Despite an economic recovery from the pandemic, supply chain issues and labor shortages have resulted in significant costs to the agriculture industry, according to CoBank’s Quarterly report.
According to Daniel Kowalski, vice president of CoBank’s Knowledge Exchange, the struggle to keep supply chains intact has driven up costs as lead time for manufacturing inputs has reached a record high. The consumer price index increased 5.2 percent year over year in August,
resulting in businesses paying much higher costs and passing on only a small portion of those costs to consumers.
Kowalski said supply chain issues will persist until 2022, causing businesses to potentially raise prices either at the end of the year or in the first quarter of next year.
Adding to supply chain issues is the rise in energy costs, coupled with the steady rise of the dollar, which “poses a headwind and creates even higher operating costs to close out the calendar year.”
Ag retailers face steep increases in input costs, such as fertilizer, due to the sharp rise in natural gas prices. U.S. natural gas futures for January delivery have doubled since April, the highest prices since early 2014. Supply chain and transportation issues from China and India may lead to potential shortages in pesticides for retailers in 2022.
The CoBank report noted that agricultural exports had kept much of the industry in the black. Kowalski noted that while China is well behind on its two-year commitment to purchase goods as part of the Phase One deal, “Agricultural exports were at 85 percent of target, with the seasonal post-harvest peak yet to come.”
As the Phase One agreement ends at the close of 2022, there is uncertainty for the coming year for agricultural exports. According to the report, USDA currently projects that China will import $39 billion of U.S. ag products in 2022, up from an estimated $37 billion in 2021.
“So while the China trade forecast looks promising for the coming year, success will be much more dependent on prices remaining high, as volume is likely to fall,” Kowalski said in the report.
The CoBank report notes that commodity prices for the grain sector have declined from their highs but “have reached critical support levels.”
“With the U.S. soybean and corn crop harvest underway, seasonal price volatility is another immediate crosscurrent,” Kenneth Scott Zuckerberg, CoBank’s lead economist for grain and farm supply, wrote.
“Prices tend to show seasonal weakness due to ‘harvest pressure,’ i.e., farmers begin selling grain during harvest as yield visibility emerges. On the flip side, there are numerous fundamental drivers for price support, including continued tight supplies and rising demand for soybean and other vegetable oils for use in ‘green fuel’ (namely renewable diesel).”
Beef demand
Exports and the easing of dining restrictions in the U.S. benefited the protein sector. CoBank reports beef exports are expected to be on a record pace in 2021, with exports to Korea up 17 percent in volume through July and China up 137 percent from 2020. Consumer demand increased as more dining establishments opened, leading to a lack of availability in the domestic supply chain.
The pressure of domestic demand, combined with exports, resulted in cold storage for all animal proteins to be 20 percent lower year-over-year at the beginning of the summer and 3 percent lower by the end of July.
Per-head packer margins remain at historic highs, as boxed beef prices for Choice cutouts averaged $322/cwt, up nearly 50 percent year over year, and well above typical rates, according to CoBank.
“As a result, packers are motivated to continue processing as many head as possible, alleviating the backlog of cattle amassed in the first quarter of 2021,” noted Brian Earnest, CoBank’s lead economist for animal protein. Saturday cattle slaughter remains elevated, exceeding the five-year average by 80 percent last quarter.
“We anticipate that shedding excess cattle will close the gap between availability and processing capacity by early 2022,” Earnest continued.
Earnest cautioned that inflation is expected to test consumers’ meat budgets in the fourth quarter.
Lastly, the CoBank Quarterly report notes as the new water year began on Oct. 1, 94 percent of the West is experiencing some form of drought, and “there is a collective intake of breath hoping for a wet year ahead.”
The report notes a prediction of La Niсa from the National Oceanic and Atmospheric Administration, but there is concern in the Southwest for drought relief in 2022. — Charles Wallace, WLJ editor
