Washington Insider -- Tuesday

Managing the Phase One Agreement

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

US Ag Trade Bucks Overall Trade Trend

U.S. agricultural trade data for January showed exports at $11.44 billion against imports of $11.67 billion for a trade deficit of $234 million. U.S. ag exports nudged higher by just $65 million while imports rose by $306 million, producing the monthly red trade ink.

Overall U.S. exports fell slightly while imports posted a larger decline, trimming the U.S. trade deficit. This marks the fourth month in the last year that U.S. agriculture has registered a monthly trade deficit.

So far in Fiscal Year (FY) 2020, ag exports total $48.03 billion ($46.85 billion year ago) while imports are at $43.65 billion ($43.25 billion year ago) with a trade surplus of $4.38 billion ($3.61 billion year ago).

USDA in February forecast U.S. ag exports for FY 2020 to be at $139.5 billion against imports at a record $132.5 billion for a trade surplus of $7 billion. That suggests there will be more months ahead with either minimal trade surpluses for agriculture or monthly deficits.

EIA Expects Slowing Growth for Biofuel

U.S. biofuel production is expected to slowly grow through 2050, according to the Annual Energy Outlook 2020 from the Energy Information Administration (EIA), with economic and policy factors the key reasons for that expectation.

U.S. biofuel consumption in 2019 totaled 1.09 million barrels per day (bpd) and accounted for about 7.3% of total motor gasoline, distillate and jet fuel consumption. Ethanol production “slowly decreases between 2019 and 2030, and then it increases toward the end of the projection period, largely mirroring the Reference case projection for motor gasoline consumption,” EIA said. “The projected decline in domestic ethanol-blended gasoline consumption is offset by increasing U.S. ethanol exports.”

EIA expects that biodiesel production will rise by 30,000 bpd from 2019 to the end of the forecast period, with other biofuels will rose by 80,000 bpd.

While the biodiesel tax credit is not included in the forecast, EIA said, the renewal of the credit “is expected to increase domestic production and net imports of biomass-based diesel.”

Washington Insider: Managing the Phase One Agreement

Amid heavy-duty market uncertainty, Bloomberg weighed in on progress toward the phase one goals of the china trade deal this week. The U.S. is willing to show China “some flexibility” on its pledges to boost American imports — but is expected to insist that Beijing prevents an export surge when its production returns to full strength. The key metric will be whether the trade imbalance widens between the world’s two largest economies, the report said.

Given Beijing’s challenges in containing its coronavirus outbreak and the country’s lagging demand for American imports, U.S. officials are thought to have told their Chinese counterparts that China’s purchasing boost, signed in January with specific target dates and commodities, could start off slowly, Bloomberg says.

That understanding comes with “some conditions.” The administration has made clear that its “flexibility” is only an option as long as there isn’t a sharp rebound in shipments of Chinese products without a corresponding upswing in imports. Such a development could swell the already gaping U.S. trade deficit with China — the metric President Trump has frequently based his policies on. One other condition being noted is that the total of the purchase targets can’t change and that China’s purchases fulfill the commitments eventually.

The White House declined to comment on Bloomberg’s report and directed questions to the U.S. Trade Representative who said that the “U.S. expects China to meet its commitments under the agreement.”

The U.S.-China trade balance is a frequently used administration gauge to measure “who’s winning the global battle for economic supremacy — but a measure most economists find wanting.” Still, Bloomberg thinks there would likely be little patience in the U.S. administration — particularly leading up to Trump’s re-election bid in November — to let China delay purchases for long while exports accelerate.

Bloomberg notes that trade observers express some uncertainty about how China would ensure that there is no surge in exports. For the first two months of this year, China had a trade surplus of $25.4 billion with the U.S. but that deficit with narrowed in January to $23.7 billion, the smallest since 2011, according to U.S. data released last week.

The phase-one trade deal that led to a tariff cease-fire took effect in mid-February. Since then, China has been making progress in fulfilling some of its agreed requirements, lowering tariffs, reducing restrictions on U.S. agricultural products and approving Mastercard Inc. to set up a bank-card clearing business.

However, with the economy shut for much of January and February due to Lunar New Year holiday and then the COVID-19 outbreak, there is little evidence that China has continued to fulfill its promise in the deal that’s most important to the administration — a sharp increase in its purchases from the U.S.

China agreed to increase its imports of U.S. goods and services by $76.7 billion over the 2017 level in in the first year of the deal and then by $123.3 billion in the second year, increasing imports by a total $200 billion over two years. A more detailed annex of the agreement that lays out specific commodities and their target numbers was classified.

The document also set up regular meetings to discuss the progress and implementation of the agreement. The two sides are currently preparing for talks, Bloomberg said.

The president acknowledged last week that the buying spree might not fully be in effect before November.

“They’re going to start kicking in fairly soon. Unfortunately, by the time we get to the election they’ll just be partially kicked in,” the president said about his China deal and other trade agreements in a TV interview last Wednesday.

So, we will see. Clearly, the administration faces a serious challenge as it seeks to limit economic damage from the coronavirus outbreak. How it manages both its economic threats and its trade policies are issues that should be watched closely by producers as the season progresses, Washington Insider believes.

Want to keep up with events in Washington and elsewhere throughout the day? See DTN Top Stories, our frequently updated summary of news developments of interest to producers. You can find DTN Top Stories in DTN Ag News, which is on the Main Menu on classic DTN products and on the News and Analysis Menu of DTN’s Professional and Producer products. DTN Top Stories is also on the home page and news home page of online.dtn.com. Subscribers of MyDTN.com should check out the US Ag Policy, US Farm Bill and DTN Ag News sections on their News Homepage.

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