Washington Insider: Cloudy Outlook for China

In an indicator of how important China has become to the world economy, Bloomberg is reporting this that China’s economy begins 2018 facing what its own leaders call three years of “critical battles.” Those fights to tackle domestic debt, poverty and pollution pose a hat trick of risks to the world’s No. 2 economy even before higher interest rates and trade war threats from the US are taken into account. While the nation is starting from a position of strength, with full-year growth in 2017 poised for its first acceleration since 2010, the expansion is seen slowing in 2018, Bloomberg says. As a result, the government of Xi Jinping is signaling that it’s sanguine about more modest economic performance, if progress on the top risk -- financial fragility -- can be made. "Significant economic imbalances continue to create downside risk to the outlook for 2018," said Rajiv Biswas, chief Asia-Pacific economist at IHS Markit in Singapore. "Risks to the Chinese economy will remain among the key risks to the global growth outlook in 2018, with the Asia Pacific region particularly vulnerable to the shock waves from a slowdown." Those waves haven’t materialized at this time, and in fact economic activity is holding up, Bloomberg says. The official manufacturing purchasing managers index was at 51.6 in December, signaling improving conditions. New export manufacturing orders also climbed to a six-month high, according to a sub-index. The Caixin manufacturing purchasing managers index, which is more representative of smaller firms, also showed strong momentum with a reading of 51.5 in December, beating all estimates. However, these figures "likely are overstating momentum, particularly in construction," according to a report by Freya Beamish, chief Asia economist at Pantheon Macroeconomics Ltd in Newcastle, UK "The profit story appears to be deteriorating, as input price rises continue to slow." Forecasters see expansion slowing to 6.5% -- the slowest pace since 1990 -- this year. In its report, Bloomberg highlights several economic areas that have the potential to trip up economic growth or spur market turbulence. Chief among these is the financial sector, recently the focus of the Communist Party which renewed its pledge to prevent and control financial risk calling it a pivotal challenge for the next three years. As the financial system opens further to foreign firms, a debt-to-GDP ratio that’s heading toward more than 320% by 2022 stands as the main danger. "Even its own propaganda machine admits that this is such a serious problem that Beijing doesn’t expect there to be any solution in anything less than three years," said Pauline Loong, managing director at research firm Asia-Analytica in Hong Kong. "Financial instability is the core problem. Solve that and you ease pressure on capital outflows, complications from deleveraging, weaknesses in smaller banks." A second area of concern is whether tightening financial and environmental regulations to help curb debt may cause tremors in 2018 that slow housing and infrastructure construction, according to Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong. "A sharper-than-expected slowdown in construction could thus weigh on broader activity with emerging sectors not yet vigorous enough to provide a sufficient cushion," said Neumann. "The biggest fault line running through the Chinese economy is the construction sector." U.S. policy is another area of uncertainty, especially as president Trump pushes a turn toward protectionism, says David Loevinger, a former China specialist at the U.S. Treasury Department. "On the menu for 2018: lots of red meat for the Republican base, and that means bashing imports," said Loevinger, now an analyst at TCW Group Inc. in Los Angeles. "Since nationalistic populism is as irresistible in China, Chinese politicians will feel compelled to retaliate." Also, if the U.S. Federal Reserve raises interest rates more than markets expect and tax cuts build on underlying 3.2% growth, the dollar may get a second wind that puts the yuan and capital outflows under pressure again, according to George Magnus, an associate at Oxford University’s China Centre and former adviser at UBS Group AG. "If the Fed starts hiking and the dollar goes on a bull run, that would cause big problems," says Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen. Yet another factor is the degree of tension between North Korea and the United States. Should this escalate into a more significant confrontation, there will be profound and far-reaching consequences not just for China’s economy but that of the entire Asia-Pacific region, says Zhu Ning, deputy director of the National Institute of Financial Research at Tsinghua University in Beijing. In fact, there have been suggestions by the administration that the US is considering still tougher regional policies to increase pressure on North Korea. So, the outlook for the Chinese economy seems to be headed for some potential choppiness for the coming year, in spite of current strength. Of course, this is a high stakes area producers should watch carefully, even as they follow the evolution of US trade policy toward North America and the building pressure for major shifts on NAFTA, Washington Insider believes. 

Actions under Foodstock Flexibility Program Not Expected For Fiscal 2018

No purchases of sugar under the Feedstock Flexibility Program (FFP) are expected for Fiscal 2018, according to the USDA Commodity Credit Corporation (CCC), based on current crop and consumption forecasts. CCC is required to make the determination each quarter. FFP is aimed at avoiding forfeitures of sugar placed under loan and USDA's current forecasts are that ending stocks are unlikely to lead to any forfeitures. The next quarterly estimate on FFP will occur on or before April 1, 2018. 

