Washington Insider -Wednesday

Proposed Sanctions Over COOL

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

Russian Food Processors Call for Import Ban to be Eased

In the wake of Russia's ban on Western farm goods, the country's meat and dairy processors are calling on their government to do more to ensure adequate supplies of raw materials from abroad.

In a letter to Arkady Dvorkovich, Russia's deputy prime minister, PepsiCo's Russian operation asks the government to lift the embargo imposed on imports of dried milk products, and in particular skim milk powder, whole milk powder and butter. PepsiCo says it has an acute need for these and needs to source them from the EU, in particular from the Netherlands. Other Russian meat and dairy processors also are sharing PepsiCo's pain during the current crisis.

Meanwhile, Russian government ministers continue to insist shortages will soon be overcome thanks to an expected increase in domestic production and supplies from countries not covered by the embargo. But a new report from the European Bank for Reconstruction and Development suggests expansion will be hampered by low business confidence, restricting the access of companies to international capital markets and contributing to capital flight.

Other government officials have tried to calm food processors and consumers by noting that the import ban has only a one-year duration, implying that everything could be back to normal by mid-2015. Of course, there is no assurance that the ban will be allowed to expire after a year. And even if it is, many in Russia will be asking what was accomplished by the inconvenience of tight food supplies and higher food prices.

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Vitter Calls on EPA to Approve Increased Use of Ozone-Depleting Methyl Bromide

Sen. David Vitter, R-La., the ranking member on the Senate Environment and Public Works Committee, is lobbying the Environmental Protection Agency to consider issuing additional exemptions to allow greater use of the fumigant methyl bromide. The chemical has been largely phased out in the United States and abroad due to its ozone-depleting properties.

In the agricultural industry, methyl bromide is used mainly as a soil fumigant and for fumigating grain storage facilities. EPA gradually phased out its use from 1993 until 2005 in accordance with the Montreal Protocol treaty, which seeks to limit the use of ozone-damaging substances. Use of the chemical is now allowed in the United States only through a critical use exemption, which must be approved not only by EPA but also by the other nations that signed the Montreal Protocol.

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In a letter to EPA, Vitter tells agency Administrator Gina McCarthy about a peach farmer in his state who, because he no longer has access to methyl bromide, has seen his orchard shrink by 80% over the last decade, thus threatening "the annual [Ruston, La.] Peach Festival, which draws thousands of visitors each year."

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Washington Insider: Proposed Sanctions Over COOL

The findings of the World Trade Organization Dispute Settlement Panel on the challenge to the U.S. country of origin labeling program were reported some time ago, but that neither the principals nor the WTO are releasing the outcome at this time. In the meantime, interest groups are providing their own spin on the situations, suggesting that while WTO is no fan of the policy, it may be unwilling to conclude that it causes sufficient damage to support sanctions.

That has been comforting for U.S. COOL advocates for much of the summer, but now news is seeping out from Mexico. The story there is that serious preparations are underway to respond to the WTO ruling quickly and that the sanctions being considered could cost U.S. exporters $560 million for losses linked to program.

The dispute itself over damages to Mexico and Canadian cattle industries dates back to 2008 when cattle industry leaders in both nations filed for a WTO intervention on the grounds that the labeling requirement represented an unfair non-tariff trade barrier, press reports indicate.

"Mexico will continue to exert its rights within the framework of the WTO, including retaliatory measures, until the United States lives up to its obligations in this matter," Mexico's Economy Minister Ildefonso Guajardo stated in a response to questions regarding the pre-release of the WTO ruling.

Given the shortage of pastureland and high price of feed in northern Mexico, the cattle industry there normally sells calves to cattle ranchers in Texas and other border states. COOL calls for beef derived from calves originating in Mexico to be labeled as such, even though a significant part of the production cycle occurs in the United States. That, in turn, requires costly segregation of the animals and meat derived from them throughout the supply chain. This allows U.S. cattlemen to pay less for animals originating in Mexico, observers say.

Lost value and volume of Mexican calf exports underscore the effects of COOL, Mexican cattlemen argue. At a Mexican Foreign Trade Conference held earlier this month, Mexico's Assistant Trade Secretary Francisco de Rosenzweig issued an industry status report estimating COOL-related losses to Mexican calf exporters at between $80 and $90 per head, which is compounded by a reduction in export sales.

He pointed out that during the four years running up to COOL implementation, Mexican cattle exports averaged 1.2 million head per year, but by 2013 that number had dropped to 647,000.

Full details of the WTO ruling are scheduled for release in October and Mexican agricultural officials anticipate that the United States will have a 60-day grace period in which to modify or eliminate the COOL mandate. Rather than wait, the Mexican agriculture ministry has released a list of U.S. products that will bear the burden of WTO authorized compensatory tariffs.

These targeted sectors include dairy products, fruit, juice, meat, and vegetables — sectors in which Mexican producers often find it difficult to compete with high-volume shipments from the United States especially when they enjoy preferential tariff treatment under the North America Free Trade Agreement.

U.S. producers are aware of the fact that Mexico depends heavily on U.S. food imports, and U.S. exports to Mexico totaled $18.1 billion in 2013, making it the third largest U.S. agricultural export market. Leading categories include: corn ($1.8 billion), soybeans ($1.5 billion), dairy products ($1.4 billion), pork and pork products ($1.2 billion), and poultry meat (excluding eggs) ($1.2 billion). An abrupt decline in the inflow of these products would be expected to lead to painful shortages and consumer price inflation in Mexico, as well as reduced revenues for U.S. exporters.

There is an additional factor, however, since sanctions on U.S. products could punish consumers at a time the United States is considering retaliation against Mexican sugar exports. Assuming that the U.S. fails to back away from the COOL mandate, Mexican trade officials will be forced to play a difficult hand that balances demands for retaliation with the ongoing need to import food staples.

However, Mexican sentiment against COOL and its consequences is running very strong, observers note, and many expect that Mexican authorities will see all available sanctions as essential in confronting U.S. protectionist moves under COOL and implementing sugar provisions under the North American Free Trade Agreement.

So, crucial confrontations are looming between the United States and large, crucial Mexican markets this fall. The stakes are high, and have the potential to affect many crop and meat commodity markets — and, should be watched carefully as these fights take shape, Washington Insider believes.


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