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CoBank: Fragile recovery to be tested

Essential industries in rural America finding new ways to survive and even thrive.

According to a new quarterly report from CoBank’s Knowledge Exchange, rural America is experiencing a dichotomy of improving industry fundamentals and a surge of COVID-19 cases. Rural communities are now the source of a disproportionate number of new cases, just as many Americans are beginning to spend much more time indoors.

“The good news, at least from an economic standpoint, is that many rural industries have begun to turn the corner,” said Dan Kowalski, vice president of CoBank’s Knowledge Exchange division. “This is particularly true in agriculture. A weaker, steady dollar has supported a price recovery in most agricultural commodities, and despite the myriad of challenges they’ve faced in 2020, essential rural industries are finding new ways to survive and, in some cases, thrive.”

Large grain sales to China and recent reductions in ending stocks and expected production have provided a needed rally for U.S. grain farmers. Strong export sales were a major driver of recent positive commodity price performance. However, whether China will ultimately import the grain remains a lingering question.

CoBank’s Kenneth Scott Zuckerberg urged caution in trusting China's recent purchases. “China has a propensity to announce grain purchases, which accumulate in the 'outstanding sales' category, but then fails to close previously announced transactions. This is a risk factor, given that the recent export momentum has placed a bid under futures prices,” he stated.

Farm supply retailers navigated through a volatile yet ultimately successful growing season. The current season ended with an expected strong harvest despite crop damage and stress caused by extreme storm activity and dry weather. Based on early reports, the August derecho storm ruined at least 550,000 acres of corn and an unspecified number of soybean acres and caused more than $300 million in property damage to grain elevators across Iowa.

Direct government payments to agricultural producers throughout 2020 could result in higher prepayments to farm supply cooperatives during the fourth quarter in advance of the spring 2021 planting season.

The U.S. beef complex ended the third quarter in a far better position than where it started, CoBank lead animal protein economist Will Sawyer explained. Over the last three months, the boxed beef cutout has climbed 5%. This helped lift cattle prices by 10% since the low reached around Independence Day. “Profitability for cattle feeders has improved to breakeven levels on a cash basis, and packer margins have remained elevated,” Sawyer added.

Renewed optimism for trade is the bright spot for the U.S. pork sector after pork exports slowed significantly over the summer. Germany discovered African swine fever (ASF) in wild boars, leading many key pork importing markets to ban pork exports from Germany. Lean hog futures have spiked on this news. Hog producers are expected to lose $7 per head in the coming quarter and see positive margins of $15-20 per head in the first half of 2021.

Foodservice continues to be a difficult channel for U.S. animal protein, but the chicken sector is faring better than most, thanks to quick-service restaurants and take-out dining. The third quarter brought improved pricing and margins for the U.S. chicken industry. Most producers were modestly profitable over the summer. The weak spot in the U.S. chicken complex continues to be dark meat chicken prices.

Dairy markets remained mired in volatility last quarter, but milk and cheese prices ended on a strong note. The recovery in milk prices has already incentivized more milk production on the farm. Federal programs also helped provide a financial cushion for some struggling dairy producers last quarter. Butter and cream face an uphill battle with the uncertainty over consumer demand during the important upcoming holiday season, when demand for these products peaks.

The reopening of restaurants in the third quarter was welcomed news for specialty crop producers and processors with foodservice contracts, although the expected rise in COVID-19 cases this fall and winter would further strain the restaurant sector and close more schools, causing greater uncertainty. Produce sales at retail grocery stores, however, remain solidly above year-ago levels and are widely expected to remain at higher levels than prior years for the foreseeable future.

The U.S. ethanol sector continued to recover during the third quarter to a new baseline level equaling roughly 90% of pre-COVID-19 demand. Recent developments surrounding E15, small refinery exemptions, federal relief and another delay in Brazil's import duties appear to be incremental positives for the ethanol complex.

For a representative Iowa dry milling fuel ethanol plant, industry operating margins (defined as return on operating costs but before capital costs) also improved, averaging 21 cents/gal., up from breakeven during the first quarter, Zuckerberg stated. “The improvement occurred as supply and demand became more balanced, and active producers benefited from better productivity,” he said.

“We maintain a stable industry outlook over the next two quarters for U.S. ethanol, assuming that the economy does not experience a double dip,” Zuckerberg added. “Our outlook assumes continued high unemployment levels and below-average consumer miles driven. Our opinion could become more bullish should new coronavirus cases drastically decline and/or an effective COVID-19 vaccine is rapidly produced and widely administered.”

Despite China's strong purchases, total cotton demand remains weak. Total U.S. upland cotton export sales for the 2020-21 marketing year still lag behind last year’s pace by 17%. Global retail demand for clothing and apparel has yet to recover from the economic shock of the COVID-19 pandemic.

U.S. rough rice futures ended the third quarter near contract highs in the pan-commodity rally, with support from a weaker U.S. dollar. Rising global prices, notably in Brazil, hint at a potential improvement in export demand for U.S. rice in the fourth quarter, according to CoBank.

The electricity sector’s transition from coal to clean energy is happening more quickly than expected, according to September data. The pandemic has reduced loads and intensified fuel competition, with coal-to-gas switching idling a significant amount of coal capacity in 2020. This will likely prove to be a watershed year, with a newly reinforced acknowledgement of the “changing of the guard” paving the way for faster energy transition.

The full quarterly report is available at cobank.com.

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