CoBank Says Change Is Coming for U.S. Food and Agricultural Businesses

The widely anticipated summer economic boom is well underway and U.S. consumers are spending on services again. Jobs are abundantly available, but workers are scarce as the labor market is healing more slowly than most economists expected. According to a new Quarterly report from CoBank’s Knowledge Exchange, labor challenges felt during the pandemic and continuing today will incentivize businesses throughout the food supply chain to rapidly increase automation within their operations.

“The most significant and lasting impact from COVID will be an acceleration in automation,” said Dan Kowalski, Vice President of CoBank’s Knowledge Exchange division. “And it will affect the entire supply chain from field to grocery and restaurants. 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.”

Commodity price inflation has been a boon to many ag producers over the past year. But increases in raw material and transportation costs, combined with higher wages, are causing retailers to push those higher costs on to consumers. U.S. consumers have benefited from very low food inflation for much of the past decade, but higher prices are a near certainty for the next year.

Grocers and restaurants are anxious to learn what and how consumers will want to eat in the new equilibrium. The coming adjustments will look quite different for each segment of the food supply chain. But the acceleration in change will be meaningful, and strategic steps to build more resilient businesses are coming sooner than previously believed.

Grains

Grain prices entered a new phase of extreme price volatility in the second quarter of 2021. Corn, soybean and wheat prices climbed to a 9-year peak before shifts in non-commercial, speculative buying activity pulled prices down as fears of runaway inflation subsided. Elevated price volatility will continue in the months ahead as mixed weather forecasts and moisture deficits threaten yields during critical stages of the current growing season. Export demand for U.S. grains remains strong.

Animal Protein & Dairy

Meat and poultry prices hit record highs in mid-May as food service and retail grocery pipelines were primed for post-COVID consumer activity and summer celebrations. Food service sales reached pre-COVID levels in April, hitting an all-time monthly high of $75.3 billion. More illuminating, however, is that overall retail grocery sales growth is up 7.3% from a year ago and 15.3% from 2019, providing evidence of longer-term changes in consumer behavior.

Chicken industry margins have markedly improved from the worst of 2020 and profitability should remain strong through the end of 2021.

Pork has been one of the highest rising commodities in 2021, with lean hog futures topping out at $122/cwt in mid-June. Strong consumer demand for meat, tight supplies of competing meats and declining pork production in the second half of the year are all tailwinds for pork prices for the remainder of 2021. However, a significant reduction of U.S. pork exports to China in the second half of the year is likely.

Despite beef prices being at or near record highs, cattle ranchers and feeders are currently facing limited national slaughter capacity, high feed costs and the liquidation pressures of exceptional drought hitting the western U.S. The national beef herd is already in contraction due to weak cow-calf profitability going back as far as 2015.

Milk production in the U.S. continues to chart record highs despite the surge in feed costs and hot temperatures. In May, milk production topped 19.85 million pounds for the first time, with daily output up 4.6% year-over-year. Exports of U.S dairy products - currently at record highs - continue to be the key release valve amid the supply surge. However, the risk of a stronger U.S. dollar could threaten the export pace in the months ahead.

Cotton, Rice & Specialty Crops

U.S. cotton prices remained strong in Q2, as Chinese demand continued unabated following steady purchases earlier in the marketing year. Total U.S. cotton shipments are running 9% ahead of last year, drawing down U.S. inventories. Global shipping delays and logistical disruptions have delayed some cotton purchases around the world.

The loss of Iraq as an export market for U.S. rice has been a major blow. Rice’s slower export pace continues to be a depressing factor in prices. Concern over significant rice crop losses across the U.S. Delta and Southeast due to historic flooding drove a sharp recovery in rough rice futures late last quarter.

The U.S. sugar beet crop is expected to deliver strong yields this fall following nearly ideal planting conditions that allowed for strong crop establishment. Domestic sugar deliveries are improving, but sugar demand for use in food and beverages remains uncertain as the economy recovers in the months ahead.

The historic drought conditions in the Western U.S. intensified last quarter with water allocations to some agricultural irrigators cut to zero in California. Growers are adjusting by fallowing crop acreage and allocating scarce water to permanent plantings rather than field crops. Prices for fruits and vegetables are rising for consumers, but not necessarily for growers. Rising transportation and warehousing costs have been noted as the key drivers for rising produce prices.

EDITOR’S TAKE:

Overall, this is a very positive report for most commodities in agriculture. A few headwinds regarding uncertainty in some international markets could be problematic for some crops, such as rice. However, the largest concern for most farmers/ranchers going into 2022 will be weather and rising input costs. Should the drought continue in the west, it will be a huge problem for cattle and sheep producers, especially with a lack of hay or pasture. Pray for rain and snowpack.

Rising input costs for everything from fuel, fertilizer, seed, breeding stock and cash land rent could certainly squeeze margins for many farmers/ranchers. Again, we hope the inflationary pressure will mellow in the weeks and months ahead.

That said, there is no better time to emphasize AgPack to your potential farmer/rancher truck buyers. Savings and incentives that amount to tens of thousands of dollars can help offset some of the potential headwinds farmers may face in the months ahead. AgPack can make a huge difference to their profitability going forward and NOW is the time to contact farmers/ranchers with the good news!