The U.S. Economy has fared better than predicted with either a mild recession, or even avoidance of a recession, being real possibilities. The Real GDP, which grew at a rate of 2.4% in the second quarter of 2023, has now exceeded the 2.0% pace for four consecutive quarters.
Inflation has decelerated which is leading households to see real increases in hourly wages and helping to support consumption growth. Year-Over-Year Headline Consumer Price Index (CPI) inflation has dropped from 8.9% in June of 2022 to 3.3% in July of 2023 due to a decline in energy prices and moderation in food prices as supply constraints have eased and commodity prices have fallen. Core Inflation, the measure of inflation with energy and food removed, has also declined, however not as significantly as Headline Inflation. The target rate for inflation by the Fed remains at 2% which is anticipated to occur late 2024 or into 2025.
The unemployment rate continues to remain tight in the 3.4-3.7% range since March of 2022. This is projected to drift closer to 4% with declining productivity metrics, lower quit rates, and pressure on corporate profit margins to slow hiring. Unemployment is expected to rise to upper 3% or low 4% in 2024.
The Fed has raised interest rates 5.25% since March 2022. This is one of the sharpest rate hikes in the past four decades. The market now anticipates another quarter hike this fall before pausing on additional rate hikes. If unemployment rises as anticipated, and with student loan debt repayment resuming this fall, it is anticipated that inflation will continue to trend positively towards its goal of 2%. This will allow the Fed to begin to cut interest rates mid-2024.
A concern for the U.S. economy as we head into the fourth quarter is the potential for a government shutdown due to contentious debates over the 2024 fiscal budget. The agreement for capped discretionary spending averted a debt ceiling crisis earlier this year, however rating agency Fitch lowered U.S. rating from AAA to AA+ as a result. If there is a prolonged government shutdown from a budget negotiation stalemate, it would reinforce Fitch’s rating and could potentially result in additional rating cuts. [1][2]
WORLD ECONOMY: The goal for most global economies has been to achieve sustained disinflation while ensuring financial stability. Thus far into 2023 most economies have been able to achieve that goal.
A look at global Headline Inflation shows a decline from 8.7% annual average to 6.8% in 2023 and projected 5.2% for 2024. The build-up of natural gas inventory in Europe, weaker than anticipated demand in China, and lower global commodity prices have contributed to the significant decrease. With resolution of the supply chain disruptions that resulted from COVID-19, shipping costs and delivery times are back to pre-pandemic levels. In addition, the service sector is driving increased economic activity with tourism returning to pre-pandemic levels. Core Inflation is declining more gradually than Headline Inflation, however, it is well-above most central banks’ target rate. This more gradual decline in Core Inflation is pushing most central banks to continue to tighten monetary policy further to constrain economic activity.
In spite of the positive news of the decline in inflation, a number of risks continue to weigh heavily on the global economic outlook. These include extreme weather events, such as El Nino, which could exacerbate drought conditions and raise global commodity prices. Also the intensification of the war in Ukraine which could trigger rising food, fuel, and fertilizer prices due to supply chain disruptions. As well as continued pressure on financial institutions which are subject to interest rate risk, especially in the commercial real estate markets. Additionally, if China’s recovery underperforms and fails to meet growth targets, it will negatively affect their trading partners.
AGRICULTURAL ECONOMIC OUTLOOK
CORN: The August report reflects reduced supply, lower domestic use, smaller exports, and tighter ending stocks. The beginning stocks number from the 2022/2023 crop is adjusted higher by 55 million bushels given the reduction in both exports and the corn used for glucose, dextrose, and starch production. The 2023/2024 crop estimate is reduced from the July report by 209 million bushels, to an updated estimate of 15.1 billion bushels. The forecasted yield has been adjusted to 175.1 bushels per acre, which is down 2.4 bushels from last month. This would be the second highest crop on record behind 2016/2017. With the revised lower total bushels produced, the projection of domestic feed and industrial use is reduced, as are exports. The result is lower ending stocks and an increase in season-average corn price received by producers of 10 cents to $4.90 per bushel.
