Washington Insider -- Tuesday

Front Line of Trade Fight

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

China Deploys Tariffs in Response To US Steel, Aluminum Duties

Hours after closing public comments on a list U.S. goods to be targeted with duties in response to the U.S. import duties on steel and aluminum, China imposed sanctions on 128 U.S. products with duties of 15% for a portion of the goods and 25% for another batch. China's Customs Tariffs Commission said Sunday the previously announced tariffs on 128 kinds of imported goods originating in the U.S. would take effect today, including duties on fresh and dried fruits, ginseng, nuts, wine, and pork, as well as certain steel products, with a value of about $3 billion.

There was no indication whether Beijing might exempt Chinese-owned American suppliers such as Smithfield Foods, the biggest U.S. pork producer, which is ramping up exports to China. So far, high-volume agricultural exports to China, such as soybeans, haven’t been included in the retaliation list. The China action came in the wake of statements Friday that the final retaliation list would be unveiled at an "appropriate" time.


US Continuing to Pursue WTO Cases on China Ag Matters 'Aggressively'

The annual release of the National Trade Estimates Report from the Office of the U.S. Trade Representative (USTR) noted the U.S. is still keeping up its push at the WTO on two cases over ag issues with China. "The United States remains concerned that the methodologies used by China to calculate support levels, particularly with regard to its price support policies and direct payments, result in underestimates of the amounts reported formally to the WTO," USTR said in the report.

The WTO case launched by the Obama administration in September 2016 challenged China's rice, wheat and corn supports, saying the breached China's WTO commitments. "The United States is pursuing this case aggressively," the report said. The U.S. also filed a case over market access on rice, wheat and corn via tariff-rate quotas, arguing the access promised has "yet to be fully realized." As with the domestic support case, USTR said, also stating it was "pursuing this case aggressively."


Washington Insider: Front Line of Trade Fight

USDA released its Prospective Plantings report at the very end of March, and it indicates that producers intend to shift their operations somewhat in response to expected sector conditions.

The report is interesting because it is unique—it surveys producers’ intentions, rather than focus on stocks or growing conditions. Many media reports indicate that it is yet another USDA forecast, but it is not—it is an early season survey of produces themselves, intended to help producers counter sector trends toward surpluses or shortages and thereby boost their returns.

So, the message producers sent is that they are shifting modestly from grains to oilseeds.

That means that, if producers follow through on current intentions, soybeans will be planted on 89 million acres in 2018 while corn plantings account for 88 million acres. In response to the survey results, Bloomberg’s Grains Subindex climbed 3.1%, the most since July.

Years of bumper harvests have led to a market excess of supplies for crops that have pushed prices steadily lower—along with farm revenues. In a separate report released last week, USDA pegged corn stocks on March 1 at 8.89 billion bushels and soybeans at 2.11 billion bushels, both records for that date and above the average analyst forecasts.

Analysts are making much of the expectation that U.S. soybean acreage this year will exceed corn plantings for the first time in 35 years. Still, soybean prices jumped as the outlook raised concerns over tighter supplies amid drought in Argentina.

While planting is still a few weeks away in most Midwestern states, price swings and weather can spur sharp changes in the outlook. In February, USDA projected corn and soybeans would each cover 90 million acres—as they did last year when farmers planted 90.2 million acres of corn and 90.1 million acres of soybeans.

This year, Bloomberg notes, the prospective plantings survey comes during a time of rising trade tensions and heightened producer anxiety. And, while China is planning trade restrictions on numerous commodities, including ethanol, some analysts expect that “China probably won’t impose tariffs on U.S. soybeans.”

The only other time that soybean planting topped corn was in 1983, near the beginning of a farm crisis that culminated in relief efforts. Faced with a wave of foreclosures in rural America, the government discouraged corn growing to help ease a grain glut.

So, while U.S. soybean exporters seem likely to dodge this particular bullet, corn producers are likely to see Chinese imports of ethanol facing new, higher tariffs that will cut sales.

It reported that China announced late Sunday it will add a 15 percent tariff on ethanol imports from the United States, as part of its response to U.S. duties on aluminum and steel imports. The previous duty was 30%.

The tariffs, effective this week, are expected to offset any cost savings from importing cheaper U.S. ethanol versus domestic supply.

“The price difference is gone. We will suspend imports for now,” a manager at a private oil refinery told Reuters, adding that he was considering turning to domestic suppliers for ethanol to blend into gasoline.

That is good news for domestic Chinese producers, who are already ramping up output on cheaper corn and government subsidies. “We have so much corn. We will do absolutely fine if we don’t import ethanol,” said a manager at a major ethanol producer in China.

But analysts expect that China will likely have to resume imports soon, with domestic production unlikely to meet the demand for ethanol needed to meet the government target of having all gasoline nationwide blended with 10 percent ethanol by 2020.

China said last year the new ethanol mandate would boost industrial demand for corn and help clean up its smog. It would mean consumption of around 15 million metric tons of ethanol annually, made from 45 million metric tons of corn, Reuters said.

It is not clear where future imports will come from. A 30% duty on ethanol imports previously levied since January 2017 had already slowed a once-booming trade to a trickle.

Imports from the United States had recently picked up after prices fell enough to be attractive even with the high duties. But the new tariffs will close the arbitrage again, pushing up the price of U.S. ethanol to around $1,003.58 per metric ton after taxes, on par with domestic prices, the market sources said.

Prices in Brazil, the world’s top ethanol producer, are currently too high for exports to China, said the refinery manager, but they could be an option in future.

So, we will see. While many administration officials continue to argue that there will be no significant reactions from overseas buyers of U.S. products, producers say they see increasingly important signs that retaliations are already under way, and more coming. The question is, whether this development will lead to political pushback against administration trade policies, and how soon that may develop, Washington Insider believes.


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