Biofuels from Distillers Sorghum Oil Meet GHG Emission Reduction Thresholds

Biofuels produced from distillers sorghum oil would meet the lifecycle greenhouse gas (GHG) emission reduction threshold of 50% under the Renewable Fuel Standard (RFS), according to a notice of proposed rulemaking from the Environmental Protection Agency (EPA) published in the December 27 Federal Register. Amending the RFS to define distillers sorghum oil as "oil from grain sorghum that is extracted at a dry mill ethanol plant at any location downstream of grinding the grain sorghum kernel," EPA noted in the filing, provided the grain sorghum is made into ethanol and the oil is rendered unfit for food use without additional refining. The proposal also seeks to add biodiesel and heating oil produced from distillers sorghum oil via a transesterification process, and renewable diesel, jet fuel, heating oil, naphtha, and liquefied petroleum gas (LPG) produced from distillers sorghum oil via a hydrotreating process as being approved pathways under the RFS. Comments on the matter are due January 26 and EPA said it will not hold a public hearing on the matter unless a request for a hearing is made by January 11. 

Washington Insider: Toxic Politics Resume

It seems now that Washington affairs have become so toxic that even a meeting between Democratic and Republican congressional leaders is news, according to POLITICO. The news outlet is reporting that the leaders “will meet Wednesday with top White House officials as they attempt to hammer out a deal to avert a government shutdown and resolve an impasse on immigration.” Given the intensity of the issues involved, a broad agreement seems unlikely. The meeting was initially expected to include President Trump's chief of staff, John Kelly, but a White House spokesman said legislative affairs director Marc Short and budget director Mick Mulvaney would represent the president. The meeting is seen as an effort by the President to force action on one of his most iconic, divisive policy proposals: a wall on the southern U.S. border. Trump has signaled in recent days that he would support a measure to protect undocumented immigrants who arrived in the country as minors in exchange for wall funding and other stiff border security measures that Democrats have ardently opposed. "The Democrats have been told, and fully understand, that there can be no DACA without the desperately needed WALL at the Southern Border and an END to the horrible Chain Migration & ridiculous Lottery System of Immigration etc," Trump tweeted Friday morning. "We must protect our Country at all cost!" House Minority Leader Nancy Pelosi and Senate Minority Leader Chuck Schumer brushed off the president's tweet. "We're not going to negotiate through the press and look forward to a serious negotiation at Wednesday's meeting when we come back," said Pelosi spokesman Drew Hammill. Pelosi and Schumer will join Speaker Paul Ryan, R-Wis., and Senate Majority Leader Mitch McConnell, R-Ky, in the meeting on Wednesday afternoon. Short and Mulvaney's lead role in the negotiations is a break from similar meetings in recent months, when Democrats have walked away emboldened and claiming to have won concessions from Trump. After a September session at the White House, Trump joined Pelosi and Schumer to punt a series of fiscal negotiations until early December. Democrats bailed on the most recent planned meeting of the four leaders in November, though, after Trump tweeted that an immigration deal was unlikely. Trump told The New York Times on Thursday that he believes a bipartisan solution on DACA is within reach, though he said he wouldn't back any plan "without a wall." Rep. Mark Meadows, R-N.C., chairman of the conservative Freedom Caucus, said Friday that he's confident Trump won't sign any deal that doesn't include his immigration priorities — from the wall to ending so-called chain migration and the visa lottery program. "The president will veto something that doesn't have those items in there," Meadows told the press. "I firmly believe that." Well, this meeting looks very much like a heavy-duty standoff just now, with extremely high political stakes on both sides. At least a few commentators are suggesting that a DACA deal has significant political support now, while support for an expensive wall may have diminished, at least slightly. Still, the emotional anti-immigration battles continue to be high priority for many Americans, even as the need for off-shore labor grows in several industries, including agriculture. So, this is a fight producers should watch closely as it proceeds, Washington Insider believes. 

NAFTA 2.0 Talks Keeping Canada's PM Trudeau Up at Night

Talks between the U.S., Canada and Mexico to update the North American Free Trade Agreement (NAFTA) talks are the source of angst for Canadian Prime Minister Justin Trudeau. In comments to Global News, Trudeau said the NAFTA 2.0 talks are what keeps him up at night. "There’s a level of unpredictability" relative to the talks, Trudeau stated. "We know if the relationship with the U.S. goes sour, we could be doing everything right at home and our economy would still end up suffering." But despite that situation, Trudeau warned he will not sign a deal just to have one. "I’m not going to sign any deal at any cost," Trudeau told Global News. "If it’s a bad deal, I’m going to walk away from it, because no deal is better than a bad deal for Canadians." The makeup of the whole package is key, not whether certain items are "red lines" in the talks, he noted. The next round of talks takes place January 23-28 in Montreal. 

