Meanwhile Back With My Soy Beans and an Orange Blossom Who Can’t Shoot Straight

So, here’s from the Farm Report:

Soybeans are lower, breaking the support line from their three-day rally overnight. Traders will continue to scour today’s export data for clue on how foreign buyers are responding to the bargains created by Chinese tariffs. Sales are expected to rise after disappointing results last week. Vegetable oil markets in Asia were lower today, losing around a fifth of a cent per pound.  September soybean oil futures in China fell to 36.844 cents and September palm oil futures in Malaysia were at 24.473 cents.

and on soy beans in particular…

If production doesn’t swell too much, November futures may try to hold the $8 level into the August report. USDA put the bottom of its average cash price for the 2018 crop at $8, a level already reached in many local markets around the country. It’s still a $2 climb back to profitability. But most growers appear to have priced a good chunk of their expected production when offered a good price this winter and spring.

Hold this thought — $8.00 per for soy bean farmers or — it’s a really bad year down on the farm. “USDA’s July 12 monthly report put a number on the lost revenue farmers face: $325 million in new crop sales. That number is based on the amount the agency lowered its price range for crop, 75 cents a bushel.” [WSR]  Soy bean prices are about $8.55, nearly a ten year low. [CNN money]

All right, it’s not that I am in the soy bean business. It’s not that I expect ANY reader of this blog to have any more connection to soy beans than the occasional purchase of soy milk.  It’s that the little beans are a metaphor, an anchor, a data point, to watch the inexplicable economic idiocy of the current administration ensconced in the Oval Office.

Those slap dash, ham-fisted, wild west, off the cuff, distributive bargaining ploy, grandiose threats and counter threats being on offer from the mis-administration in lieu of any real coordinated trade strategy and policy have real world consequences for real world people — people like Iowa soy bean farmers who can’t take the hit if soy bean prices drop below $6.00.  Did we notice all those “ifs” and assumptions in the USDA pricing report?  Like automobile manufacturers in South Carolina who don’t have to take a hit if moving export production to friendlier climes will put money back into their bottom lines.  Like household appliance manufacturers who thought tariffs were such a lovely idea when they were on Samsung and LG, but on steel and aluminum not so much.

We have a *President who can’t get to “yes.”  He couldn’t get to “yes,” on a health care bill and ended up with a bill he didn’t want.  He couldn’t get to “yes” on a DACA bill, and no one’s ended up with anything at all.  He couldn’t get to “yes” on immigration policy, and ended up with a court order to reunite families in which he, in all likelihood, cannot make yet another deadline.  He can’t get to “yes” on NAFTA terms with Mexico and Canada.  He can’t get to “yes” with Asian regional trade and commerce agreements.  He just can’t get to “yes.”

My way or the highway distributive bargaining works when I want to purchase a vehicle and there are 15 dealerships in a 50 mile radius.  As noted before, the bottom line is the “walk away” point. However, there is no other China, no other Mexico, no other Canada, no other European Union, no other United Kingdom, no other Germany, no other Japan, no other France, no other Brazil.  There is no Walking Away point because there is no other place to walk to.

The price of soy beans (or cars, refrigerators, beer cans, or washing machines) cannot be determined by simply yelling at the dealer, threatening to bludgeon him with penalties,  loudly pronouncing another salvo of letters to the editor about their poor service, and later threatening to sue for ‘false’ something or another.  We have a global economy based on supply and demand principles which Orange Blossom pretends to understand, but which he provides scant evidence thereof.

And NOW he wants to weigh in (at over 239 pounds) on what the Federal Reserve should be doing with interest rates!  [CNBC]

Will someone, anyone, please take him down to that portion of the White House where the last evidence of the fire set by British troops on August 24, 1814 remains, lock him there, quietly close whatever doors are behind him — or at least make him SHUT THE H___ UP?

Orange Blossom’s Special: Or How To Bargain Against Your Own Best Interests?

Remember when Orange Blossom told us Russia is our “competitor,” and we looked at the GDP comparisons of our real competitor (China) and our 11th ranked “competitor” in terms of GDP — the Russian Federation?  Then there was the time DB went off on “distributive negotiations vs. integrated negotiations,” and allowed as how the integrated form was just a bit too deep for our Siberian Candidate?  If we put these two concepts together there’s more cause for alarm in regard to our dealing with global trade matters, some of which flow nicely over into global security concerns.