SOYBEANS: The August report indicates US soybean supply and use changes include higher beginning stocks than previously projected. This is due to increased imports of the 2022/2023 crop. The updated yield projection has been reduced 1.1 bushels to 50.1 forecasted bushels per acre. With 82.7 million harvested acres estimated, this equates to a forecast of 4.2 billion bushels of soybeans 2023/2024. With this yield adjustment from the previous report ending stocks and exports have been adjusted lower. Estimated domestic crush remains unchanged. The season-average price for producers has been increased 30 cents to $12.70 per bushel for 2023/2024. The soybean meal price is adjusted $5 per short ton higher to $380 and soybean oil price is projected 2 cents per pound higher to 62 cents per pound.
WHEAT: The 2023/2024 outlook for the U.S. is for decreased supply, slightly lower domestic use, and reduced exports which will result in an overall higher stock number. This higher stock number will remain under the five-year average and the projected 2023/2024 season average price remains unchanged at $7.50 per bushel. It is a similar story globally for wheat with lower supply, lower consumption, decreased trade, and lower ending stocks. Projected ending stocks are lowered .9 million tons to 256.6 million tons which is the lowest stocks since 2015-2016.
DAIRY: Producers have battled through the summer months with some of the lowest national income-over-feed margins as used in the Dairy Margin Coverage (DMC) since 2012. Cull rates climbed in the Upper Midwest as Region 5 (Illinois, Indiana, Michigan, Minnesota, Ohio, & Wisconsin) cow slaughter jumped 8.9% for June through Mid-August compared to levels a year ago. Producers continued to cull cows aggressively during July, and the milking herd will likely experience further contraction. The lower milk production also reduced dairy product inventories. Many producers dipped into their liquidity that was built up from strong earnings in 2022 and Q1 of 2023. As of the start of August, Class III spot milk loads were no longer trading at a discount after the first half of the year, and have started to trade at a premium of around $1.00 per cwt. This can be attributed to a tightening milk supply. Dairy margins improved over the second half of August as a continued recovery in milk prices more than offset a slight increase in projected feed costs. Futures also suggest a continued rebound in milk price with the average for Q4 hovering just over $19/CWT for Class III and $19.10 for Class IV. US dairy exports of cheese and butter are expected to be slower as US prices are quite expensive, with US cheese being the most expensive in the world. Despite that, domestic demand is strong for nearly all major dairy products.
CHICKEN: While live costs are seen moderating, year to date production through July continued to exceed that of last year (RTC 103% YOY) which, along with higher YOY cold storage holdings, has been keeping downward pressure on the weighted average national composite whole broiler price. The exception to this is jumbo BSB and wings where (ostensibly) increasing demand has begun to put upward pressure on those markets. Meanwhile, exports into Mexico continued to climb through June however this increase was almost entirely offset by reduced volumes into other key export destinations. In turn, leg quarter markets are currently holding steady however USDA projects declining overall export volumes for the remainder of 2023. While integrator profitability will likely remain challenged through the remainder of this summer, for its part, USDA is projecting a “retrenchment [of production]” later this year and into 2024 which could imply improving balance between supply and demand (and therefore wholesale pricing) in the months to come.
PORK: Cash hog prices were stable in the first half of 2023, but significantly below production costs. High feed costs remain the key profitability issue for producers, but non-feed expenses have also risen. Cash markets improved through the summer to slightly profitable levels. Hog futures contract prices have been quite volatile throughout 2023 with a sharp decline in mid-Q2 followed by a significant rally in early Q3. However, more recently futures have been in decline. Export demand has been strong (up nearly 9% through Q2 v. 2022), but domestic demand has lagged. 2023 US pork production has been above 2022 levels. Losses over the past 12 months is triggering contraction of the US sow herd, which is providing optimism for 2024 profits, along with the recent drop in feed costs and expectations of lower feed costs next year.
To view the article in the online 2023 Fall Partners Magazine, click here.
