CoBank: U.S. economic slowdown likely ahead
Full impact of monetary policy actions have yet to be felt
The U.S. economy continues to defy gravity and remains strong despite lingering inflationary pressures, higher borrowing costs and a barrage of other headwinds. Consumers continue to spend aggressively on services, businesses are still investing and the labor market remains incredibly strong. Secure jobs are the most important element in consumer spending and well-employed Americans have powered the economic recovery for three years.
However, looming risks to the economy are increasing in number and size. According to a new quarterly report from CoBank’s Knowledge Exchange, the full impact of monetary policy actions—raising interest rates, quantitative easing and contracting the money supply—have yet to be felt. Those policy actions, combined with depleted consumer savings, tighter commercial bank lending standards and the persistently inverted yield curve are likely to result in a mild recession by the fourth quarter of 2023.
“There is still a lot of wind at the back of this economy, and we don’t believe a severe contraction is coming,” said Dan Kowalski, vice president of CoBank’s Knowledge Exchange. “But we do believe it is important to not misinterpret delayed impacts for minimal impacts. Monetary effects can be slow in developing, and history tells us that the economy can seem just fine right before a recession hits.”
The labor market remains relatively tight, but the situation has improved significantly as female and non-native workers have stormed back into the work force. The labor force participation rate for women between the ages of 25-54 now stands at an all-time high, up more than 4% from the low in April 2020.
Foreign-born employment has increased at roughly double the pace of native-born employment since April 2020. The successes in these two groups have been critical so far in the economic recovery. But looking forward, it raises the question of how many more workers are available to be coaxed in off the sidelines. Ultimately, the U.S. labor force challenges are far from over.
Grains, farm supply & biofuels
With the corn and soybean growing season in full swing, drought across the Central U.S. is driving heightened seasonal market volatility. Markets are balancing the quickly deteriorating crop conditions against the potential for El Nino to bring wetter conditions later in the growing season. Wheat harvest is advancing northward in the U.S. and is revealing high variability in crop quality. USDA expects the U.S. hard red winter wheat crop to be the smallest since 1957 on substantially higher abandonments and lower yields.
Ag retailers faced a more challenging environment in the second quarter as fertilizer prices continued to fall. Prices were weighed down by reduced demand, as farmers took advantage of pre-payment programs last fall to purchase fertilizer in advance. Despite an overall slowdown in inflation, ag retailers continued to face rising costs, especially for property insurance. Grain and farm supply cooperatives paid about 50% more for property and casualty insurance coverage during the January and April 2023 renewal seasons.
The ethanol complex delivered strong second quarter results with steady production and above-average profitability. Operating margins averaged 45 cents per gallon, nearly double the long-term average. While the finalized blending requirements under the Renewable Fuel Standard (RFS) were somewhat disappointing for ethanol, they were incrementally positive for biomass-based diesel. The new rules call for 2.82 billion gallons of biodiesel and renewable diesel in 2023 and 3.35 billion gallons in 2025.
Animal protein & dairy
As the summer grilling season kicked off, beef demand remained incredibly resilient despite elevated prices for consumers. Retail beef prices averaged $7.50 per pound in May, a record high for the period, and an increase of 2% year-over-year. Robust demand combined with tighter cattle supplies spurred market momentum for cattle. Fed cattle values reached record levels, above $180 per cwt. and feeder cattle shot above $240 per cwt. While consumers have yet to balk at higher beef prices, things could quickly change when seasonal support wanes.
Excess hog supply and weak pork demand put hog prices in jeopardy this spring. After a steady start to the year, the CME lean hog index tumbled about $10/cwt., to $72 from mid-March to late April. However, more favorable market conditions across the animal protein segment drove lean hog values up 30% through May and June. While still down about $15 year-over-year, the pork cutout landed in the upper $90s, gaining about $20 per cwt. through the quarter.
Domestic chicken consumption was up about 4% year-over-year through June 1, which has helped chip away at elevated cold storage holdings. Wholesale broiler meat prices have largely rebounded to pre-pandemic levels, following significant declines in late 2022 and early 2023. Feed costs have come down about 10% from last year but remain well above their historic averages. For broiler integrators, increased feed costs coupled with higher operational expenses have crimped profitability.
U.S. milk producers continue to struggle in the current price environment. The national all-in mailbox milk price has dropped below the $20/cwt. mark after averaging $25.34/cwt. in 2022. While several factors are to blame for this year’s milk price decline, the sharp drop in American/cheddar-style cheese prices is the most significant. Prices for the category have dropped by one-third since the beginning of the year. Milk and feed futures suggest producer profitability should improve considerably by October when Class III milk prices are anticipated to increase by about $3.00/cwt.
Cotton, rice & specialty crops
U.S. cotton production is rebounding from last year’s crop that was devastated by extreme drought across the southwest. Recent rainfall in top-producing Texas is expected to reduce abandonment following three years of severe drought. The U.S. cotton crop is now estimated at 16.5 million bales, up 14% from last year. Price inflation for clothing and apparel in the U.S. continues to ease with the moderation of cotton prices, which may work to draw in new consumer demand.
U.S. rice production is expected to recover from last year’s small crop, although concerns over dryness and worsening conditions in the mid-South have led to increased volatility of rough rice prices. With improved water availability this year, California medium grain rice production is also expected to rebound with planted acreage at 465,000 acres. That’s a substantial increase from last year’s planted acreage of 220,000 acres that were restricted by historic drought conditions.
Sugar prices remain historically high as markets ration tight global supplies. USDA currently calls for a rebound in world sugar production for 2023-2024, but concerns are growing that El Nino will result in smaller harvests in 2023-2024. In the U.S., there is no relief in sight for high prices as wet weather delayed planting across northern states this spring, which resulted in a smaller U.S. sugarbeet crop.
The tight farm labor market continues to be especially challenging for U.S. specialty crop producers. The Federal Reserve Bank of San Francisco reported that weekly median wages for farm workers swelled to a record high $915 in April, a 24% increase from the year earlier. In June, the House Agriculture Committee created a bipartisan working group, tasked with evaluating the H-2A program and finding solutions for the labor supply challenges facing farmers.
The full report can be accessed here.