We also need to recall Senator McCain’s observation that the Russian Federation is a gas pump masquerading as a country.  Thus:

“Compared to Canada and Australia, Russia’s export mix isn’t nearly as diversified: About half of its exports in terms of value are a combination of oil and natural gas. (Russia sits atop the third-largest oil reserves in the world, the number one natural gas reserves.) It should come as no surprise, then, that its currency is highly influenced by Brent oil. Where oil went starting in July 2014, so went the ruble.”  [USfunds]

That direction would be down.  Notice the date: 2014.  By December 2014 Russia was in a recession. [CNN money]  As of August 2016 Russia was in the throes of an 18 month recession. [CNN money] It’s not until May 2017 that the World Bank was ready to declare Russia waa in “recovery” mode.

“Growing macro-stability, driven by the government’s policy response package of a flexible exchange rate policy, expenditure cuts, and bank recapitalization – along with tapping into the Reserve Fund – has helped facilitate the adjustment of an economy hit by the double shocks of low oil prices and restricted access to international financial markets. The positive terms-of-trade effect from rising oil prices, coupled with more stable macroeconomic conditions, are expected to drive Russia’s economic recovery going forward.” May 23, 2017 [ WorldBank]

Now, let’s dive into the polite verbiage in this paragraph.  It’s ever so polite.  The second thing the Russians had to do was “make expenditure cuts,”  — can we say “austerity?”  By 2016 the Russian government was well into “austerity:”

Russia is preparing to slash government spending across the board over the next three years as it struggles to bring down a budget deficit swollen by lower oil prices and recession. Deep cuts are looming for health, education and even defence — which is slated for a swingeing 27 per cent reduction in expenditure next year, according to a draft budget that the government submitted to parliament late on Friday. [FinancialTimes]

Yes, even the vaunted military budget of  the Russian Federation was under the hammer in late 2016.  And did we catch that part about “restricted access to international financial markets?”  We now introduce the Magnitsky Act!  First enacted in 2012, and then there’s this bit: “Since 2016 the bill, which applies globally, “authorizes governments to sanctioof n human rights offenders in Russia, freeze their foreign assets, and ban them from entering the signing country.”  Why does the Kremlin care so deeply about the Magnitsky Act? See Slate, see The Atlantic, see the San Diego Union Tribune.   The oligarchs already had problems “accessing” financial markets, and the Magnitsky Act topped off the sundae.  And as for bank bailouts… the US has nothing on what the Russians had to do with their bank “recapitalization.” [Reuters 2015] [Reuters September 2017] [Moody’s 2018]

So here we are.  We have a gas pump masquerading as a country, with a GDP of $1.283 trillion.  Okay it’s not exactly fair to compare US states with entire countries, but who’s playing fair?  Our entire “gas pump masquerading as a country” has a smaller GDP than three individual US states.

 Ouch.

Here we go again.  Mr. Orange Blossom Siberian Candidate, masquerading as  a US president, has been noticeably eager to avoid applying those sticky sanctions against the Russian oligarchs (of the Magnitsky Act variety) and had to get hog tied by a veto proof majority bill applying sanctions.  All bright smiles and twinkly eyes about a distributive bargain in which he gives up those icky sanctions (and facilitates access to financial markets) in exchange for ________________??  In which he slaps trade penalties on our real competitor (China) in exchange for _____________________??  In which he wants to make big deals with a nation with a very narrow economy (did I mention gas pump disguised as a country?)  With which he wants to conduct distributive bargaining while one economy is the largest on planet Earth and the other is smaller than three individual states part of that biggest economy on planet Earth?

So we’re going to get brassy with our top three trading partners, China, Canada, and Mexico [Forbes] and then get obnoxious with the Japanese (did we keep them in the loop when dealing with North Korea?), followed by calling the EU a “foe,” (GDP $17,308,862 million), insult Germany, France, and the UK, while ignoring India and Italy. Oh, and that thing about slapping tariffs on South Korean refrigerators … well, now Whirlpool is upset because those tariffs they applauded on the fridges just got really complicated when the Orange Blossom Special slapped on steel tariffs. [WSJ] [Bloomberg]  Oh well, DB’s been bouncing up and down for a while now complaining that integrated bargaining, nuanced negotiation, and multi-faceted layers of critical analysis and evaluation weren’t something often associated with the Orange Blossom Special.

