Inflation, the lingering effects of the war in Ukraine and supply chain issues cloud the forecasts for the rest of 2022, according to a CoBank Quarterly report.
While the Federal Reserve is expected to raise interest rates in July and again in September, “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,” Dan Kowalski, vice president of CoBank’s Knowledge Exchange division, wrote. Despite the focus on inflation, the U.S. economy continues to advance, and “a sag in commodity prices is raising hopes that when transmitted through wholesalers and retailers, those lower costs will be passed on to consumers in the form of smaller price increases.”
Kowalski noted that the 20-year high in the value of the U.S. dollar should aid inflation by making imports cheaper, but it also hurts exports, which will hamper several industries and developing countries.
Kowalski said the Federal Reserve is focused on controlling long-term inflation and preventing hyperinflation, similar to what the U.S. experienced in the 1970s and 1980s.
“Most economists are now projecting a better than even chance that the U.S. will be in recession by mid-2023,” Kowalski wrote. “We echo those projections, and while agriculture and energy are likely to continue performing well due to the Ukraine conflict, several other sectors will slow in coming months, just as the Fed intends.”
Beef market
Inflation is now the top challenge to meat and poultry consumption. Retail meat and poultry prices were 18 percent 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 percent higher than the five-year average for the March-May period,” said Brian Earnest, lead economist for animal protein in CoBank’s Knowledge Exchange division.
Poor pasture conditions and high hay prices have accelerated slaughter rates. CoBank shows the slaughter rate was 16 percent higher year over year during May and 18 percent higher than the five-year average.
The cost of gain for feedlot operators has risen, complicating operational efficiencies, and CoBank expects this will continue through the fall period.
Declining cattle supplies are expected to coincide with excess processing capacity over the next 12-18 months, contributing to more favorable conditions for producers.
Higher cattle prices and May’s limited beef cutout rally have lowered packers’ profit margins in the past 12 months, but margins are still at $300/head.
Grains
Kenneth Scott Zuckerberg, lead economist for grain and farm supply in CoBank’s Knowledge Exchange division, wrote investors had reduced their long positions due to growth prospects turning bearish, sending wheat and corn futures lower this past month.
Grain prices remained volatile in the second quarter 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. Zuckerberg noted USDA’s quarterly Grain Stocks report showed on-farm corn stocks increased by 22 percent year over year, suggesting farmers are holding onto old crop bushels in anticipation of higher prices in the future.
“During the month of June, corn acres in drought increased nationally from 19 percent to 23 percent, and soybean acres in drought increased 10 percent to 15 percent,” Zuckerberg wrote. “An expected heat wave in early July could negatively impact crop yields, especially for corn during the critical July pollination period.”
Energy
Rising electricity bills and rising gasoline prices are also contributing to inflation.
“While most consumers have already seen an increase in their monthly utility statements, an additional bump appears to be coming, as sky-high wholesale prices ultimately filter down into retail rates,” wrote Teri Viswanath, lead economist for power, energy and water in CoBank’s Knowledge Exchange division.
CoBank attributes higher electricity prices to the rise in natural gas and coal prices, and it projects that prices could triple by the summer. Even if fuel prices stabilize, the need to upgrade and repair the grid due to natural disasters will likely keep residential costs higher for longer. — Charles Wallace, WLJ editor
