Effects from the pandemic and Ukraine war continue to reverberate through the global economy. Food and energy prices remain high, though prices for underlying commodities have lost upward momentum as economic fears rise. The drop in commodity prices and recent bond yield inversions are sending up red flags about slowing economic activity and a potential oncoming recession.
The Federal Reserve is poised to raise rates until it believes inflation has been tamed. Unfortunately, the risk of over- or under-doing it is high given that the lag time between action and reaction in monetary policy can be long. For now, the Federal Reserve has the data it needs to move forward with a 75 basis-point rate increase in July and will be poised for another 50 or 75 basis-point hike in September.
After more than two years, COVID-related supply chain complications are finally easing and various metrics indicate improvements to supply chain performance both domestically and globally. However, those improvements have been modest and agricultural supply chains remain broadly mired in dysfunction, according to a new quarterly report from CoBank’s Knowledge Exchange.
“Warehouse and inventory costs are still rising at near-peak levels, and transportation costs are rising at a much higher rate than pre-pandemic,” said Dan Kowalski, vice president of CoBank’s Knowledge Exchange. “Grain rail car availability and prices were at multi-year lows and highs, respectively, in the second quarter. Although as consumer purchases of goods continues to soften, supply chains will slowly recover.”
While agricultural and energy commodity supplies remain tight, shifts in speculative sentiment have brought prices down from their peaks. For agriculture, replenishing grain and oilseed supplies globally will require two growing seasons, said CoBank. And there is no relief in sight for natural gas supplies, ensuring power prices will remain high as well.
Grains, farm supply & biofuels
Grain prices remained volatile in Q2 as markets continually reassessed a range of factors including the war in Ukraine, a smaller Brazilian soybean crop and ongoing dry conditions in the U.S. Wheat prices fell below $9.00/bushel as investors reduced their commodity exposure amid a rapidly cooling global economy. CoBank said grain and oilseed prices should experience upside pressure in the near term, due in part to tight global supplies of wheat and soybeans in particular.
Ag retailers navigated a challenging spring agronomy season marked by input cost inflation, planting delays and producer cost-cutting efforts. Fertilizer prices began to ease in June but are likely to remain elevated compared to long-term averages. Mid-year crop ratings are better than a year ago but warm and dry conditions across the Corn Belt may limit yields.
CoBank said farm supply co-ops will face additional risks going into the fall agronomy season. Additionally, Asian-made crop protection chemicals continue to be in short supply and interest rate hikes will make borrowing more costly.
The U.S. ethanol complex delivered a strong Q2 with few signs of demand destruction despite a spike in retail gasoline prices and rising inflation. Operating margins remained favorable at 33 cents/gallon, well above the five-year average of 22 cents/gallon. Ethanol exports hit a four-year high of 185 million gallons in April, resulting in year-to-date growth of 67% through the first four months of 2022.
Animal protein & dairy
According to the report, inflation is now the key risk to meat and poultry consumption, as the impact of COVID-19 on consumer food spending is diminishing. Retail meat and poultry prices were 18% higher in May compared to 2021 and both spot market supplies and freezer inventories are below pre-pandemic levels. The combination of tight supplies and steady demand kept meat prices 20% higher than the five-year average for the March-May period.
CoBank reported that beef cow culling remains elevated as cattle ranchers and feeders grapple with poor pasture conditions and higher corn and hay prices. Declining cattle supplies are expected to converge with excess processing capacity over the next 12-18 months, which should contribute to more favorable conditions for producers.
Fed cattle prices have largely flattened in recent months, the report noted, but added that cost of gain for feedlot operators have risen considerably, further complicating operational efficiencies. CoBank expects this will continue through the fall period.
On the pork side, Brian Earnest, lead economist for animal protein, said pork industry dynamics have been fairly uneventful in recent months. While prices for many of the main pork categories have appreciated in line with expectations, the strong upward rallies witnessed in 2021 have yet to emerge. Still, he said the wholesale pork cutout price remains well supported, averaging 30% above January through June of last year.
U.S. pork exports are contracting in 2022 after several years of successful growth, driven primarily by a reduction of exports to China as the country continues to recover from African swine fever. The volume of U.S. pork exports to China has fallen from over 160 million pounds per month in 2021 to about 40 million pounds per month in 2022.
Turkey, egg and broiler markets have been roiled by the loss of roughly 40 million commercial birds to highly pathogenic avian influenza (HPAI).
Earnest said broiler meat production is expected to be flat to lower for 2022 compared to a year ago. Despite restrained supply growth, domestic chicken consumption is expected to remain near all-time highs. While market conditions are conducive to at least moderate broiler production growth, Earnest said expansion has been hindered by access to adequate inputs.
The turkey and egg markets have been the most impacted by HPAI. Earnest relayed that egg prices skyrocketed and fresh tom breast meat eclipsed the $6.00/lb. threshold, “previously considered unattainable.” While higher prices would normally incentivize a rapid recovery, “producers are juggling other considerations such as corporate commitments to cage-free use by 2025 and a longer-term contraction in turkey production.”
The report relayed that milk collections in the U.S. remained tight last quarter with record high milk prices prompting only a minimal expansion in the dairy herd. Despite tight supplies, milk continued to flow to cheese vats last quarter with cheese manufacturers building inventories to record levels. Conversely, U.S. butter inventories remain tight. CoBank said high prices and strong demand for U.S. milkfat from both domestic and international sources pulled butter out of storage.
Power, water & communications
CoBank said steeply rising natural gas and coal prices could triple the price of wholesale electricity this summer, driving up electricity bills for consumers. While most consumers have already seen an increase in their monthly utility statements, an additional bump appears to be coming and the price of electricity is unlikely to drop anytime soon. Even as fuel prices begin to moderate, the need to upgrade and strengthen the grid against natural disasters will likely keep residential costs higher for longer. Unfortunately, high energy costs have a cascading effect, feeding inflation and hampering economic growth.
Investor interest in the data center market is showing no signs of slowing down as investors continue to pour money into the cloud. DigitalBridge, a global-scale digital infrastructure investor, announced plans to acquire Switch for $11 billion, marking the fourth major data center acquisition in the last year. Most enterprises are adopting a hybrid cloud approach, leveraging a combination of on-premise, colocation and cloud data management systems. Capacity constraints and inflationary costs are increasing the demand for third-party data center services.
The full CoBank report can be accessed here.