Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.Perdue Downplays Odds For More Farmer Trade Aid
USDA Secretary Sonny Perdue Wednesday maintained his stance that a third round of trade aid payments to farmers should not be needed. His view did not shift even as lawmakers like House Ag Committee Ranking Member Mike Conaway, R-Texas, said a third round of Market Facilitation Program (MFP) payments would be “vital” for agriculture.
Perdue warned lawmakers that the MFP efforts were aid payments, not price support or safety net payments. Perdue told reporters after the hearing that he put odds at 10% – one in ten – for a third round of payments. But he acknowledged that if directed to make the payments, USDA would provide them even as he insisted repeatedly that President Donald Trump’s tweet on the possibility of another round of trade aid started with the word “if,” meaning the payments were not guaranteed to be coming.
Some say the reason Perdue is pushing back on the aid effort is that a third round of payments would signal that China would not be living up to terms of the phase-one agreement between the two sides.
USDA’s Perdue Optimistic On China Phase One Trade Deal Commitments
Much of USDA Secretary Sonny Perdue’s testimony before the House Ag Committee on the rural economy focused, not surprisingly, on the U.S.-China phase-one agreement.
Ag purchase commitments by China under the phase-one deal are a reason to be upbeat, Perdue told lawmakers, even given concerns about the impact coronavirus may have on China meeting them. “None of us obviously know what the impact is going to be,” he said of coronavirus, adding market fundamentals remain strong thanks to robust consumer demand and the new trade agreement.
Perdue related that signals from China are that they “want to fulfill” their purchase commitments under the Phase One deal. On the purchase commitments themselves, he said, “We are going to trust but verify as we go along, and looking on a week-by-week, month-by-month basis of where they are in that regard.” Regarding soybeans, Perdue said, “We are hopeful, we are optimistic,” and he predicted China would begin to ramp up purchases from the U.S. “in late spring and summer,” as the market shifts from South American producers.
USDA will be watching carefully to see whether that shift occurs, he added.
Perdue also noted optimism on getting U.S. rice into China, pointing out that elimination of non-tariff barriers like the ones that have shut U.S. rice out of that market were an integral part of the phase-one deal.
Washington Insider: Chinese Farm Imports Questioned
Bloomberg is reporting this week that crop traders obsessing over the deadly coronavirus in China “may be overlooking another key challenge to the administration’s phase one trade deal: the strength of the U.S. dollar.”
The report says the virus outbreak is upending supply chains and cutting food demand in China, delaying billions of dollars in U.S. sales of everything from pork to soybeans. It also thinks that making up for the losses later in the year may be difficult if the dollar continues to strengthen against currencies in Brazil and Argentina, two of the top U.S. ag rivals.
China has pledged to buy $36.5 billion in U.S. farm goods this year under the trade deal, $12.5 billion more than in 2017. But some tariffs remain in place and China has said its purchases need to make economic sense with both Washington and Beijing acknowledging that the timing of the sales depends on market conditions.
“We are already dealing with retaliatory tariffs and now coronavirus presents challenges for China to fill its obligations,” said Dan Kowalski, vice president of research at CoBank, a $145 billion lender to the agriculture industry. “If the dollar remains strong, that has tangible impacts on market conditions. And that could or could not play a part in China filling its purchases.”
Phase one of the trade deal specifies that “the parties acknowledge that purchases will be made at market prices based on commercial considerations and that market conditions, particularly in the case of agricultural goods, may dictate the timing of purchases within any given year.”
Traders were already skeptical China would reach the phase one targets before the virus hit, as indicated by USDA’s internal export projections, Bloomberg notes. “Now, with the Brazilian real and the Argentine peso hitting record lows against the dollar, the trade-deal targets are even more in doubt,” the report said.
“We always have to be mindful that the Chinese are price buyers,” said Stephen Nicholson, a senior analyst for grains and oilseeds at Rabobank. “I don’t think that’s going to change under phase one. They are going to do what they do. I think they will continue to buy what they need and they will buy at the best price. It’s an ingrained behavior.”
For now, U.S. authorities are dismissing the currency threat. Ag Secretary Sonny Perdue said at a USDA forum last month that he expects China to live up to its pledges and Ted McKinney, the undersecretary of agriculture for trade, added that their $36.5 billion commitment stands despite the dollar strength.
Gregg Doud, U.S. chief agricultural negotiator in U.S. Trade Representative’s office also dismissed the idea. But he also delivered a “scary prospect for American farmers already dealing with high debt, several years of low prices and piles of corn and soybeans from last year’s harvest still stashed in their bins,” Bloomberg said.
“At least in my mind, as an old commodity analyst, I don’t think that’s an issue here,” Doud said at the USDA event. “It just means that as that gap gets further, the U.S. price has to come down to be competitive with what’s going on in South America.”
Brazil is already harvesting a record soybean crop and with a weaker real boosting farmer profits, the incentive will be there to expand plantings in the years to come. The same goes for Argentina, though the hike in export taxes there has made shipments less appealing.
“Maybe China doesn’t reach $36.5 billion,” said Dan Basse, president of consulting firm AgResource. “But I think if you were to ask the market today, and say it’s going to do the same as in 2017 – $24 billion, $28 billion – we’d probably be OK there.”
There’s no reason to sound the alarm bells at this point, said CoBank’s Kowalski. The lender believes China will make a “good faith” effort to meet the targets and said the nation will have a bigger opportunity to buy American farm goods in the second half of the year.
Concerns about the slowdown of the Chinese economy may also end up helping the nation meet its pledges. That’s because the agreement allows for nations to impose tariffs equivalent to the size of the damage without retaliation in the case of non-compliance.
“They signed an agreement, they know it’s enforceable,” Steve Censky, USDA’s deputy secretary, said last month in Arlington, Virginia. “Given their economy and everything else, they don’t want to be back in the soup, battling the U.S. on tariffs.”
So, we will see. Global crop competition looks likely to be intense this year, so USDA’s outlook may well face increasing pressure as the season advances. These are trends producers also should watch very closely as they are tested across the season given the political prominence of the export commitments involved, Washington Insider believes.
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