CoBank Quarterly: US monetary policy poised to replace COVID as economic wildcard


With the economy on solid ground, Federal Reserve decisions will have outsized influence

DENVER (January 13, 2022)—Despite rising COVID cases and related complications, the U.S. economy continues to thrive. Workers regularly return to the labor market; the unemployment rate is currently below 4% and consumers continue to spend with confidence.

Until the omicron push subsides, the biggest economic risk will be millions of workers reporting sick and hampering already beleaguered supply chains. The impacts for the food and agriculture sectors will vary widely by product, but will generally be less severe than at the start of the pandemic, according to a new quarterly report from CoBank’s Knowledge Exchange.

“Economic risks from new, high-impact coronavirus variants will persist through 2022,” said Dan Kowalski, vice president of CoBank’s Knowledge Exchange division. “But Americans are increasingly making peace with the idea that the virus, in one form or another, will be with us for months or even years, and we need to find a way to live more normally with it. This change in mindset will reduce the risks to the economy to some extent.

By the end of December, the United States had recovered 84% of the jobs lost since the start of the pandemic, which is equivalent to a deficit of 3.6 million fewer workers compared to the start of 2020. The outlook for the chain of supply have improved thanks to the increase in the number of workers in warehousing and transport. Since May 2020, the United States has added 800,000 jobs in both sectors, eclipsing the number of pre-COVID jobs by 3%.

As the labor market approaches full employment, the Federal Reserve’s latest arguments for maintaining its very accommodative monetary policy are losing their value. With the market now pricing in a drastic change in monetary policy, the tightening of financial conditions has begun.

Cereals, agricultural supplies and biofuels

Corn and soybean futures traded higher in the fourth quarter, hitting six-month highs in late December. Grain exports are recovering after disruptions to barge movement caused by Hurricane Ida extended into the fourth quarter. However, combined corn, soybean and wheat shipments to China fell by a third from last season. Partially offsetting lower Chinese purchases, combined corn, soybean and wheat exports to Mexico increased by 24%.

Farm supply co-ops and agri-retailers benefited from a profitable fall season amid strong crop prices, strong farmer cash flow and favorable harvest conditions. Fertilizer prices continued to climb, rising about 20% in the fourth quarter and 160% from a year earlier. Inflation in input costs, shortages of crop protection products and labor issues could threaten agricultural supply margins throughout the spring 2022 planting season and potentially beyond.

Ethanol production has rebounded to pre-COVID levels and fourth quarter profit margins are at all-time highs, currently averaging $1.34/gallon. Production hit a record 17 billion gallons annualized for two straight weeks in late October, before stabilizing at 16.3 billion by year-end.

Animal proteins and dairy products

US animal protein production increased moderately in the fourth quarter, but supply remains under pressure due to robust demand. Combined red meat and poultry production set a November record of 8.9 billion pounds, up 3.5% from a year earlier. Poultry ending inventories fell to their lowest level in five years, and hog inventories fell to their lowest level in 12 years. Meanwhile, wholesale meat indices in the fourth quarter rose 25% year over year, reflecting increased demand for animal protein.

Chinese imports of animal protein have slowed significantly from their record highs during the summer months. For U.S. producers, reliance on China has diminished for poultry and pork, while opportunities for beef remain strong. The outlook for sales to China for 2022 remains mixed as the country’s hog inventory rebounded, but African swine fever remains a wild card. China’s growing affinity for American beef has beef producers optimistic.

Milk supply tightened further in the fourth quarter as the U.S. dairy herd continued to shrink, particularly in western and southwestern parts of the United States where feed availability remains a challenge. persistent challenge. However, signs of prosperity are on the horizon with rising heifer prices, moderating dairy cow slaughter and slowing farm gate sales. Class III milk futures traded on the CME ended 2021 above $20/cwt after starting the year below $18/cwt.

Cotton, rice and specialty crops

Cotton futures prices reached $1.20/lb. end of November, the highest close in more than a decade. But news of the omicron variant came soon after, and cotton futures fell 10 to 15 cents. Nonetheless, prices have held above the long-term uptrend that started in April 2020. However, despite the nearly two-year bull market, there is a growing threat of downside risk as the global stocks appear to be plentiful.

Rough rice futures languished in the fourth quarter amid ample exportable supplies in India and declining export price competitiveness. The continued weakness of the Brazilian Real has been a headwind for US rice, as Brazilian rice exports are more competitive in Western Hemisphere markets. US export sales commitments for all rice in the current marketing year are down 36% year over year and shipments are down 5%.

The sugar beet harvest is complete and record yields are expected after ideal growing conditions in the upper United States growing region. US sugar shipments for human consumption have increased 2.1% over the past two years. The question for 2022 is whether wholesale prices approaching 50 cents/lb. will finally curb the consumption of sugar.

The producer price index for specialty crops soared in the last quarter as lower harvests pushed up farm gate prices. The increase in fruit and vegetable prices is mainly due to the persistent drought in the western United States which reduced production due to lower acreage and yields. The smaller walnut harvest this fall is also driving up the prices of almonds, walnuts and pistachios for growers and consumers.

Electricity, water and communications

Natural gas and coal prices hit multi-year highs in 2021 as buyers raced to line up ample supply ahead of winter. The massive reboot of the economy last year and the inability of producers to keep pace are largely responsible for energy supply shortages and soaring prices. However, some argue that the energy transition has played a role in high fuel prices, as collective weaning from fossil fuels hampers supplier response. The energy crisis in Europe seems to corroborate this analysis.

The Infrastructure Investment and Jobs Act provides $15 billion for the removal of lead pipes, a far cry from the $45 billion likely to be required. However, as the biggest payout in a generation, funding could make a significant dent in solving this problem. The success of the current program will depend, in part, on how the funds are spent.

The $65 billion in new broadband funding represents three times the Rural Development Opportunity Fund (RDOF), which was the federal government’s largest subsidy program for broadband. States will receive two-thirds of the funding to build networks in unserved and underserved areas. By tapping into local knowledge to find out where coverage is needed and who can build it, the Federal Communications Commission appears to have learned from the shortcomings of previous programs.

Read The Quarterly. Each CoBank Quarterly provides updates and insights on the US macro economy and agricultural markets; grains, biofuels and agricultural supplies; animal proteins; Dairy; Cotton and Rice; Specialty crop and rural infrastructure industries.

About CoBank

CoBank is a $155 billion cooperative bank serving vital industries across rural America. The bank provides loans, leases, export financing and other financial services to agribusinesses and rural electricity, water and communications providers in all 50 states. The bank also provides wholesale loans and other financial services to affiliated agricultural credit associations serving more than 75,000 farmers, ranchers and other rural borrowers in 23 states nationwide.

CoBank is a member of the Farm Credit System, a national network of banks and retail lending associations licensed to serve the borrowing needs of agriculture, rural infrastructure and rural American communities. Based out of Denver, Colorado, CoBank serves customers from regional banking centers across the United States and has an international representative office in Singapore.



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