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Pandemic, economic hibernation disorienting ag outlook

Labor and supply chains among biggest challenges facing essential rural industries.

Krissa Welshans

April 3, 2020

5 Min Read
rural countryside with storm clouds

The COVID-19 pandemic has brought the U.S. economy to a screeching halt, ushering in a recession in the process. For most businesses, the sudden stop to the economy is more jolting than the financial crisis of 2008 and has forced them to make hard, immediate decisions about employees and finances. According to a new quarterly report from CoBank’s Knowledge Exchange, COVID-19 has also underscored the critically important nature of agriculture and other industries essential to rural America.

“This quarter will largely define the next year in terms of the economy and how severe the damage caused by the coronavirus will be,” Dan Kowalski, vice president of CoBank Knowledge Exchange, said.

While agriculture will be somewhat protected from experiencing the worst from the economic fallout, CoBank said food distribution has been disrupted almost overnight, causing processors of dairy products, meat and produce to reorient production and supply chains in real time. In fact, the report noted that many of the 13 million jobs in the foodservice industry have been eliminated, and grocery chains are hiring as they adjust to the monumental shift of consumers purchasing nearly 90% of their food at supermarkets, up from 48%.

“Nearly everyone will be impacted to varying degrees, and the pace of the recovery will be uneven, but the economy had been on good footing, and it’s entirely possible that we can get back to reasonable strength within a few quarters,” Kowalski said.

He explained, “Ushering an economy that accounts for 25% of global GDP [gross domestic product] through two months of dormancy, and trying to keep it relatively intact, will come at an expense this country has never experienced. The national deficit was expected to be roughly 5% of GDP in 2020 and now will be somewhere in the range of 12-13% -- the highest since World War II -- but not spending the trillions necessary to bridge the gap would have been catastrophic and left us with a country that would be unrecognizable when the tide of the crisis finally goes out.”

Specific to agriculture, the U.S. grain sector remains stuck in a rut, with pressure on commodity prices, a weakening basis for corn and soybeans in some markets and export volatility likely over the next two to three months. Since 2020 began, corn prices have declined by 12%, and soybeans prices have dropped by 7%.

While crop farming fundamentals remain challenging, agricultural retailers are entering the 2020 growing season on relatively stable footing. Retailers are optimistic for a full agronomy season, given pent-up demand for fertilizer and crop protection products following last year’s complicated and wet fall application season. However, much of the crop farming sector picture will hinge on weather.

The U.S. ethanol complex, on the other hand, is navigating through an extremely difficult operating environment, exacerbated by the recent collapse in crude oil and gasoline prices and a virtual overnight evaporation of demand. Several large players have restructured or exited the business, with more expected to do so over the next three months, CoBank reported.

The U.S. chicken industry entered 2020 with optimism largely driven by expectations for renewed exports to China. However, CoBank said that focus swiftly changed to the domestic market in early March when the spread of the COVID-19 dramatically shifted the U.S. market to at-home eating, boosting chicken demand. Chicken production grew 7.7% in the first two months of 2020.

The U.S. cattle complex has seen a swift and sharp decline in the last month, following the drop in global equities and oil prices. Since mid-January, April live cattle futures have fallen by approximately 25%. The beef complex profit pool is shifting in favor of packers at the cost of lower feeding margins. CoBank said the loss of restaurant and foodservice customers due to COVID-19 will test beef prices this spring.

China’s demand for U.S. pork has set export records, but it hasn’t led to strong prices or profit margins. While international demand has been significantly higher than last year, so has the U.S. pork supply, CoBank relayed.

“Hog producers are expected to realize negative margins through April before margins turn to positive territory this summer. To realize strong margins, producers will need strong export growth to continue,” the bank reported.

Overall, Kowalski said 2020 may be a breakeven or just slightly above breakeven year for the hog industry, “which would be quite a disappointment for the industry in light of the strong exports at the start of the year.”

According to CoBank, U.S. animal protein processors face two countervailing challenges in the coming months: the risk of plant reductions/shutdowns due to worker illnesses, and cold storage facilities reaching capacity.

Regarding the dairy sector, CoBank said milk prices have fallen precipitously in recent weeks due to COVID-19. The seasonal increase in milk supplies with the spring flush was met with economic weakness in China and other countries that decreased dairy exports. School closings have affected fluid milk consumption. CoBank said consumer stockpiling has boosted sales for nearly all dairy products -- including yogurt, butter, cheese, fluid milk and products containing a lot of dairy, such as frozen pizza -- but not enough to offset the foodservice-related losses.

Despite strong exports, cotton prices have sunk to new lows on fears of slower global economic growth. U.S. cotton exporters are optimistic about a faster export pace following India’s announcement of lockdown into the first half of April, which may impair India’s cotton export pace.

Meanwhile, rough rice futures surged to new highs, driven by a surge in retail rice sales and tighter global stocks.

U.S. specialty crop growers are fearing an even tighter labor situation unfolding this spring as processing of new H-2A visa applications in Mexico is impaired by COVID-19 complications. Specialty crop growers have benefited from the surge in produce sales at grocery stores but saw reduced exports due to logistical issues related to COVID-19.

Broad segments of the power and energy sectors are likely to realize falling revenues in the second quarter of 2020 and possibly beyond. Electric utilities will suffer from weakening electricity consumption by the commercial and industrial sectors. Rural water systems will also face challenges during the economic downturn.

About the Author(s)

Krissa Welshans

Livestock Editor

Krissa Welshans grew up on a crop farm and cow-calf operation in Marlette, Michigan. Welshans earned a bachelor’s degree in animal science from Michigan State University and master’s degree in public policy from New England College. She and her husband Brock run a show cattle operation in Henrietta, Texas, where they reside with their son, Wynn.

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