While investment in automation was occurring prior to the pandemic, labor challenges in the past 18 months and likely for the near future have spurred a rapid increase, according to a Quarterly report by CoBank.
“The most significant and lasting impact from COVID will be an acceleration in automation,” said Dan Kowalski, vice president of CoBank’s Knowledge Exchange. “It won’t be an overnight transformation, but much larger investments in technology now will lead to a much more automated supply chain over the next few years.”
Kowalski noted the labor market is healing but at a much slower pace due to enhanced unemployment benefits amid the expected summer boom on consumer spending. The report stated the labor shortage will “drag on the economic recovery until at least early fall.” A second concern was people are very conscious of rising prices and expect higher wages to combat higher living expenses.
As the economists noted, it is difficult to forecast the inflation rate—it is driven by a variety of factors, including a supply shortage of labor, transportation, goods inventories, and service offerings. The Federal Reserve moved its 2021 inflation expectations to 3.4 percent.
“Goldman Sachs expects goods shortages to begin improving by yearend, but to persist into 2022,” Kowalski said. “That will correspond to elevated inflation for much of the next year.”
Grains
Grain prices took a roller coaster ride in the second quarter due to several factors, including swings in China’s grain purchases, USDA’s planted acres and quarterly grain stocks report, and drought.
Lower yields are expected in corn, soybeans and wheat due to weather volatility between now and harvest.
“Suffice it to say, July weather will be critically important to the U.S. corn crop during pollination, while August (at this moment unpredictable) will be important for soybean and spring wheat development,” said Kenneth Scott Zuckerberg, lead economist for grain and farm supply. “Buckle up your seatbelts, the next phase of the grain run will not be one for the faint of heart.”
Zuckerberg also noted the biofuels sector grew during the past quarter due to economic growth and seasonal summer driving. Still, the future is in doubt as it is not clear what the role of ethanol will be in the infrastructure package.
“Second, the U.S. Supreme Court’s ruling that the Environmental Protection Agency has wide latitude to exempt small oil refineries from the Clean Air Act’s renewable fuel standard (RFS) requirements is a negative development for the ethanol complex,” Zuckerberg noted.
Beef demand
Foodservice sales regained pre-COVID levels in April, hitting an all-time monthly high of $75.3 billion. Overall retail grocery sales growth was 7.3 percent higher from a year ago and 15.3 percent higher from 2019, “providing evidence of longer-term changes in consumer behavior,” reported Rob Fox, director of CoBank Knowledge Exchange.
Despite higher beef prices at the supermarkets, producers are frustrated between slaughter capacity not accelerating, liquidation due to drought conditions and high feed costs.
“With packer margins reportedly hitting $1,000/head earlier in the year, it is not surprising that producer organizations have pressured Congress to help their cause,” Fox said. “Congress has responded with hearings and draft bills geared to increase pricing transparency and competition for cattle.”
Fox stated the likely outcome coming from Congress would be transparency in cattle pricing. However, the prospect of processors building new plants is unlikely due to a contraction in the herd size from weak cow-calf profitability. According to Fox, the U.S. beef cow herd will likely be down another 1-2 percent by year end.
“There is a sliver of a silver lining for producers: As cattle on feed numbers work themselves down and feed prices have backed off recent highs, August feeder futures are trading near $160, a level the market has not settled at since 2017,” Fox wrote.
Lastly, the CoBank report noted that drought conditions had forced California’s State Water Resources Control Board to notify 6,600 farmers in June of “impending water unavailability,” with many farmers told they would receive little to no water allocations. Growers are adjusting by either fallowing acreage, watering permanent crops rather than field crops, or taking out permanent crops. As a result of these measures, crop yields are lower, thus increasing the prices paid by consumers.
The cutback in water supplies and drought conditions has forced growers to pump from backup wells or purchase water through the water market. According to the report, prices on the Nasdaq Veles California Water Index (NQH2O) have nearly doubled since January to $850/acre-foot. — Charles Wallace, WLJ editor
