Policy Updates: August 11, 2017

Tough Trump talk on N. Korea continues | China’s links to N. Korea | ‘Transitory’ lack of inflation | Prevent-plant acres | Shift to legal U.S. farm labor | Alibaba product could boost U.S. food exports to China | Prevent-plant acres | Cotton AWP | IEA boosts world oil demand forecast | U.S. budget deficit | Brazil’s BRF may sell shares | CME lowers live cattle futures margins

— Tough Trump talk on North Korea continues. President Donald Trump said yesterday that his “fire and fury” comments may not have been tough enough, and refused to rule out a preemptive strike against the country. Today, Trump escalated his rhetoric against North Korea by warning that the U.S. had put in place “military solutions” that were “locked and loaded”. “Military solutions are now fully in place, locked and loaded, should North Korea act unwisely,” the president wrote in a morning tweet. “Hopefully Kim Jong Un will find another path!”

The war of words between Washington and Pyongyang has spurred a sharp response from some, with Australia backing the U.S. position, while the Communist Party-linked Global Times in China said that the country should prevent Trump and his allies from overthrowing Kim Jong Un.

Tough talk is impacting world markets. World stocks are falling for a fourth day after Trump doubled down on his North Korean rhetoric. He also warned that if Kim Jong-un’s regime “does anything” to the U.S. or an ally, “things will happen to them like they never thought possible.” Meanwhile, China state media said the country should remain neutral if North Korea fires first on U.S. territory. Meanwhile, the Volatility Index, or VIX, surged by 45% on Thursday to its highest level since April amid growing tension between the U.S. and North Korea.

On the more subdued side of the matter, the Los Angeles Times notes that “warships are not known to be moving toward the Korean peninsula, the U.S. has not reinforced troop levels in South Korea and U.S. dependents have not been ordered out.” Meanwhile, Secretary of State Rex Tillerson said Americans should “sleep well at night” and Defense Secretary James Mattis emphasized diplomacy.

Another impact of the North Korea situation: “We’re going to be increasing our budget by many billions of dollars because of North Korea and other reasons having to do with the anti-missile,” President Trump said at his New Jersey golf club.

Trump dangles trading concessions for China. President Trump continued to signal the possibility that he may ease his rhetoric over Chinese trade practices if Beijing takes steps to help contain Pyongyang’s nuclear program. “I think China will do a lot more,” Trump said. “If China helps us, I feel a lot differently toward trade.” The Trump administration has twice delayed actions related to import restrictions on China’s handling of U.S. intellectual property rights and forced technology transfers. The Commerce Department has been preparing an investigation examining whether to limit imports of Chinese steel.

Tough talk is impacting world markets. World stocks are falling for a fourth day after Trump doubled down on his North Korean rhetoric. He also warned that if Kim Jong-un’s regime “does anything” to the U.S. or an ally, “things will happen to them like they never thought possible.” Meanwhile, China state media said the country should remain neutral if North Korea fires first on U.S. territory. Meanwhile, the Volatility Index, or VIX, surged by 45% on Thursday to its highest level since April amid growing tension between the U.S. and North Korea.

On the more subdued side of the matter, the Los Angeles Times notes that “warships are not known to be moving toward the Korean peninsula, the U.S. has not reinforced troop levels in South Korea and U.S. dependents have not been ordered out.” Meanwhile, Secretary of State Rex Tillerson said Americans should “sleep well at night” and Defense Secretary James Mattis emphasized diplomacy.

Another impact of the North Korea situation: “We’re going to be increasing our budget by many billions of dollars because of North Korea and other reasons having to do with the anti-missile,” President Trump said at his New Jersey golf club.

Trump dangles trading concessions for China. President Trump continued to signal the possibility that he may ease his rhetoric over Chinese trade practices if Beijing takes steps to help contain Pyongyang’s nuclear program. “I think China will do a lot more,” Trump said. “If China helps us, I feel a lot differently toward trade.” The Trump administration has twice delayed actions related to import restrictions on China’s handling of U.S. intellectual property rights and forced technology transfers. The Commerce Department has been preparing an investigation examining whether to limit imports of Chinese steel.

