Washington Insider --Thursday

Technical Basis for Ag Trade Aid Criticized

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

Approval by Japanese Diet Clears Way for January Implementation of Trade Deal with US

Japan’s Diet, their upper house of parliament, has approved the limited trade deal reached with the U.S. that will cut tariff levels on farm and industrial goods. The lower house of parliament cleared the plan last month. No U.S. congressional approval of the deal is required. This now paves the way for the deal to be implemented starting in January.

Agricultural provisions in the pact are the highlight for the U.S. side, while Japan insists that the U.S. has committed to remove tariffs it has in place on Japanese autos and auto parts, with the two sides to embark on negotiations on the time frame for such an action.

As for the economic impacts of the deal, Japan’s Cabinet Secretariat indicated it would boost real GDP by 0.8%, with that expectation based on the assumption that existing tariffs on Japanese car exports to the U.S. would be removed. Japan’s agricultural production was forecast to fall between 60 billion-110 billion yen ($552 million-$1 billion), according to the estimate.

For the U.S., the deal will result in tariffs being either lowered or removed on $7.2 billion in U.S. agricultural products like beef, pork, wine and cheese. The accord largely sets the tariff levels for U.S. market access in Japan at those that would have been put in place had the U.S. remained in the Trans-Pacific Partnership (TPP) agreement that has since been finalized between the 11 countries that were part of the TPP. That pact is now the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Government Bank Regulators Give Approval For Banks To Serve Hemp Companies

Federal regulators gave banks the go-ahead to serve industrial hemp customers without any enhanced anti-money laundering reporting requirements.

The Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Financial Crimes Enforcement Network said in guidance that banks would no longer have to file suspicious activity reports just because they conduct transactions or other services for hemp-related businesses.

Banks had been slow to serve industrial hemp-related businesses despite the cousin to marijuana being removed from federal controlled substance scheduling in the 2018 Farm Bill.

There was uncertainty over whether hemp would be subject to the same types of robust reporting requirements as marijuana.

Washington Insider: Technical Basis for Ag Trade Aid Criticized

The fact that efforts to compensate producers for the impacts of the trade wars with China and others are controversial likely is no surprise to most observers — the 1980 efforts to compensate producers for the Carter administration’s embargo on shipments of commodities to Russia were a political disaster. So it likely was expected to be a challenge to find a “just right” level for such payments this time.

That appears to be the case, Bloomberg is reporting. It says that the President’s $28 billion farm bailout “may be paying many growers more than the trade war with China has cost them.”

Bloomberg says it has found “six academic studies that conclude that the USDA’s calculations “overshot the impact of the trade conflict on American soybean prices.” The result likely will add to criticism that the bailout has generated distortions and inequalities in the farm economy.

The dispute is involving big names in ag economics. For example, “it’s clear that the payment rates overstate the damage suffered by soybean growers,” Joseph Glauber said. He is USDA’s former chief economist and published a review of the research in late November. “Based on what the studies show, the damages were about half that.”

The academic research has focused on soybeans in part because the crop has been the most visible target of Chinese retaliation and overall received the most trade aid. But USDA’s calculation method likely overstates the conflict’s financial impact on most other farm products, as well Glauber, now a senior fellow at the International Food Policy Research Institute, told Bloomberg.

The divergence doesn’t necessarily mean a bonanza for American farmers, who are being financially squeezed on other fronts, including a global commodity glut that is depressing prices and a year of wild weather that is damaging crop yields.

Also, the trade conflict risks long-term loss of market share for U.S. producers as overseas customers build relationships with replacement suppliers. Neither the academic nor the USDA estimates take potential future market losses into account.

“You’re ruining a huge export market,” said Yuqing Zheng, an agricultural economist at the University of Kentucky. “Longer term, we don’t know for sure what the impact will be.”

Still, a team Zheng led estimated the trade conflict depressed U.S. soybean prices by only 36 cents per bushel in its first year, a period in which the bailout program paid soybean growers more than four times that: $1.65 per bushel, Bloomberg said.

The program is encountering other flak, as well. For example, Senate Democrats reported in November that the trade aid program favors large producers over smaller ones. And an advocacy group, the Environmental Working Group, released a study that asserted big farms so far have been the main beneficiaries of the billions of dollars in aid payments.

Still, USDA appears willing to emphasize the current program’s positive impacts. It said last week that it expects net farm income to rise more than 10% this year to $92.5 billion “with government aid accounting for all of the increase in profits.”

The trade aid, particularly for soybeans, largely goes to the president’s political supporters, Bloomberg said and notes that he has maintained overwhelming backing from them. Glauber estimates more than half of the direct payments under the USDA’s market facilitation program cover soybeans.

The apparent over-payment stems from the method the USDA uses to compute trade damages. The department forecast the overall price impact of punitive tariffs China and other nations imposed on U.S. farm products without considering potential sales in alternative markets. For example, as China bought more soybeans from Brazil, other buyers stepped in to purchase more soybeans from the U.S. in some cases, replacing product they had previously bought from Brazil.

“A broader analysis like some of these show the beans go elsewhere,” Glauber said. “They don’t just go into storage. Some of them go to Europe. Some of them go to other uses. We ended up crushing a lot more soybeans in 2018 than expected. We exported more vegetable oil, more protein meal. All of that mitigates the price impact.”

Robert Johannson, the USDA’s chief economist, said the department decided to base trade aid on a projection of “gross” trade losses rather “net” losses primarily for consistent treatment of producers of diverse farm products affected. It’s harder to isolate net trade impact for specialty crops such as pecans or almonds than for major commodities such as soybeans, he said. “We need to be pretty sure whatever method we use is consistent across all commodities,” Johannson said.

USDA officials also concluded after consulting with U.S. trade negotiators that there was an advantage to using the gross damages method because it is the basis the country uses for its negotiations.

The USDA has boosted its trade damage estimate for soybeans in this year’s aid program, at $2.05 per bushel, a figure a number of analysts say still exceeds their estimates of impact in the period. This year’s payment is higher because the USDA decided to calculate the damage based on export sales over the past 10 years; last year’s payment was based on a comparison with the prior year.

So, we will see. Glauber and several of the other critics of the program’s management are high-profile professionals and their criticism certainly will attract attention, although the current “fog” of the policy wars makes it very hard to focus on criticisms, let alone for advocates to react to them.

Whether or not the economists’ views now emerging have much impact on the program’s technical design is difficult to anticipate, especially amid so many tough economic and political controversies. However, the amounts involved are significant and will be watched closely by budget hawks — and should be followed closely by producers as program decisions are debated, Washington Insider believes.

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