Economic Clouds Gather as Fears of Higher Rates and Weakening Conditions Linger

DENVER (July 14, 2022)—Effects from the pandemic and Ukraine war continue to reverberate through the global economy. Food and energy prices remain high, though prices for underlying commodities have lost upward momentum as economic fears rise. The drop in commodity prices and recent bond yield inversions are sending up red flags about slowing economic activity and a potential oncoming recession. 

The Federal Reserve is poised to raise rates until it believes inflation has been tamed. Unfortunately, the risk of over- or under-doing it is high given that the lag time between action and reaction in monetary policy can be long. For now, the Federal Reserve has the data it needs to move forward with a 75 basis point rate increase in July, and will be poised for another 50 or 75 basis point hike in September. 

After more than two years, Covid-related supply chain complications are finally easing and various metrics indicate improvements to supply chain performance both domestically and globally. However, those improvements have been modest and agricultural supply chains in particular remain broadly mired in dysfunction, according to a new quarterly report from CoBank’s Knowledge Exchange.  

“Warehouse and inventory costs are still rising at near-peak levels, and transportation costs are rising at a much higher rate than pre-pandemic,” said Dan Kowalski, vice president of CoBank’s Knowledge Exchange. “Grain rail car availability and prices were at multi-year lows and highs, respectively, in the second quarter. Although as consumer purchases of goods continues to soften, supply chains will slowly recover.” 

While agricultural and energy commodity supplies remain tight, shifts in speculative sentiment have brought prices down from their peaks. For agriculture, replenishing grain and oilseed supplies globally will require two growing seasons. And there is no relief in sight for natural gas supplies, ensuring power prices will remain high as well.

Grains, Farm Supply & Biofuels

Grain prices remained volatile in Q2 as markets continually reassessed a range of factors including the war in Ukraine, a smaller Brazilian soybean crop and ongoing dry conditions in the U.S. Wheat prices fell below $9.00/bushel as investors reduced their commodity exposure amid a rapidly cooling global economy. Grain and oilseed prices should experience upside pressure in the near term, due in part to tight global supplies of wheat and soybeans in particular. 

Ag retailers navigated a challenging spring agronomy season marked by input cost inflation, planting delays and producer cost-cutting efforts. Fertilizer prices began to ease in June but are likely to remain elevated compared to long-term averages. Mid-year crop ratings are better than a year ago but warm and dry conditions across the Corn Belt may limit yields. Farm supply co-ops will face additional risks going into the fall agronomy season. Asian-made crop protection chemicals continue to be in short supply and interest rate hikes will make borrowing more costly.

The U.S. ethanol complex delivered a strong Q2 with few signs of demand destruction despite a spike in retail gasoline prices and rising inflation. Operating margins remained favorable at $0.33/gallon, well above the five-year average of $0.22/gallon. Ethanol exports hit a four-year high of 185 million gallons in April, resulting in year-to-date growth of 67% through the first four months of 2022. 

Animal Protein & Dairy

Inflation is now the key risk to meat and poultry consumption, as the impact of COVID-19 on consumer food spending is diminishing. Retail meat and poultry prices were 18% higher in May compared to 2021 and both spot market supplies and freezer inventories are below pre-pandemic levels. The combination of tight supplies and steady demand kept meat prices 20% higher than the five-year average for the March-May period. 

Beef cow culling remains elevated as cattle ranchers and feeders grapple with poor pasture conditions and higher corn and hay prices. Declining cattle supplies are expected to converge with excess processing capacity over the next 12-18 months, which should contribute to more favorable conditions for producers. 

After several years of successful growth, U.S. pork exports are contracting in 2022 driven primarily by a reduction of exports to China. The volume of U.S. pork exports to China has fallen from over 160 million pounds per month in 2021 to about 40 million pounds per month in 2022.

Milk collections in the U.S. remained tight last quarter with record high milk prices prompting only a minimal expansion in the dairy herd. Despite tight supplies, milk continued to flow to cheese vats last quarter with cheese manufacturers building inventories to record levels. Conversely, U.S. butter inventories remain tight. High prices and strong demand for U.S. milkfat from both domestic and international sources pulled butter out of storage. 

Cotton, Rice & Specialty Crops

Fears that the rapidly decelerating global economy will stifle cotton demand has led December 2022 cotton futures to plummet 35% from their mid-May highs. However, CoBank economists believe the fears of plunging cotton demand may be overblown. Through April 2022, retail clothing store sales jumped 15% from a year ago, far outpacing the 5.8% increase in clothing prices over the same period. Additionally, the share of cotton fiber used in apparel has rebounded after more than a decade of decline. 

U.S. rice prices marked a new record high in Q1 2022, up 43% year-over-year, with the momentum carrying over into Q2. April rice imports were the second highest on record for the month, with combined imports year-to-date more than double the average pace over the past decade. With U.S. all-rice acreage falling once again per the June Acreage Report and USDA projecting higher rice production globally in 2022, another year of strong rice imports is ahead.

U.S. tree nut exports spiked in Q2 as port congestion eased and shipping container rates fell. Almond, walnut and pistachio exports charted a record high for the month of April and the momentum carried into May, according to position reports.

Record high produce prices following three years of drought in the Western U.S has hastened the pace of fruit and vegetable imports. With retail prices of fruit and vegetables rising while growers struggle to maintain production, imports are likely to fill the gap in the months ahead.

Power, Water & Communications

Steeply rising natural gas and coal prices could triple the price of wholesale electricity this summer, driving up electricity bills for consumers. While most consumers have already seen an increase in their monthly utility statements, an additional bump appears to be coming and the price of electricity is unlikely to drop anytime soon. Even as fuel prices begin to moderate, the need to upgrade and strengthen the grid against natural disasters will likely keep residential costs higher for longer. Unfortunately, high energy costs have a cascading effect, feeding inflation and hampering economic growth.

Investor interest in the data center market is showing no signs of slowing down as investors continue to pour money into the cloud. DigitalBridge, a global-scale digital infrastructure investor, announced plans to acquire Switch for $11 billion, marking the fourth major data center acquisition in the last year. Most enterprises are adopting a hybrid cloud approach, leveraging a combination of on-premise, colocation and cloud data management systems. Capacity constraints and inflationary costs are increasing the demand for third-party data center services. 

Read The Quarterly. Each CoBank Quarterly provides updates and an outlook for the Macro Economy and U.S. Agricultural Markets; Grains, Biofuels and Farm Supply; Animal Protein; Dairy; Cotton and Rice; Specialty Crops and Rural Infrastructure Industries.

About CoBank

CoBank is a cooperative bank serving vital industries across rural America. The bank provides loans, leases, export financing and other financial services to agribusinesses and rural power, water and communications providers in all 50 states. The bank also provides wholesale loans and other financial services to affiliated Farm Credit associations serving more than 76,000 farmers, ranchers and other rural borrowers in 23 states around the country.

CoBank is a member of the Farm Credit System, a nationwide network of banks and retail lending associations chartered to support the borrowing needs of U.S. agriculture, rural infrastructure and rural communities. Headquartered outside Denver, Colorado, CoBank serves customers from regional banking centers across the U.S. and also maintains an international representative office in Singapore.