Washington Insider -- Thursday

Coronavirus Economic Hits

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

USMCA Start Appears Now Pushed Back To At Least July 1

While there has been no official comment from the Office of the U.S. Trade Representative (USTR), it does not appear that the U.S., Canada and Mexico notified each other via letters that they have taken the needed shifts to laws and regulations to align those with provisions of the U.S.-Mexico-Canada Agreement (USMCA).

The agreement cannot enter into force until the first day of the third month following the last notification from the three countries they have met their obligations.

That suggests that the earliest the deal could now take effect is July 1.

Several key lawmakers had called on USTR to push back their announced intention that USMCA will start on June 1.

CCC Loan Interest Rates Slashed

The actions by the Fed have now translated into a rather direct impact for agriculture, reduced borrowing costs for those getting Marketing Assistance Loans (MALs) from the Farm Service Agency (FSA).

The interest rate on commodity loans disbursed in April will be 1.625%, down from 2.5% in March. Plus the stimulus package extends the maturity on the loans for an additional three months, taking it to 12 months.

Rates on Farm Storage Facility Loans (FSFLs) also declined markedly for April, falling to 0.75% to 1.25%, depending on the length of the loan, after those were at 1.375% to 1.625% in March.

Washington Insider: Coronavirus Economic Hits

It is clear that nothing is “business as usual” these days, especially concerning the economic outlook for U.S. states and businesses. Bloomberg called the results of the altered outlook a picture of “billion dollar blows.”

The bad news is everywhere, Bloomberg said. For example, New York anticipates a loss of $10 billion to $15 billion in revenue, reflecting the State’s position at the epicenter of the outbreak. Ohio state agencies are looking to cut 20% in spending, and Cincinnati is furloughing 1,700 city workers. Georgia may have to renege on a $1,000 pay raise for teachers that state House lawmakers had budgeted for in the coming year. California is already dipping into reserves and has warned state agencies not to expect full funding next year.

At this time, States, cities and counties are continuing to rely on revenue from taxes on income, sales of goods and even on gains from the stock market, all sources of money that the virus threatens to wipe out. Moody’s Analytics is advising policy makers to expect no less than a 10% hit to their general fund budgets, with the actual losses likely much larger for most states, said Dan White, the firm’s head of public sector research. That’s calculated off a baseline expectation that second quarter gross domestic product will decline 15% to 20% from a year earlier, “which is almost unprecedented,” he said.

While the federal government’s $2.2 trillion economic stimulus package will reimburse states for some of the costs of responding to the virus outbreak, it doesn’t address the revenue problem, according to Fitch Ratings. And the unprecedented shutdowns in economic activity have made it difficult for revenue forecasters to predict what happens next.

The economic shocks are likely to lead to a “very deep decline” in GDP during the second and third quarters followed by an improvement -- whereas the slump was spread out over about nine quarters during the Great Recession, Moody’s White said. He said some states may call special sessions to update the budget.

“They are scrambling. Best case scenario, they are going to be very cautious,” he said.

The drop in state revenue could easily exceed the 11% drop that states saw in a two-year period after the 2008 recession, said Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officers. While rainy day funds and reserves are at a peak, that won’t be enough for some states to cover the deficits in revenue, he said.

“All states are going to be feeling the effects of this downturn,” he said. Sigritz said he expects the pinch to be felt in usually-smaller revenue sources like gasoline taxes as people drive less and gaming taxes as casinos are shuttered.

“The numbers are what the numbers are,” New York Governor Andrew Cuomo said of the state budget Tuesday. “The numbers don’t lie, the numbers leave you few alternatives.” Cuomo said he’s not counting on federal funds to balance the budget. New York already was facing a projected $6 billion budget gap when Cuomo released his $178 billion spending proposal in January that was expected to reflect significant health-care savings.

At least 38 states and territories have issued some version of a stay-at-home order, shuttering parts of the economy as residents stay inside and restaurants and stores close. The result may be the steepest drop in sales taxes ever, according to the Institute on Taxation and Economic Policy, a left-leaning think tank. States like Florida, Texas and Washington are especially susceptible to the declines because the states derive over half of their revenue from sales and excise taxes, while the average is 35%, according to the group’s 2018 report.

And, while the budget outlook is raising anxiety levels for many U.S. officials, President Trump observed that timing is good now for a massive infrastructure bill, a measure to fund construction and repairs of roads, bridges, railroads or other public works projects -- because interest rates very low.

“With interest rates for the United States being at zero, this is the time to do our decades long awaited Infrastructure Bill,” the President said. Bloomberg noted that the president has long advocated for an infrastructure plan but has never settled on how to finance it.

Speaking at a coronavirus briefing, the president said low rates would allow the country to borrow cheaply for a new program and asserted that infrastructure spending could help blunt the surge in unemployment and businesses failures expected to result from the coronavirus pandemic and economic shutdown.

So, we will see. The president’s comments came as both parties increasingly raised proposals for “phase 4” follow-on legislation to support federal supports of many kinds. Now, the economic uncertainty continues to rise amid a combination of economic urgency and rising uncertainty which producers should watch closely as these challenges intensify, Washington Insider believes.

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