— China’s economic links with North Korea. While China backed the U.N. Security Council resolution which prohibits the purchase of things like coal, iron ore, seafood and other items from North Korea, trade between China and North Korea continues in other areas — both legitimate and illicit.

China’s exports to North Korea in the second quarter of 2017 were $934 million compared to $721 million in the first quarter, according to trade analysis firm Panjiva. Their exports to North Korea are up 17% for the same period in 2016.

China imported $640 million in apparel from North Korea in 2016, second only to coal imports, according to Panjiva. The UN sanctions do not apply to apparel and textiles.

Trade via illicit channels like online gambling and illegal arms sales to the Syrian government each bring some $1 billion into North Korea, Panjiva estimates.

— Fed and the ‘transitory’ lack of inflation. New York Fed President William Dudley became the latest Fed official to talk about the current state of a lack of higher on inflation. In comments Thursday, Dudley said inflation would have difficulty hitting the Fed’s 2% target for six to 10 months. However, he still said the situation reflects “one-off” factors and not a more-embedded set of factors. He did say that the tight labor market and weaker U.S. dollar could end up spurring inflation higher while low wage growth is a reflection of sluggish productivity.

Fed rate-hike odds are sliding. The market is pricing in just a 33.6% chance the Fed will raise its benchmark interest rate before the end of the year, according to Bloomberg’s World Interest Rate Probability data.

— FSA certified acreage data August 2017 = very preliminary information. Reports from U.S. producers so far show they have reported planting 86.832 million acres of corn, 88.219 million acres of soybeans, 42.671 million acres of wheat and 12.117 million acres of upland cotton for 2017, according to the August release of certified acreage data from the Farm Service Agency (FSA).

Producers have to file planted acreage data to FSA as part of their participation in U.S. farm programs, including levels of acreage they were prevented from planting.

Prevented planting acres show some surprises. The initial release of the FSA shows a total of 2.565 million acres were prevented from planting in 2017, down from the 2016 total of 3.412 million acres.

On an individual state basis, nine U.S. states so far are reporting 100,000 acres or more were prevented from being planted in 2017. While much attention has been focused on the U.S. eastern Corn Belt this season as having planting woes, none of the data from those states so far shows any of them having more than 46,000 acres as prevented planting. The top states in 2017 for prevented planting are:

Arkansas: 431.725 acres, including 217,903 acres of rice, 100,899 acres of corn, 65,907 acres of soybeans, 20,885 acres of wheat and 16,239 acres of upland cotton.

North Dakota: 152,347 acres, including 62,923 acres of soybeans, 52,047 acres of wheat and 32,066 acres of corn.

New York: 150,530 acres, including 101,562 acres of corn and 45,641 acres of soybeans.

Kansas: 147,060 acres, including 119,963 acres of corn, 21,246 acres of wheat and 4,712 acres of sorghum.

Wisconsin: 125,345 acres, including 97,803 acres of corn and 23,069 acres of soybeans.

Louisiana: 124,668 acres, including 79,143 acres of soybeans, 36,080 acres of wheat, 4,169 acres of rice, 3,264 acres of upland cotton and 1,995 acres of corn.

Missouri: 124,630 acres, including 51,580 acres of corn, 24,717 acres of rice, 20,187 acres of soybeans, 17,831 acres of wheat and 10,093 acres of upland cotton.

Texas and South Dakota perspective. Texas reported 503,748 acres of prevented planting in 2016, but growers there so far have only reported 97,254 acres. Drought-stricken South Dakota reports 97,254 acres prevented planting so far in 2017 against 249,367 acres in 2016.

Comments: This initial release of data from FSA is far from complete as history proves. That is also why the National Ag Statistics Service (NASS), while they will monitor the data from FSA throughout the growing season, will not opt to incorporate the information as a tool to adjust planted acreage until October, when the data are far more complete. Given historical patterns, it would appear that total prevented planting acres in the U.S. this year will not be as high as they were in 2016.