US, South Korea Trade Talks To Start

Talks between the U.S. and South Korea to revise the trade agreement between the two countries will start Jan. 5 in Washington, according to an announcement from South Korea. Leading the talks for the U.S. will be Michael Beeman, an assistant U.S. Trade Representative, and Yoo Myung-hee, a director general for FTA Negotiations from South Korea, according to South Korea's trade ministry. "In the upcoming negotiations, we plan to push for the inclusion of our issues of interest with the aim of enhancing mutual reciprocity and achieving a balance of interests," according to a trade ministry statement. 

Washington Insider: Senators Caution on NAFTA

More and more, lawmakers are weighing in with the administration on the perils of dumping NAFTA. For example, Bloomberg is reporting this week that the Senate Finance Committee Republicans warned the administration trade czar on the “high price for the U.S.” if the administration pulls the plug on the North American Free Trade Agreement.” Committee Republicans told USTR Robert Lighthizer that it would be a “paradox of enormous irony” if Congress passes a pro-growth tax bill and a U.S. exit from NAFTA causes a farm recession and tanks the stock market, Senate Agriculture Committee Chairman Pat Roberts, R-Kan., told Bloomberg. “I think Bob gets that,” Roberts said, adding that Commerce Secretary Wilbur Ross and others in the administration might have different ideas. Lighthizer met with Roberts and other Finance Committee Republicans Dec. 19. USTR spokeswoman Amelia Breinig told Bloomberg that Lighthizer has had similar sessions with Republicans and Democrats on the House Ways and Means and Senate Finance committees. The three NAFTA countries are preparing for a negotiating round in Montreal Jan. 23-28. The talks have stalled over U.S. demands for a sunset clause to terminate the pact after five years unless the parties agree to renew it and a new requirement for 50 percent U.S. content in automobiles, among other matters. The President has repeatedly threatened to pull the U.S. out of the pact if he can't secure a better deal. When asked about a possible contingency plan if the U.S leaves NAFTA, Roberts said that there is some talk about legislation to use Commodity Credit Corp. funds to offset the damage to U.S. farmers that a NAFTA exit would cause. “We could consider that in the farm bill,” he said, adding that it would be best to prevent the NAFTA pullout from happening. The Commodity Credit Corp. was established to stabilize, support, and protect farm income and prices. Roberts said it would be “pretty difficult” to try to fashion legislation to offset the harm caused by a NAFTA exit “and get the criterion and the metric to try to make that work.” The U.S. is losing markets now with Mexico buying wheat from Argentina, he said. “There's wheat from Kansas that should be going to Mexico,” Roberts said. “We have wheat on the ground. Our prices are very low.” When asked if Lighthizer gave any reassurances on NAFTA, Roberts said: “We were being more specific. He was being more general.” Roberts said Lighthizer also discussed a sunset clause to terminate new trade deals after five years. The U.S. has proposed five-year sunset clause in the NAFTA talks, but Mexico and Canada say that such a clause would create uncertainty in business relationships. Roberts said he didn't think anyone would sign on to that approach. A spokeswoman for Senate Finance Committee Chairman Orrin Hatch R-Utah, told Bloomberg that Hatch continues to believe terminating or weakening NAFTA would be detrimental to the U.S. and Utah's economy, although Hatch supports “modernizing” the pact, she said without providing more detail. Bloomberg commented that the meeting with Lighthizer came as Republican lawmakers are “upping engagement” with the administration to try to prevent the U.S. from withdrawing from NAFTA. Also, Iowa Governor Kim Reynolds told a recent news conference that Iowa's farmers would fight for NAFTA. She traveled to Washington, along with three other farm-state governors, to meet with Lighthizer and Ross on NAFTA and said she told them, “if you think they're going to stand down and just let this be a negotiating tactic, they're not. You're going to hear from me and you're going to hear from Iowa farmers about the impact that this would have on the ag economy not only in Iowa but in the Midwest and across this country,” she said. Ag committee chair Roberts and others across agriculture no doubt have clear memories of how unsuccessful Carter administration policies were in their efforts to offset impacts of the embargo of grain and meat shipments to the Soviet Union in 1980. While the programs used were substantial, the political impact of the market interruption was a political catastrophe for that administration—a fact that Governor Reynolds and Senator Roberts and many others can be expected to remind officials repeatedly as the trade talks continue, Washington Insider believes.