Washington Insider -- Wednesday

The President's Stark Choice

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

Perdue Refutes EPA Claim On Small Refiner Exemptions

USDA Secretary Sonny Perdue delivered a strong rejection of EPA's claim small refinery exemptions (SREs) are having "zero impact" on corn ethanol producers. "I would refute the comment" as "[there is a] negative impact" on ethanol production from the waivers, Perdue told IEG Policy in a Virginia appearance.

EPA "likes to point to export totals of ethanol production, which is good and healthy" to argue the waivers are not hurting ethanol producers, he noted. While welcoming ethanol exports, Perdue stated, "the demand destruction over domestic usage has been affected by the small refinery waivers."

Perdue pointed out that with a 15 billion gallon mandate for conventional ethanol, “every time you issue a waiver, you decrease that [obligation], which decreases corn use, and that decreases ethanol capacity for the American producer.” Perdue cited a need to boost the infrastructure for E15 fuel as one way to help offset the small refiner exemptions.

Bankruptcy Filings in Farm Country Climb

Farm bankruptcy filings in the year through June were up 13% from 2018, and loan delinquency rates are on the rise, according to the American Farm Bureau.

A challenging growing season, low prices, liberal use of Renewable Fuel Standard waivers and, of course, trade policy, are straining the ag sector, the group noted. President Donald Trump signed into law a measure that would more than triple the debt cap on Chapter 12 bankruptcy to $10 million from a prior $3.237 million.

While the level of bankruptcies is up, they still are well below the levels seen during the farm crisis in the 1980s. This also puts more attention on the Friday update from USDA on U.S. farm income.

Washington Insider: The President’s Stark Choice

It seems that the world of trade and economic policy has gotten quite a lot more challenging in recent days, and the urban press has noticed. For example, the New York Times says that the administration has recently sent numerous conflicting signals on trade policy — and that in addition to the impact of protectionist policies themselves, the uncertainty and anxiety from conflicting policy moves are also negative market factors.

Overall, the Times says, the president can try to sever the deeply intertwined American commercial relationship with China, or he can prod economic growth to assuage the fears of investors around the planet. “But he cannot do both at the same time,” the report asserts.

The Times waxes a little poetic about all of this—it proclaims that the President “can disregard the admonitions of news outlets he derides as fake news. He can simply consult the one source whose verdicts he tends to celebrate: the stock market.”

There’s proof, NYT says — among those who control money, portents of further trade hostilities lead to stock sales “with abandon” while amplifying talk of recession. By contrast, intimations of a deal reverberate as a clarion call to buy, sending share prices higher while easing worries about a potential global economic downturn.

Talk of a trade deal with China makes for happy stock markets. However, thunderous threats of fresh tariffs on Chinese goods and efforts to push American industry to forsake China damage share prices and shrink economic growth prospects — even as they bring approval from Trump’s most ardent political supporters who portray the trade war as a tough but necessary piece of business, too long avoided by the cowards who resided at the White House before.

NYT recounts that on Friday the president unleashed furious threats toward China and vowed to raise tariffs on $550 billion of Chinese goods and declared China’s president, Xi Jinping, whom he had previously called a “good man,” an “enemy.” And he commanded American companies to abandon China and start making their products in the United States.

In markets around the globe, investors reacted to these developments as powerful signals to yank their money to safety. They reacted as if much of the globe suddenly appeared riskier, the Times said. The Times also notes that the trade war that has escalated over the last year has already produced distress.

For much of the world, countries that are innocent bystanders will actually suffer “even more than the United States and China,” said Louis Kuijs, the Hong Kong-based head of Asia economics at Oxford Economics. “There is not going to be any de-escalation any time soon.”

While the U.S. is still growing, with an unemployment rate lower than it had been in half a century, companies are deferring investments as they puzzle over the impact of trade hostilities. Such a slowdown in investment could eventually prompt households to curb their spending and lower growth, the Times says.

Long before Trump took office, American governments complained about China and its failed promises to open its markets—and on its lavish subsidies for state-owned companies. It turned itself into an export juggernaut while ignoring labor and environmental standards.

The administration sees no solution in slow-moving cases at the WTO but often pushes for a fundamental redrawing of commercial geography. In that view, the American economy should “decouple” from China, the Times says.

The president’s recent pronouncements appear to underscore that he is truly “willing to see Americans accept the costs”—plunging stock markets, weakening investment—for a wholly new sort of relationship with China as adversary. “The potential outcomes are many, but none of them involve the world’s getting richer, the Times said.

So, by Sunday morning, at the Group of 7 summit in France, the President was expressing “second thoughts” about his new tariffs and by Monday he was calling Xi a “great leader” and reporting that China was interested in resuming trade talks. Stock markets were buoyant. At least for a few hours, the bewildering notion that the United States and China were dissolving ties could be forgotten.

Throughout the administration’s tenure, trade experts have struggled to separate its real policy aims and beliefs from negotiating ploys. Many administration positions are seen as perpetually flexible, depending on which advisers have the President’s ear — and on the tenor of television conversations about economic growth prospects and—especially — the stock market.

In addition, key advisers — like USTR Robert Lighthizer and chief trade adviser, Peter Navarro, author of a book called “Death by China” — urge the president to untether the American economy from China.

At the same time, other advisors such as Larry Kudlow, who leads the National Economic Council and Treasury Secretary Steven Mnuchin tend to focus on areas of interest to investors, not least share prices.

While President Trump is famously adept at maintaining positions that seem mutually exclusive, the Times says, the trade war threatens to force him to choose between it and economic growth.

In Beijing and Washington alike, hard-liners have dug in, shrinking room for a compromise. In both capitals, a sense of permanent alteration has transpired, a deepening assumption that — whatever comes next — China and the United States will proceed with profound wariness. The Times concludes that for the global economy, that could entail grave uncertainties and perils.

So, we will see. So far, it seems as if policy uncertainty has been worsening, rather than clarifying — but it also seems that pushback from the Congress and the industries is growing. These are key trends and will affect both economic and political trends—and which should be watched closely by producers through the coming months, Washington Insider believes.

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