And, the worst of it all seems to be that OBS never seems to actually GET anything.  We’ve got a big nothing-burger from North Korea, trade dispute referrals from Canada, Mexico, and China, nothing out of the renegotiation of NAFTA, nothing from EU/Japan trade deals, nothing from Australian/Japanese/Chinese regional trade deals.  Nothing so far.

If China is our true competitor, then why are we driving Chinese buyers into Russian soy bean markets?  (See, I told you I could get my soy beans into almost any post!)  If we want to compete with China, then why are we encouraging them to negotiate deals with the European Union?  Don’t WE want the business?

When a country doesn’t carefully evaluate who are its competitors, who are its friendly competitors, who are its adversaries, and who are its enemies; and, then doesn’t engage in the integrated bargaining necessary to cope with the ramifications and results of trade and economic negotiations the results are messy at best, and dismal at worst.  The Orange Blossom Special is off the rails, chasing the Gas Pump into a swamp, and one more metaphor and I will have rendered this paragraph as incomprehensible as Trump Administration Trade Policy.

Soy Beans: Wherein DB goes off again on her soy beans while readers roll their eyes.

A note to patient and loving readers: These are soy beans.  I know, I’ve regaled you with soy beans before.  However, please allow me some latitude to discuss them once again.  The blessed little beans are illustrative of many issues related to the mis-administration of the Angry Man Baby occupying the White House and his minions.  

Let’s begin with what we do with soy beans, and please let’s get past the soy sauce and soy milk bit.  A sixty pound bushel of soy beans will yield about 11 pounds of crude soy bean oil and 47 pounds of soy bean meal.  The beans are about 18% oil and 38% protein.  Trust me, this is good — and it’s especially good for animal feed.  [NCsoy] Thus, most of the commercial use of soy beans goes for animal feed and a smaller amount goes for human consumption wherein we get back to the soy sauce, soy milk, soy flour, and our tofu.  But wait! There are other commercial and industrial uses for soy by-products as well and here’s a partial list:  Biodiesel fuel; biocomposites creating everything from countertops  to furniture to flooring to particle board and even to recycled newspaper. A person could sit at a kitchen counter containing soy while reading a newspaper containing soy, printed with soy ink, while the toddler marks the kitchen wall with a soy based crayon.  A person could escape all this because there are hydraulic fluids and lubricants which are soy based, and even automobile upholstery can be manufactured with soy containing elements.  In short, DB rants about soy beans because they can be environmentally friendly little Glycine Max’s which don’t have just a market, but have several markets — agricultural, commercial, and industrial.

Who grows these things?  We do. The United States of America leads the world in soy bean production with about 108 million metric tons per year.  Brazil produces about 86.8 million metric tons annually.  Argentina grows approximately 53.4 metric tons per year, and China adds another 12.2 million metric tons annually.  India comes in around 5th place in world production with 10.5 million metric tons, then Paraguay chips in another 10 million.  Canada produces approximately 6 million metric tons, Ukraine adds another 3.9 million, and Bolivia grows 3.3 million metric tons.  Last but not least Uruguay comes in with annual production of 3.2 million metric tons.  [WorldAtlas] Notice something about the names of the countries on this list?

One thing that pops out is that one country, China, has been singled out as a competitor, while the others are traditional American allies in diplomatic terms.  Remember that thing about integrated and distributive bargaining?  Recall that integrated bargaining requires negotiators (on trade and other matters) to consider their mutual interests along with the issues upon which they have issues to resolve.  Hold this thought.

Now consider Farmer Jones in eastern Nebraska who grows soy beans and sells his 60 pound bushels to a grain dealer — in dollars.  The financial markets kick in, as with every other commodity there is “future trading.”  At the moment, China, the largest soy bean importer has reduced its purchases of US soy beans, the price of soy beans got so cheap that other countries started to increase their orders from American dealers.  [Bloomberg] Sounds good so far, but caveat emptor.  This puts soy bean values at “fire sale” levels for our allies in Brazil, Argentina, India, Paraguay, Canada, Ukraine, Bolivia, and Uruguay.  So, let’s talk about Brazil for a second or two.

