market,” Tom Vilsack, president and CEO of the U.S. Dairy Export Council and a former USDA Secretary of Agriculture, told Bloomberg.

Iowa, which voted for Trump in 2016 after supporting Democrat Barack Obama in 2008 and 2012, is the largest U.S. producer of hogs and of corn. North Carolina, another electoral battleground, is the nation’s second-largest hog producer.

David Herring, president of the National Pork Producers Council and a hog farmer from Lillington, North Carolina, said “American pork producers cannot afford retaliatory tariffs from its largest export market, tariffs which Mexico will surely implement.”

Trade disputes with Mexico and China already have cost U.S. pork producers $2.5 billion over the past year, Herring said. The two rounds of financial aid the Trump administration has announced for farmers “provide only partial relief to the damage trade retaliation has exacted,” he said.

Trump’s latest tariff barrage, meanwhile, would immediately hit the vast, tightly integrated supply chains of U.S. automakers, a bedrock industry in Michigan and northern Ohio, which the President carried in 2016 but are vulnerable now, Bloomberg said.

The administration already took a hit in northern Ohio in March when GM halted production at its small car factory in Lordstown, located in a region where the president had promised industrial jobs would be coming back.

Mexico is the largest source of parts for U.S.-made autos, so tariffs would increase costs for virtually every major manufacturer. Higher prices at the dealership could cut into sales that are already expected to decline for the second time in three years.

Even before the tariff announcement, General Motors Co. and Ford Motor Co. had announced plans to cut thousands of salaried jobs.

Auto industry analysts brushed aside an assertion by Trump that companies will leave Mexico and “come back home to the USA” in response to tariffs.

“Until there’s some greater certainty about how long these tariffs would be in place, nobody is going to be moving billions of dollars and putting in duplicative capacity in the U.S.,” Kristin Dziczek, vice president of industry, labor and economics at the Center for Automotive Research in Ann Arbor, Michigan said.

No automaker has halted production at a Mexican factory since the President took office, she added. In fact, Ford recently said it would begin building commercial vans in Mexico, while Fiat Chrysler this year reneged on plans to move heavy duty truck production to Michigan from Mexico. GM is building its new Chevrolet Blazer in Mexico, even as it plans to close four vehicle and parts plants in the U.S.

So, there are still more moving parts to U.S. trade policy just now, especially as the U.S.-China fight shows signs of becoming even hotter. Producers should watch very closely as the still uncertain details of the new tariffs on Mexico are defined and implemented, Washington Insider believes.

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