A summary of CoBank’s article titled-
Forces That Will Shape the U.S. Rural Economy in 2019
Part 2 of a 2 part series.
By Sam Hartman
It seems like the world is getting more complicated by the day and it can be overwhelming and confusing to try to catch up with all the news outlets and current events. This brief, two-part series will break down the top factors that will affect the 2019 U.S. rural economy in summary paragraphs. This series will explore the global economy; the U.S. economy; monetary policy; the U.S. government; the U.S. farm economy; ag trade policy; grain, farm supply, and biofuels; and the U.S. animal protein sector. Each of these topics will help you better understand how such external factors might affect your farm business. If you’re interested and want to learn more about a specific factor, check out the full report published by CoBank’s Knowledge Exchange! The link can be found below.
- With continued depressed commodity markets, the U.S. farm economy is positioned for another difficult year. Costs across the board are on the rise, notably interest expense, labor, seed, fertilizer, and transportation. Interest rate in particular is threatening as farmers are forced to rely more and more on debt to continue operations in a down market all while in a rising interest rate environment. Once again, trade policy plays a role as steel and aluminum tariffs remain in effect (think: grain bins, farm machinery, maple evaporators, etc.). While land values remain strong, continued interest rate hikes coupled with net farm losses could result in decreased farm land values as farmland is sold off to raise capital.
- The U.S. farm economy is hinging on trade policy certainty, and ag trade policy is centered on three key trade factors: legislative approval of the USMCA, the discontinuation of the tariffs on steel and aluminum, and significant improvements to trade relations with China. Now that congress is split, approval of the USMCA could be a challenge. The U.S. has just weeks until the “cease-fire” on tariffs with China will end. It is expected that progress will be made before this deadline, but not significant progress. China recently offered to balance trade through an increase in U.S. goods purchases, which would have a large impact on U.S. agricultural exports. However, the U.S. is continuing to search for alternative export markets for agricultural goods including Taiwan, Columbia, Vietnam, Kenya, and the U.K. Competition will be fierce in Southeast Asia as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is in effect (the CPTPP is essentially the former TPP without the U.S.). All this combined with a strong U.S. dollar makes for a bleak export market outlook for 2019, further reducing margins and opportunities for U.S. agriculture.
- The grain, farm supply, and biofuels industries in the U.S. will face increasing competition in the coming year. This is yet another sector facing negative outlooks from U.S. trade policy uncertainty. Other large players, including South American countries and Baltic Region countries, are taking advantage of opening markets left from decreasing U.S. trade. It could take years to recapture this loss in market share. It’s not all bad news, however. Farmers who are forced to seek alternative crops are turning towards sorghum, cotton, barley, oats, and industrial hemp. Some are even turning towards segregated crops such as high-oleic soybeans, Enogen corn, and non-GMO corn. Ultimately, farmers will be able to maintain breakeven or adequate margins in the coming year if ag retailers are able to keep input prices low.
Click here to view CoBank’s full report.
Click here to view Part I of this summary.
- Just as the dairy sector has been negatively impacted from oversupply since 2015, the U.S. animal protein sector fell into a similar situation in 2018. While animal protein supply has been increasing for a number of years now, it was balanced out more or less through increasing exports. 2019 will demonstrate a sharp reduction in protein sector exports as previous trade partners move to new partners with whom free trade agreements are established. Milk production is also expected to increase, mostly from higher per-cow output and not from increasing herd size. Demand for animal protein and dairy may ramp up as recent data suggests per capita meat and poultry consumption is reaching 2006 levels, an unprecedented peak before the Great Recession hit. Beef especially has enjoyed strong demand as of recent, coupled with higher than average packer margins. Per capita dairy consumption is also on the rise, although mostly in the form of increased cheese and butter demand. Cheese inventories are, however, up significantly given the shift in consumer palate away from American cheese in favor of Cheddar, and others. This is going to majorly affect the rest of the country’s milk price, while here in the Northeast, we should see a better increase driven by Class IV (butter) prices. Butter inventories are down and our Class I is based off of the higher of Class III or IV. Experts predict an increase in cheese plants to be built in 2019 and 2020. As labor availability grows tighter, older cheese plants with poor working conditions might lose employees to newer plants and look at possible closures.