CoBank Quarterly: Electricity Supply Constraints put AI Boom and U.S. Economic Growth at Risk

DENVER (October 10, 2024) – Generative artificial intelligence applications have drawn billions of dollars in investments with the expectation of big productivity gains that will propel U.S. economic growth. But the proliferation of hyperscale data centers that power those applications is creating a widening imbalance between U.S. electricity demand and supply that could jeopardize those expectations.

Data centers currently account for approximately 4% of the country’s energy demand, but that number is expected to grow exponentially over the coming years. Many market participants believe the U.S. is 12-24 months away from not having enough electricity to run these power-hungry generative artificial intelligence data centers.

According to a new quarterly report from CoBank’s Knowledge Exchange, the growing imbalance between energy supply and demand could threaten U.S. economic growth. The report suggests AI adoption will be increasingly critical to economic growth given structural problems in the labor market.

“Economic growth is anchored in two core pillars, a growing workforce and technology that makes it more productive,” said Jeff Johnston, digital infrastructure economist with CoBank. “Growing the U.S. workforce will be a challenge given structural headwinds including an aging population, falling birth rates and a lack of immigration reform. That makes the adoption of technologies like generative AI applications and the operational efficiencies they deliver critically important to future economic growth.”

Historically, data center operators prioritized access to deeply integrated fiber networks and proximity to Fortune 500 companies as the main criteria for new site locations. That is no longer the case, as access to available power has become the top criterion. As a result, data center operators are increasingly looking to build new sites in rural markets where access to renewables and excess power is available.

U.S. Economy and Government Affairs
After months of anticipation, the Federal Reserve finally begin cutting interest rates in September in response to weakening labor market metrics and a series of tame inflation reports. But market expectations for higher long-term interest rates and widening yield spreads mean borrowing costs will not drop as much as some consumers and companies hope. Federal Open Market Committee members appear to agree the interest rate environment will remain higher than pre-pandemic levels through at least 2025.

While Congress will be in recess until after the November election, momentum is building to add the Farm Bill to the lame duck calendar. High interest rates, low commodity prices and multiple natural disasters are increasing the urgency for legislative progress. The current farm bill has now expired, and a simple extension of the old one is becoming less palatable with reference prices falling further out of date.

Grains, Farm Supply and Biofuels
U.S. farmers are harvesting a record-large soybean crop and the third-largest corn crop on top of large carryover stocks from the previous marketing year. The ample harvests coincide with a host of export headwinds including a strong U.S. dollar, stalled rail shipments into Mexico and low water levels on the Mississippi River. However, export demand is showing signs of recovery as droughts in Brazil and Russia send global grain and oilseed buyers back to the U.S.

Fertilizer prices have moderated and ag retailers are anticipating strong farmer spending on inputs this fall. Final 2024 expenses for fertilizer, pesticide, fuel and oil are expected to decline nearly 10% from 2023, mostly due to price reductions. While lower, input costs have not dropped in tandem with crop prices and remain above pre-pandemic levels. Many ag retailers are bolstering their input financing programs as a result.

U.S. ethanol production margins will benefit from lower corn and natural gas costs. Export demand remains strong, but more competition could be on the horizon with Brazil constructing new corn-ethanol plants. Soy oil demand for U.S. biofuel production continues to face headwinds from rising imports of used cooking oil and tallow, which are now estimated to account for 1 of every 6 gallons of biomass-based diesel produced in the U.S.

Animal Protein and Dairy
Despite rising prices, beef demand remained robust throughout the grilling season. Retail prices continued climbing through August, topping more than $8.60/lb. Price-sensitive consumers found relief in ample retail hamburger promotions. The composition of beef coming to market in 2024 has been more fed cattle, with more steers entering the feedlot than last year. Falling feed prices, a changing mix of cattle and tighter availability is contributing to higher cattle weights.

Hog production margins are improving on lower feed costs. Iowa State University estimates farrow-to-finish operators recorded their fifth consecutive month of positive margins in August. However, any expansion in production is unlikely as non-feed operational costs remain elevated. Pork prices should hold steady through the rest of the year as a result. Global pork demand remains robust, and the U.S. will likely overtake Europe as the leader in pork exports this year.

Chicken remains a leading growth segment for animal protein, as consumers seek value at the retail meat case. U.S. per capita chicken consumption is on pace to rise 1.5 lbs. in 2024. Consumer interest in both dark and white meat items is growing as marketers address inflation concerns. Broiler production was moderately higher through summer, with strong revenues for integrators.

Dairy farmers could experience some of the best margins in a decade given the combination of higher milk prices and falling grain costs. In July, milk production margins climbed to $12.33 per cwt., the highest level since May 2022. Forecasts for the remainder of the year expect margins to improve to nearly $16 per cwt. Cheese and butter prices have moved higher due to tighter milk supplies.

Cotton, Rice and Sugar
Hurricane Helene caused widespread cotton crop losses across the Southeastern U.S. The hurricane arrived with more than three-quarters of the crop in the region having open bolls, risking losses to crop quality. Other cotton-producing states across the South suffered crop losses from tropical rains in prior weeks. The estimated size of this year’s crop will be revised downward as the losses are tallied.

U.S. rice prices have defied the downward trend in grains amid tight Brazilian supplies. Brazilian rice prices now trade at a rare premium to U.S. prices. Export demand for U.S. long-grain rice in the Western Hemisphere remains robust. However, India’s return to the export market with non-basmati white rice after a year-long export ban will boost global rice supplies and pressure world prices.

U.S. sugar beet farmers are harvesting a record crop following a mild growing season. Domestic sugar cane production has also risen to record levels. Combined, the record crops will help replenish tight U.S. supplies following Mexico’s drought-stricken cane sugar harvest. Globally, drought and widespread fires in Brazil, the top sugar-exporter, have underpinned world sugar prices with Brazil’s harvest expected to fall.

Food and Beverage
National food and beverage brands continue to struggle with lower volume sales. Value is still top of mind for consumers, who are continuing cost-cutting behaviors set during the height of inflation. Grocery price increases have slowed, but a variety of segments are still well ahead of pre-pandemic levels. Retailers’ early start to the holiday shopping season is likely to keep budgets top of mind for consumers. Value menus have led to an uptick in restaurant traffic, but not enough to surpass grocery traffic growth.

Power and Digital Infrastructure
Residential energy spending now remains elevated beyond the traditional three-month peak seasons due to hotter summers and more volatile winters. As the seasonal relief from high energy bills during off-peak demand periods continues to wither away, affordability of electricity bills is becoming an acute concern. Nearly 80% of U.S. consumers indicate they are stressed over high household energy costs. Meanwhile, utilities continue to request rate increases at a record pace, with power delivery costs rising faster than generation costs.

The race to build fiber broadband networks in underserved markets is heating up. Operators have shown that when a new fiber network is built in a market that is only being served with hybrid fiber-coax and/or DSL, the fiber operator rapidly gains market share. Given the heightened urgency, broadband operators are looking for new loan structures that will accelerate their network build timeline. So called “loan to cost” structures enable operators to borrow money before the network begins to generate cash flow.

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; Food and Beverage industries and Rural Infrastructure.

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 77,000 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.