Back in 2011 the US and Brazil signed an Agreement on Trade and Economic Development.  Here comes that integrated bargaining component again, because the framework isn’t just about who sells what individual products to whom, but how the two nations can expand direct trade and investment relationships, incorporating reducing trade barriers and sharing innovations.  It appears to be working, at least if we note the report from the US Trade Representative: “U.S. goods and services trade with Brazil totaled an estimated $88.2 billion in 2016. Exports were $55.2 billion; imports were $33.0 billion. The U.S. goods and services trade surplus with Brazil was $22.3 billion in 2016.”   And, there’s some other nice bits:

The top export categories (2-digit HS) in 2016 were: mineral fuels ($5.0 billion), aircraft ($4.8 billion), machinery ($3.6 billion), electrical machinery ($3.1 billion), and optical and medical instruments ($1.7 billion).

U.S. total exports of agricultural products to Brazil totaled $899 million in 2016. Leading domestic export categories include: wheat ($316 million), prepared food ($54 million), dairy products ($47 million), cotton ($47 million), and feeds & fodders nesoi ($42 million).

U.S. exports of services to Brazil were an estimated $24.9 billion in 2016, 11.4% ($3.2 billion) less than 2015, but 235% greater than 2006 levels.  Leading services exports from the U.S. to Brazil, in 2015, were in the travel, transport, and telecommunications, computer, and information services sectors. [USTR]

Thus, the Brazilians are exchanging their Brazilian reals (current exchange rate 0.26/dollar) to buy US mineral fuels, electrical machinery, processed food, medical equipment, telecommunications systems, computer gear, and IT services from us, among other trade goods and services.  Now, ask the question: Do we really want their soy beans on the market at fire sale prices earning fewer “reals” when we want them to exchange those “reals” into US dollars to buy travel, computer, and IT services?  Fuel? Medical equipment? Aircraft? Our agricultural products? At what point does our “winning” come back to haunt us?

Or, consider this from our competitor’s side of the frame. China.  Again, with our little soy beans:

While the Asian nation is targeting a slew of American farm goods in this round of taxes, soybeans are the top agricultural commodity the country imports from the U.S. by far. The oilseed, used to make cooking oil and animal feed, accounts for about 60 percent of the U.S.’s $20 billion of agricultural exports to China. Before the tariffs were announced, a study by the University of Tennessee forecast that a 25 percent duty would spark a drop in American shipments of at least $4.5 billion. Brazil, already the world’s biggest soybean shipper, is set to be the biggest winner, filling the gap left by the U. [Bloomberg]

Wow, there comes Brazil again! Now the Chinese are exchanging their yuan (current exchange rate 0.15/US dollar) for Brazilian reals in order to buy their Brazilian soy beans.  And those grain deals? — they aren’t being made with US grain dealers in dollars, they are being made using yuan/reals.  Lower demand for the US dollar? There’s a delicate balancing act playing out in international currency markets every day. In our integrated system of international trade the old distributive system of winners and losers doesn’t serve very well. The agricultural market is connected to the futures market, the futures market is connected to the commodities market, the commodities markets are connected to the financial markets, the financial markets are connected to the currency markets… “foot bone connected to ankle bone, ankle to leg, leg to hip, hip to back bone,” right up the economic body with the old song as metaphor for the global economy.

And, we haven’t even talked about whether or not we want China to pick up more of our national treasuries to keep financial markets steady?  So, this is why DB gets excited about her soy beans, and other components of US trade and economic development.  It’s not that I am fascinated with soy sauce on my chow mein, or even on my potstickers, but because the little beans are illustrative of wider, larger, economic issues which seem much more important than whether my soy sauce is embellished with hot peppers.

Distributive Bargaining, or How Not To Make Friends and Influence People

Okay, we know that our baby boy in the White House isn’t exactly one to pore over reports, briefs, and academic papers, but his behavior in several realms is beginning to attract notice from those who do — especially people who muse about such things as distributive bargaining.  This first drew publicity back in August 2017 when experts were dismayed at his use of distributive bargaining in inappropriate settings. [HuffPo] Harken back to the early days of baby boy’s dealings with Mexico and Australia, over The Wall and refugees.

“Nobody wants to feel taken. Effective negotiators recognize that once we understand each other’s underlying interests, we can truly invent options for mutual gain,” said Shapiro, who wrote the book Negotiating the Nonnegotiable: How to Resolve Your Most Emotionally Charged Conflicts. “These leaders behind closed doors need to feel comfortable sharing information with one another so they can start figuring out options that address each of their constituency’s interests.”

