It’s a new year! And a new decade! That means it is outlook season.
Over the past couple weeks, several academic, financial, and government groups have released outlook reports and analyses of the domestic and international economies, with many focusing on the agricultural economy and beef in particular.
Here at home, most of the reports projected 2020 will be a year of solid, slow economic growth overall. Dr. Larry Deboer, professor of ag economics at Purdue University, started off the Purdue Ag Econ Report (PAER) with an economic version of the popular “one decade later” trend dominating social media.
[inline_image file=”31455b156e1132f43dd57c33e6148562.jpg” caption=”As the old year comes to a close, there’s plenty to reflect upon, especially from a tax perspective.”]
“Our current expansion in gross domestic product (GDP) began in July 2009. In July 2019 it reached its 121st month, making it the longest expansion in U.S. history,” he wrote. “There was no recession in the decade of the 20-teens. That’s the first such decade in U.S. history.”
He, and authors of the similarly-focused Quarterly U.S. Rural Economic Review from CoBank, noted that low unemployment, wages that outpace inflation, and recent rate cuts by the Federal Reserve are a good sign.
“The current strength of the economy, however, is precarious in the sense that it is almost entirely dependent on consumers.”
“That’s a lot of good news,” Deboer continued, adding the caveat that the growth of the past decade was slow, low, and likely to stay that way going forward into 2020. He explained that with unemployment as low as it is, net population growth as low as it is, and productivity rates relatively stable since 2006 when the tech boom ended, the U.S. economy largely reached capacity in the first quarter of 2018. This condition will serve to limit much growth beyond the relatively low GDP growth around 2 percent.
Still, that’s better than what is projected for most other advanced economies around the world, according to CoBank.
There are also potential clouds on the horizon for the overall economy.
“The current strength of the economy, however, is precarious in the sense that it is almost entirely dependent on consumers,” the CoBank report noted, pointing out that most indications of business and industry confidence are raising red flags.
One of those red flags is the yield curve inversion of May 2019, according to Deboer.
“Ordinarily the 10-year Treasury bond interest rate is higher than the rate on three-month Treasury bills. But lenders and investors move their money to long-term bonds when they fear recession. Interest rates on those bonds decrease; rates on short-term bills increase. They invert when the short-term rate moves above the long-term rate.”
Deboer explained that over the past 50 years, yield curve inversions have “been perfect predictors of recession,” with every one of the five instances of inversion being followed by a recession within 5-16 months.
“So, our inversion in May forecasts a recession by September 2020,” he pointed out. However, he also noted that, if you look back 53 years to the inversion of 1966, there was no recession. The situation then differed in important ways that look similar to our current situation, namely, the Fed reversed course and cut rates three times in 2019.
“Perhaps this will be enough to prevent a recession, as it did in the 1960s,” Deboer projected.
Ag economy
Predictions for the agricultural economy are similar to the overall economy; looks like it will improve, but there are notable red flags.
Generally speaking, the projected improvements cite sustained or growing demand for ag products at home and abroad, and the new trade agreements taking force or crystalizing, which in turn will help add certainty and stability to the ag markets.
“The outlook for the cattle and beef sector is bright for 2020 with strong domestic and international demand coupled with minimal supply growth.”
However, one element cited as part of the projected improvement of the ag economy is also one of the biggest red flags; the large increase in government support from the trade aid programs.
“The farm financial outlook … improved last quarter with USDA raising its estimate of total U.S. net farm income for 2019 to $92.5 billion due largely to a substantial increase in government support,” CoBank said in its report. It, along with PAER authors, noted that the largest of the trade aid programs—the direct payment Market Facilitation Program—is expecting to see its third tranche of payments in January 2020. The program was initiated in 2018 and was then expected to be a one-time payment.
“The importance of this additional aid to the farm economy has been apparent with all farm program payments (including trade damage assistance) reaching 40 percent of national net farm income ($33 billion/$88 billion),” wrote Dr. Roman Keeney, associate professor of ag economics at Purdue University, in the PAER.
“The increasing role of government transfers in farm income is consistent with a number of concerning indicators for farm financial health, including the much reported 24 percent increase in farm bankruptcies and real farm national debt approaching inflation-adjusted levels of the early 1980s ahead of the last major farm crisis.”
Keeney additionally observed that while the large injection of support “may help stave off short-term financial and cash flow stress but does little to promote the kind of sustained growth that might flow from productivity and investment responding to market signals.”
Beef fundamentals
Expectations for the beef world in particular are looking up.
“Domestic demand in the U.S. for beef has been very good through 2019 and is expected to continue into 2020—even with the increased supplies of competitive proteins,” read the Beef Quarterly Q4 2019 report out of RaboBank.
According to the December World Agricultural Supply and Demand Estimates (WASDE) report, USDA anticipates that 27.58 billion pounds of beef will be produced. This estimate is up 1.4 percent from 2019’s total production estimate of 27.2 billion pounds.
“With a more normal weather environment in 2020, the U.S. cattle and beef supply chain will likely have a solid year with decent margins throughout the supply chain.”
By comparison, expectations for pork and chicken production are 28.69 billion pounds (+3.5 percent) and 44.77 billion pounds (+3.2 percent) respectively.
“The outlook for the cattle and beef sector is bright for 2020 with strong domestic and international demand coupled with minimal supply growth,” echoed the CoBank economic review report.
“Beef demand domestically is quite strong with the premium of beef over pork and chicken looking to set a new record high in 2019,” it continued. As the growth of the competing proteins will be larger than beef, we can expect this dynamic of beef premiums over pork and chicken to increase. Domestic demand will be bolstered by international demand “led by China’s protein shortfall caused by the outbreak of ASF [African swine fever],” according to CoBank.
“With a more normal weather environment in 2020, the U.S. cattle and beef supply chain will likely have a solid year with decent margins throughout the supply chain.”
Of dairy cows and drought
One area that might help with the beef supply chain is the dairy industry’s improving profitability. According to USDA, the U.S. dairy herd seems to have stopped its liquidation from earlier in 2019 and 2018.
“The estimate for the average size of the milking herd for October is 9.327 million head, 5,000 higher than September,” noted the December Livestock, Dairy, and Poultry Outlook out of USDA’s Economic Research Service.
“The September estimate was revised 7,000 higher than reported the previous month. With the revised estimate for September and the recent estimate for October, NASS cow numbers are estimated to have increased since August, contrasting with the downward trend since the beginning of 2018.”
The growing dairy herd is the result of increased prices and price estimates on most classes of dairy products, according to CoBank.
“The rapid rise in milk prices, gaining 10.9 percent [year over year] in October, will be a driving force to add more cows to the herd,” read the economic review.
With fewer dairy cows going to slaughter, it is possible that the depressed cull cow market of the past year will be less pressured.
Additionally, the ongoing droughts and catastrophic fires in Australia—the second largest single source of U.S. beef imports, most of which is lean manufacturing beef—plus the intense protein demand from China means the usual supply channels for lean beef will continue to be disrupted. This could mean U.S. fast food companies—the major consumers of lean manufacturing beef—will have to look to domestic sources, which would likely bolster cull cow prices.
RaboBank summarized this dynamic, saying:
“Growing Chinese demand has attracted increased volumes of beef trimmings from Australian during 2019, and we expect ongoing competition for this supply in 2020. After trending up since mid-year, U.S. import prices jumped in October and reached the record levels seen in 2014. Such pricing pressure is forcing American [quick service restaurant] operators to seek alternative domestic supplies, pushing up other prices in the U.S.” — Kerry Halladay, WLJ editor
