Severity of economic disruption varies widely among agriculture and rural market sectors, while uncertainty abounds
Rural industries are grappling with how to adjust their businesses to remain relevant and sustainable in the face of the coronavirus pandemic. Agricultural supply chains have been massively disrupted and lost revenue. Water and power suppliers have adapted as commercial customers went dark and demand shifted to residential customers.
According to a new Quarterly report from CoBank’s Knowledge Exchange, 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.
“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 Dan Kowalski, vice president of CoBank’s Knowledge Exchange division. “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.”
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.
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.
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.
COVID-19 continues to snarl supply chain logistics with specialty crops growers fearing further losses in food service demand as the pandemic resurges. Growers that have contracts with grocers and retailers have fared better. Domestic demand for tree nuts like almonds, walnuts, and pistachios has been robust as consumers stockpile shelf-stable foods. Another record large almond crop is expected as harvest begins in the weeks ahead, putting greater focus on the U.S. tree nut export program.
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 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.
The full Quarterly report is available on cobank.com. Each CoBank Quarterly provides updates and an outlook for the Global and U.S. Economic Environment; U.S. Agricultural Markets; Grains, Biofuels and Farm Supply; Animal Protein; Dairy; Other Crops; Specialty Crops and Rural Infrastructure Industries.
CoBank is a $158 billion 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 70,000 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.