— Report: Shift to legal U.S. farm labor. The percentage of undocumented workers in the agricultural sector dropped from 55% to 47% between 2000 and 2014, according to a report by the nonpartisan Migration Policy Institute. The report analyzed data from the U.S. Department of Labor’s National Agricultural Worker Survey. Link for details.

The labor shift was largely caused by a decline in illegal immigration from Mexico after the 2008 recession.

Key findings from the report:

• Many migrant farm workers now in the U.S. have been here for some time and have settled with their families.
• Majority of U.S. farm workers are Mexican-born men, accounting for about 68% of farm workers, up from 55% in 1989-1990.
• Farm workers are getting government help, with half receiving Medicaid, food stamps or other benefits in 2014.
• Job focus has changed: In 1990, 40% of immigrant labor jobs were in harvesting, but that number dropped to less than a quarter.
• Ag operations are using H-2A. Number of H-2A-eligible positions certified by the Labor Department rose from around 60,000 in fiscal 2006 to 140,000 in fiscal 2015 — the largest 300 farm employers each requested visas to fill approximately 100 or more jobs.

Meanwhile, nearly one-quarter of all federal inmates are illegal immigrants and virtually all are in deportation proceedings or already face removal orders, according to a new Homeland Security report. The Justice Department’s Bureau of Prisons, fulfilling a presidential executive order requiring transparency on prisoner immigration status, said that it houses 187,855 inmates of which 42,034 are foreign born. Link for details.

— More U.S. food products could be headed to China via Alibaba. A growing number of people in China are using an Alibaba product for ordering food from a menu in the morning and having it sent to their homes by the afternoon. Distribution networks, much like in the U.S. food industry, are now seen as a major ingredient for future food delivery (think Amazon’s recent purchase of Whole Foods). Alibaba is a Chinese e-commerce company that provides consumer-to-consumer, business-to-consumer and business-to-business sales services via web portals.

Agents in the U.S. are working with U.S. farmers and food product companies to get products approved for the fledgling Chinese system.

Distribution is central to those wanting to carve out a new food industry market. With a growing list of customers, firms like Alibaba and Blue Apron in the U.S. will need to get more meal kits delivered on time and intact to keep its business moving.

Another recent development in China: A growing number are using Apple Pay, Bitcoin and other systems to pay for their purchases.

— Cotton AWP moves lower. The cotton Adjusted World Price (AWP) is at 62.46 cents per pound, effective today, down from 63.41 cents per pound the prior week. This marks the lowest AWP since the week of January 6 when it was 61.61 cents per pound.

— IEA raises its forecast for world oil demand. The International Energy Agency said today it was raising its world oil-demand forecast for the rest of 2017 to 1.5 million barrels a day and for 2018 to 1.4 million barrels a day amid a rebalancing in the market. However, IEA echoed the OPEC report Thursday that signaled the cartel is pumping more oil. IEA said crude output from OPEC countries rose 230,000 barrels bpd in July to a new high of 32.84 million bpd. OPEC said Thursday cartel countries pumped 0.5% more crude in July compared to June at 32.9 million bpd.

— U.S. budget deficit continues to increase. The U.S. piled up a monthly deficit of $42.9 billion in July, down from a deficit of $90.2 billion in June, it still expanded the fiscal 2017 pool of red ink to $566 billion, up 10.6% from the same point in fiscal 2016. The deficit would have been even worse for July since July 1 fell on a Saturday, that pushed some spending into June. However, government spending has risen 4% so far in fiscal 2018, with interest on the public debt, education and transportation accounting for some of the biggest increases.

— Brazilian food processor BRF may sell shares to boost case. The board of Brazilian food processing firm BRF has authorized the sale of up to 13.4 million shares, a move which could bring in up to 525.2 million reals ($165.4 million) to boost its cash position, according to a securities filing, The company Thursday reported a bigger-than-expected loss in its second quarter, the third consecutive quarterly decline as the impacts from the food safety scandal continue to impact Brazilian meat firms.

— CME lowers live cattle futures margins. Margins for live cattle futures speculators will be lowered to $1,925 per contract, down 14.6% from $2,255 per contract. The rate will be effective after the close of business today (August 11).