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Long grind to shore up shaky economy lies ahead

CoBank Quarterly: U.S. economic recovery hinges on virus control and consumer confidence.

July 13, 2020

4 Min Read

According to a new Quarterly report from CoBank’s Knowledge Exchange, the recent rebound in the U.S. economy is real, but the sharpest post-shutdown economic gains are almost certainly behind us and a long grind to shore up a shaky economy lies ahead.

“Economic data prior to the recent resurgence of coronavirus cases has shown a consistent, steady improvement in the U.S. economy, coinciding with business re-openings,” said Dan Kowalski, vice president of CoBank’s Knowledge Exchange division. “But traditional economic data can go stale remarkably fast in the COVID era, making high-frequency economic indicators an essential tool. And those indicators are signaling a plateau, followed by a possible downshift in the economy.”

Despite COVID-19, U.S. grain has been moving and basis has generally tightened since April 1. Wheat export activity has been strong and domestic demand has been healthy, as home-bound consumers buy more packaged food. China has been buying U.S. grain, although the run rate is below the levels agreed upon in phase one of the trade deal. Sorghum exports to China have been especially robust; sorghum basis has tightened meaningfully in response to strong export demand.

Farm supply retailers benefited from a healthy spring agronomy season and are well-positioned for the remainder of the growing season. Crop progress has been above average amidst favorable weather. USDA rated around 70% of corn, soybean, and spring wheat crops as good-to-excellent in its June 29 report. A surprise ruling against dicamba could have long-term implications for crop protection sales and advice.

Ethanol production and margins began to recover during the second quarter as the U.S. economy began to reopen. However, coronavirus is resurging in several states and renewed activity restrictions will potentially reduce driving and fuel demand. Looking ahead to 2021, ethanol fuel demand may recover to only 85%–90% of pre-COVID levels.

U.S. chicken plants endured far less COVID-19 disruption in the second quarter than beef or pork. The chicken sector swiftly filled retail meat cases when demand shifted from foodservice and the red meat supply dropped. While chicken producers have been able to manage through their production disruptions, demand and prices have been volatile. CoBank analysts expect around 3% industry growth for the sector in 2020 as its value-proposition may appeal to U.S. consumers facing a difficult economic outlook.

Beef packing plant capacity fell to historic lows in late April, spiking the cutout value to record highs. Beef production and prices have now returned to pre-pandemic levels. Concern within the beef sector is now shifting from supply to demand. Food service traffic has improved, but many social distancing restrictions remain. This means ongoing challenges for the dine-in, full-service sector, which especially hurts the beef complex.

The pork industry has rebounded from a supply chain shock that saw U.S. production fall by nearly half, before climbing back to above prior-year levels two months later. Pork production in the last week of the quarter was up more than 10% above the same week a year ago as the industry is beginning to work through the backlog of hogs. Second quarter pork exports remained strong.

Dairy producers and processors struggled through extreme market volatility last quarter due to COVID-19. Milk, cheese, and butter prices fell to multi-year lows on steep losses in food service demand and record milk production. Cheddar block prices bounced to record highs on restaurant restocking, high demand from pizza chains, and government purchases. Milk and butter prices also recovered. Although, many farmers did not benefit from higher milk prices last quarter because of negative producer price differentials.

China took the headlines in cotton as the standout overseas buyer for the quarter, helping lift cotton prices from the multi-year lows in March and early April. As China strives to fulfill phase one commitments, its imports of U.S. upland cotton at the end of June were up 50% over last year’s pace, and outstanding sales of unshipped cotton more than quadrupled year-over-year.

COVID-19 continues to snarl supply chain logistics with specialty crops growers fearing further losses in food service demand as the pandemic resurges. Growers that have contracts with grocers and retailers have fared better. Domestic demand for tree nuts like almonds, walnuts, and pistachios has been robust as consumers stockpile shelf-stable foods. Another record large almond crop is expected as harvest begins in the weeks ahead, putting greater focus on the U.S. tree nut export program.

Most rural telecommunications operators signed the FCC’s Keep Americans Connected pledge, which includes not disconnecting service for customers that who cannot pay their bill due to COVID-19-related economic stress. Offering free service has strained rural operators’ cash flow, which could impact future network build plans.

The U.S. energy sector is used to volatility in supply, but not profound changes in demand. For the first full month of COVID-19 stay-at-home advisories, April data shows U.S. electricity system peak demand levels hit 12-month record-setting lows, with net electricity generation decreasing 6.7% year-over-year. Demand recovery to pre-pandemic levels will be slow and the longer road to recovery makes it more likely that structural change is inevitable.

Source: CoBank, which is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset. 

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