The meat and dairy markets were particularly affected
October 17, 2023
5 minutes reading
The combination of high interest rates and a strong U.S. dollar is beginning to take a disproportionate toll on rural industries such as agriculture, forestry, mining and manufacturing, according to a quarterly report from CoBank.
Most international transactions are still conducted in dollars, and a strong dollar makes U.S. exports more expensive and imports cheaper. This disproportionately hurts the backbone of the rural economy, says a new quarterly report from CoBank’s Knowledge Exchange.
While the US economy is exceeding expectations, the rest of the world – particularly Europe and China – is underperforming. Due to the economic situation of the USA compared to other countries, the dollar has become much stronger than previously expected. Expectations that interest rates will remain high for the foreseeable future have also helped strengthen the dollar.
“The challenge for agriculture and other rural industries that rely heavily on global markets is that their export partners simply cannot afford to buy U.S. products,” said Rob Fox, director of CoBank’s Knowledge Exchange. “Combine the loss of exports with an overall slowdown in the U.S. economy, and it’s a double whammy for many companies operating in rural America.”
The disruptive geopolitical and economic events of recent years have created a historically unusual situation in which commodity prices and the dollar increased simultaneously. But these events are now losing importance as market drivers. The fundamentally inverse relationship between the broad range of commodities and the dollar has largely returned.
Farm bill negotiations will take a back seat as the House tries to select a new speaker and Congress works to pass its annual budget bills before the continuing resolution expires on November 17. The most likely outcome is an agreement by the end of the year to extend the current farm law by a few months or up to a year or more.
Grains, agricultural supplies and biofuels
Historically low water levels on the Mississippi River are limiting grain transportation ahead of the peak fall harvest season. Higher inland shipping rates on the river are putting pressure on inland corn and soybean baselines. The combination of a strong US dollar and strong export competition from Brazil and Russia is creating major headwinds for the US grain and oilseed export program. Winter wheat planting is underway in the US, with acreage expected to decline slightly as prices remain below expected breakeven production costs.
Fertilizer prices continued to weaken in the third quarter. Anhydrous ammonia and potash prices fell by 30% and 15%, respectively. Prices for natural gas, used both as a raw material and as a means of production, fell by about 7%. The fall fertilizer application season should be somewhat normal for regions that experience a decent harvest. While the outlook for the 2024-25 planting season is cloudy, lower fertilizer use is expected as acreage switches from corn to soybeans.
Fuel ethanol production was very strong in the third quarter, averaging 16.1 billion gallons compared to 15.4 billion in the second quarter of 2023. A strong summer travel season and attractive fuel ethanol pricing were the key demand drivers . Profitability was also favorable, at over 50 cents per gallon compared to 20 cents per gallon in the same period last year. Capacity for renewable diesel and other biofuels continues to grow, increasing by 26%, or 800 million gallons, since January 2023.
Animal protein and dairy products
Limited supplies of market-ready cattle resulted in limited beef availability in the third quarter. The USDA estimates that total U.S. beef production will decline 5% in 2023 and expects another 7% decline in 2024. Supply shortages continued to cause turmoil in the wholesale beef market. Composite boxed cuts of beef climbed to record highs in June and July, averaging a 16% year-over-year premium in the quarter. But with feeder cattle prices up 30% compared to last year, packers’ margins have come under pressure. Despite the rising price environment, consumer demand for beef remains undiminished.
The U.S. Supreme Court’s decision to uphold California’s Proposition 12 sparked a rally in the pork market. Pork cut values rose 41% from May to July, counteracting weak prices earlier in the year. Hog prices also rebounded, with nearby hog futures rising 36% from late May to early August. As production increases and seasonal interest wanes, markets have since cooled. The USDA’s latest hog and swine report suggests that while the industry is making efficiencies, production levels will continue to fluctuate due to poor profit expectations.
At the start of the third quarter, chicken markets were subdued. The price of breast meat was unusually low for the time of year and wing prices were around $1 per pound. While increased consumer prices may have contributed to the smooth disappearance, it has been difficult to offload the burden of the increased surplus. The sharp drop in margins combined with high input costs caused some manufacturers to rethink their longer-term production goals. Given the announcement of six plant closures this year, growth will be limited.
Strong cheese production and the slowdown in milk exports combined to send prices for Class III milk down to a paltry $13.77 per hundredweight. until midsummer. With abundant cheese and strong milk production, spot loads of Class III milk in the Midwest hit a low point well below the five-year average. Faced with low milk prices and high feed costs, dairy farmers sent more cows to slaughter to take advantage of record high beef prices. Futures markets suggest the final quarter of the year could be significantly better, with Class III milk prices expected to be at $17.30 per hundredweight. The biggest wild card for milk prices is China, the world’s leading importer of dairy products, which is facing an economic downturn.
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