Mexico didn’t want to feel “taken” by The Wall, nor did Australia want to be “taken” by being strong armed into breaking a U.S-Australian deal on refugees.  Unfortunately, baby boy’s negotiation style fits into the classic distributive bargaining definition:

‘The ultimate aim, under distributive bargaining approach, is not to come to a win-win kind of situation but that one side wins as much they can. Both parties will try to get the maximum share from the asset or resource which needs to be distributed.”[EconTimes]

Nothing creates instant impasse quite so well as setting out intractable positions and demanding one side accept terms which are in essence a loss in order to appease the more bellicose of the two bargainers. Baby boy is the more bellicose of the bargainers.  At this point, it’s relevant to address the difference between distributive bargaining and integrated bargaining.

In distributive bargaining the Big Point is the Walk Away Position.  That would be the point at which I would walk away from the car dealership if the make, model, and price of the vehicle in question wasn’t what comported with my financial situation and personal needs.  After all there are other dealerships, and I can safely ignore my other competitors.  If I were to consider my competition I’d want to engage in integrative bargaining, also sometimes called productive bargaining.

 “In integrative bargaining, each party works at understanding what the other really needs out of the negotiation. This, in turn, depends on being able to question the other party about their interests, or otherwise discover what they really are (i.e. it is possible for one party to lead into this process even if the other party initially is not cooperative). In integrative bargaining, parties will tend to avoid taking arbitrary “positions,” while still being assertive about their needs. This approach is clearly distinguishable from “distributive” or “positional” bargaining, in which the usual sequence is for one party to start unrealistically “high” and the other to start low, with successive offers narrowing the difference — without either party really understanding what the other seeks to achieve.” [BICK]

While we could say distributive bargaining is product driven, we could assert that integrated bargaining is process driven.  This is a bit too simplistic, but then our baby boy on Pennsylvania Avenue isn’t all that interested in complicated, nuanced, matters, so let’s keep it simple for him.

Much integrated bargaining was done during the negotiating process for the Trans Pacific Partnership — which had its problems, however being intractable and simplistic wasn’t one.  The bargaining also assumed there were not one but several layers and levels of interests involved.  The US wanted to get a handle on Chinese statutes on intellectual property rights. The Chinese were interested in involvement in a regional trade scheme.  The US was interested in Chinese purchases of US debt, thus keeping interest rates under control.  The Japanese were interested in securing their interests in the Pacific region with both the US and the Chinese, and with the Australians.  The Australians were (are) interested in securing markets for goods and services while maintaining strong diplomatic ties to western Europe and the United States.  And so on.  There were 12 nations in on the negotiations.  So, baby boy blew it up.  [BBC] See also: WaPo April 2017.

On the third day of his presidency, Trump signs an executive order withdrawing the United States from the Trans-Pacific Partnership. “Everyone knows what that means right? We’ve been talking about this for a long time,” Trump says as he signs the order. “Great thing for the American worker, what we just did.”  [WaPo]

Not. So. Fast.  First, on July 14, 2017 those 11 other nations which had been involved in the integrated bargaining over the TPP terms signed an agreement without the US.  They get what they wanted…we get to twiddle our thumbs?  And we’ve still not come to any agreement with the Chinese about their handling of intellectual property rights.  Punditty types on my television set are wringing hands and clutching pearls as the US and China descend into trade/tariff war territory — “but but but what about the intellectual property rights — the real issue between the two countries? — they moan into their microphones. What about it?

When Baby Boy shifted US bargaining from integrated to distributive negotiations he shaved off the need to consider the needs of our competitors and our interest in dealing with the issues on a multi-layered basis, and went straight for the Winner Takes All distributive bargaining model. So, if we’re wondering what’s going wrong in regard to our trade relations with our two largest markets, Canada and Mexico, and our problems with China, and our issues with the European Union… look no further than Baby Boy and his one size fits nothing distributive bargaining model.

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More information at:

Economic Times, Definition of Distributive Bargaining.  Beyond Intractability, Distributive Bargaining. University of Colorado-Boulder, Distributive Bargaining.  Harvard PON Distributive Bargaining Strategies.  Small Business Chronicle, Distributive and Integrative Bargaining.