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COVID-19 economic recovery may favor rural communities

CoBank report details how rural industries look to re-emerge post pandemic.

Rural industries are grappling with how to adjust their businesses to remain relevant and sustainable in the face of the coronavirus pandemic, however, rural industries may be better positioned to handle the days ahead. The recent rebound in the U.S. economy is real, but the sharpest post-shutdown economic gains are almost certainly behind us and a long grind to shore up a shaky economy lies ahead, according to a new Quarterly report from CoBank’s Knowledge Exchange.

“2020 will go down as a year when many American businesses were shaken. But we believe rural industries, bruised as they may be, will bounce back more resilient, wiser, and more efficient,” the report noted.

Unlike previous recessions, low population density is now vital for economic resilience in the face of COVID-19, said Dan Kowalski, vice president of CoBank’s Knowledge Exchange division. In many rural areas, shutdowns were shorter and the economic drag less dire. Survey data also indicates that regardless of the shutdowns, rural residents have felt comfortable venturing out in public sooner than their urban counterparts.

“Economic data prior to the recent resurgence of coronavirus cases has shown a consistent, steady improvement in the U.S. economy, coinciding with business re-openings,” said Kowalski. “But traditional economic data can go stale remarkably fast in the COVID era, making high-frequency economic indicators an essential tool. And those indicators are signaling a plateau, followed by a possible downshift in the economy.”

Kowalski added, “The coronavirus pandemic has dealt an economically devastating hand to nearly the whole country, metro and non-metro alike. But economic recovery may now favor rural communities for the first time in many years.”

Ag economic impact

Despite COVID-19, U.S. grain has been moving and basis has generally tightened since April 1. Wheat export activity has been strong and domestic demand has been healthy, as home-bound consumers buy more packaged food. China has been buying U.S. grain, although the run rate is below the levels agreed upon in phase one of the trade deal. Sorghum exports to China have been especially robust; sorghum basis has tightened meaningfully in response to strong export demand.

Farm supply retailers benefited from a healthy spring agronomy season and are well-positioned for the remainder of the growing season. Crop progress has been above average amidst favorable weather. USDA rated around 70% of corn, soybean, and spring wheat crops as good-to-excellent in its June 29 report. A surprise ruling against dicamba could have long-term implications for crop protection sales and advice.

Ethanol production and margins began to recover during the second quarter as U.S. economies began to reopen. However, coronavirus is resurging in several states and renewed activity restrictions will potentially reduce driving and fuel demand. Looking ahead to 2021, ethanol fuel demand may recover to only 85%–90% of pre-COVID levels.

U.S. chicken plants endured far less COVID-19 disruption in the second quarter than beef or pork. The chicken sector swiftly filled retail meat cases when demand shifted from foodservice and the red meat supply dropped. While chicken producers have been able to manage through their production disruptions, demand and prices have been volatile. CoBank analysts expect around 3% industry growth for the sector in 2020 as its value-proposition may appeal to U.S. consumers facing a difficult economic outlook.

Beef packing plant capacity fell to historic lows in late April, spiking the cutout value to record highs. Beef production and prices have now returned to pre-pandemic levels. Concern within the beef sector is now shifting from supply to demand. Food service traffic has improved, but many social distancing restrictions remain. This means ongoing challenges for the dine-in, full-service sector, which especially hurts the beef complex.

The pork industry has rebounded from a supply chain shock that saw U.S. production fall by nearly half, before climbing back to above prior-year levels two months later. Pork production in the last week of the quarter was up more than 10% above the same week a year ago as the industry is beginning to work through the backlog of hogs. Second quarter pork exports remained strong.

Dairy producers and processors struggled through extreme market volatility last quarter due to COVID-19. Milk, cheese, and butter prices fell to multi-year lows on steep losses in food service demand and record milk production. Cheddar block prices bounced to record highs on restaurant restocking, high demand from pizza chains, and government purchases. Milk and butter prices also recovered. Although, many farmers did not benefit from higher milk prices last quarter because of negative producer price differentials.

Rural broadband

Most rural telecommunications operators signed the FCC’s Keep Americans Connected pledge, which includes not disconnecting service for customers that who cannot pay their bill due to COVID-19-related economic stress. Offering free service has strained rural operators’ cash flow, which could impact future network build plans.

The FCC is calling on Congress to appropriate funds to cover costs incurred by telecom and cable operators. Rural operators have worked to ensure their community members stay or get connected. For example, when stay at home orders were issued, operators proactively reached out to school districts to locate and connect students who did not have internet access. “These sacrifices are admirable, but they cannot go on forever,” wrote Jeff Johnston, lead communications economist with CoBank’s Knowledge Exchange Division.

A Senate bill introduced on June 29 addresses future (not past) hardships for internet service providers that choose to continue in the spirit of the FCC’s Keep Americans Connected pledge. The proposed Emergency Broadband Connections Act would provide $50 per month to pay for broadband for workers who have been laid off or furloughed during the COVID-19 pandemic. In addition, the bill would seek to provide devices such as laptops and tablets to eligible households.

The U.S. energy sector is used to volatility in supply, but not profound changes in demand. For the first full month of COVID-19 stay-at-home advisories, April data shows U.S. electricity system peak demand levels hit 12-month record-setting lows, with net electricity generation decreasing 6.7% year-over-year. Demand recovery to pre-pandemic levels will be slow and the longer road to recovery makes it more likely that structural change is inevitable.

 

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