Expectations From the USDA Ag Forum and the Crisis in China
Update for February 20th, 2020
The 96th annual USDA Agricultural Outlook Forum is underway. Chief Economist for the USDA, Robert Johansson will unveil the current expectations for the U.S. commodity markets and trade for the 2020 season during the forum. The trade is looking for increases in both corn and soybean acres as well as production and ending stocks compared to a year ago.
Source: Bloomberg, USDA
The strength of the global economy greatly depends on the economic health of its largest markets, and right now the world’s second largest economy is in crisis. Estimates (from Bloomberg Economics) indicate that the economy in China is likely running at 40% to 50% of its typical capacity and right now no one has any idea how quickly normal operations will resume while the country is battling the coronavirus outbreak. During the time leading up to the Lunar New Year holiday travel within and out of the country was comparable to the previous year but since the coronavirus outbreak travel has dropped by 80%. Millions of workers have still not returned to work and for those that are traveling by bus are dealing with reduced bus capacities by 50%, due to an official order given in an effort to reduce the risk of further spreading of the virus. Many of the large manufacturers along the eastern coast of China still remain idle and of the 109 American manufacturing companies in China that have resumed production, results of a recent surveyed indicates that many of their employees have not returned to work and as a result production output is down. Buying patterns of Chinese consumers has also been drastically altered since the outbreak began. Consumers have cut back on non-essential spending but even if people wanted to go out many shops and restaurants remain closed, and online retailers are having logistical issues getting orders delivered. (Bloomberg)
In response to the dire situation, China’s Ministry of Finance has announced they will allow companies to apply for exemptions from tariffs on U.S. commodity and energy products. Applications for one-year waivers will begin March 2nd and will be approved within three working days. This process is important for U.S. exporters to be aware of because the Chinese purchaser must receive the approved waiver prior to their purchased cargo clearing customs in order to be valid.
The U.S. Government Accountability Office (GAO) has been asked by the Senate Agriculture Committee’s top democrat Debbie Stabenow, to review the $28 billion MFP payout process and management. She is also joined in this effort by the House Ag Chairman Collin Peterson (D-MN). The investigation is based on concerns that the tariff aid program was biased and provided more funds to southern states as well as favoring large and foreign agricultural companies over small farms. Stabenow is asking the GAO to determine three points:
How the payments would have been distributed if limits included in the 2018 farm bill would have been used by the USDA in issuing MFP funds.
What safety guards were in place to prevent waste, fraud and abuse.
Whether the appropriate formula for calculating payments was used or if a different model would have been better. Meaning, was the actual trade damage caused to each specific commodity considered and used to ensure that the farmers most vulnerable to going out of business as a result of the trade war were prioritized.
The USDA is defending the payout structure used for MFP and has noted that the largest portion of the aid went to the Midwestern states of Iowa, Illinois and Minnesota and that foreign owned companies that qualified for payments helped to support U.S. ranchers. The GAO has agreed to investigate the matter brought to them by Senator Stabenow, in addition the USDA Inspector General Phyllis Fong told lawmakers her office will also looking into the MFP payment structure. (New York Times, Politico)
The National Weather Service has issued warnings regarding the elevated risk of flooding again this spring in areas where the ground is already saturated from last season’s precipitation. The Climate Prediction Center is also concerned about the chances of yet another wet spring. The maps below show the 90 day precipitation outlook for March, April and May and as you can clearly see the CPC expectations are for above normal rainfall for the majority of the U.S. Corn Belt.
