The U.S. economy remains strong, but the slowdown is beginning. There are multiple factors that will come into play over for the remainder of 2023 and into 2024. These factors will affect how the U.S. economy will weather the storm and determine the extent of the likely unavoidable recession.
The banking industry needs to heal their balance sheets because of asset devaluation and the reduction of deposit accounts. The concern over recession will push the banks to tighten their lending standards which could affect the availability of credit for individuals as well as small businesses. Commercial banks have taken advantage of the liquidity programs offered by the federal government and have put in place safeguards over the last few months.
Inflation is cooling with the decline in energy prices and with food prices stabilizing, which is helping to improve all-items inflation. Core Inflation, which excludes energy and food, however, remains high. Core Consumer Price Index (CPI) inflation has averaged 5.1% (annualized) from January through April. The Federal Reserve’s target is 2% over the long run. To achieve their goal, it will take noticeable softening in the labor market. Projections suggest that as we move into Q4 2023 and 2024 there will be a slowdown in consumer spending. Core CPI is anticipated to drop from 4.9% overall in 2023 to 3.1% in 2024.
The housing market has settled down coming off high interest rates last fall. The stabilization in the market will hopefully provide a margin correction and avoid large scale defaults. With the peak of mortgage rates potentially behind us, single family starts are anticipated to bottom out in Q3 2023 then look to rebound Q4 into 2024 slowly.
The Federal Reserve has raised interest rates at ten consecutive meetings since March 2022 as it tries to slow investment and spending. Strong unemployment numbers and job gains, however, have kept inflation high. It is anticipated that the Federal Reserve will continue to hold its current 5-5.25% target range for federal funds rate steady for remainder of 2023 with potential rate cuts in 2024 as inflation starts to decline and labor market softens. Early predications indicate the potential of 25 basis points (.25%) cuts every other meeting.
Necessary to keeping the magnitude of the recession in check is reaching a deal on the U.S. debt ceiling. Over recent days there have been positive signs that there are concrete terms that could result in an agreement between the parties. House Republicans are demanding spending cuts in exchange for an increase to the debt ceiling. Even with moderate spending cuts, the federal deficit grows from 4.3% of GDP in 2022 to 5.9% in fiscal 2024.
Global Economic Outlook
Globally the early signs suggested a recession in 2023 could have a soft landing; however, concerns are growing that it will not be the case. Underlying stress in the financial sector along with high debt limits and Russia’s invasion of Ukraine will pressure the impending recession’s landing to be hard. Global headline inflation is projected to drop from 8.7% in 2022 to 7% in 2023 thanks to lower commodity prices, however core inflation will come down much slower and it will take until 2025 to reach the goal of 3.5%. It will be key to watch if the stress in the financial sector continues, and increases, and if so, what policy changes come from that.
Another factor that will negatively impact the global economy is if the war intensifies in Ukraine. This would lead to more food and energy price spikes, which in turn would push inflation up. Key to preventing this is the continuation of the Black Sea grain deal. The deal was set to expire May 18 but was renewed for another two months. It allows for the flow of exports of food and fertilizer to reach global supply chains. Russia threatened to quit the agreement to get the West to relent on sanctions imposed since the invasion of Ukraine. Russia’s demands include access to international banking systems, allowing the export of fertilizer and allowing for imports of needed agricultural supplies. This deal is crucial to prevent a global food crisis as Ukraine is a major grain exporter. According to the Food and Agriculture Organization (FAO), without Ukraine’s grain moving through these ports there could be 47 million people pushed to acute food insecurity because of the war.
Agricultural Economic Outlook – May 2023 WASDE Report
Corn: The 2023/2024 U.S. outlook for corn is for larger production, greater domestic use, and exports, with higher ending stocks. The corn crop is projected at a record 15.3 billion bushels, up more than 10% from last year based on planting projections and weather adjusted trend yields assuming normal plantings. Domestic corn usage is anticipated to rise 55 million bushels and U.S. corn exports are projected to be 325 million bushels higher as lower prices support increase in global trade. Total U.S. corn production will outpace increased usage and exports, and ending stocks 2023/2024 are projected to increase 805 million bushels. If realized this will result in the highest absolute ending stocks since 2016/2017. Thus, the average season farm price is expected to decrease by $1.80 per bushel from 2022/2023 to $4.80 per bushel for 2023/2024. The global outlook for corn for 2023/2024 is calling for record high production and use, with larger ending stocks increasing 15.5 million tons to 312.9 million tons.
Oilseeds: The 2023/2024 outlook for U.S. soybeans includes higher ending stocks mostly due to improved yields at 4.51 billion bushels, an increase of 5% over last year. Soybean crush is expected to be up 90 million bushels over last year at 2.31 billion bushels. This is the result of an increase of soybean oil as a biofuel feedstock. Exports are expected to be down 40 million bushels from 2022/2023 due to competition from South American production and limited gain in world demand. Ending stocks are projected at 335 million bushels which is up 120 million from revised 2022/2023 forecast. Soybean prices are expected to fall to $12.10 per bushel from $14.20 last year. Soybean meal and soybean oil prices are also anticipated to be lower.
Wheat: US Outlook 2023/2024 wheat crop includes lower supplies and exports with increased domestic use and smaller ending stocks from 2022/2023. Projection includes increased planted acres, however increased abandoned acres in Texas, Oklahoma, and Kansas along with lower anticipated yields reducing supply. Average seasonal price for wheat is projected to be reduced to $8.00 per bushel, down 85 cents. Globally consumption is anticipated to be lower due to reduced feed and residual use with projected ending stocks at 264.3 million tons, which is 1.9 million lower.
Dairy: Coming off historic high milk prices in 2022 and a relatively strong first four months of 2023, high costs for feed and replacement heifers, higher beef prices and tight labor availability continue to impair herd growth and expansion. Midwest cheese states and the Southwest are also struggling with an oversupply of milk. Discounts related to oversupply will not help producers on top of Class III futures that dip into the mid to low $16/CWT in Q2 and Q3 before rebounding to $19/CWT in Q4. Class IV futures remain higher through Q2 and Q3 in the low $18/CWT before jumping over $19/CWT for Q4. Softening demand is expected to result in the lower milk prices, but wholesale and retail dairy product prices have remained mostly resilient so far. Producers will likely need to dip into their liquidity built up from strong earnings in 2022. Ongoing structural changes within the dairy processing industry will likely persist in 2023 with the continual expansion of cheese processing capacity expected to divert milk away from butter churns, providing ample cheese supplies while keeping butter inventories tight. This trend would suggest that Class IV milk prices will likely maintain a premium to Class III milk in 2023.
Protein Sector:
Chicken: A combination of high costs and weak chicken prices have negatively impacted the integrated broilers bottom line. With decreasing feed costs, the poultry industry will see things change as we move further into 2023. Additionally, the export broiler market reached 630 million pounds during January which was a record, up 13% year over year. Robust dark meat markets are helping offset the weakness seen in the white breast meat market where inventories reached record highs in February.
Beef: Cattle markets ended Q1 2023 in good shape with fed cattle trading at $165/cwt and feeder cattle above $190/cwt on concerns over tightening supplies. Demand has been strong, however there is concern over higher prices with consumers struggling to maintain spending habits.
Pork: Hog prices have remained relatively flat through the Q1 2023. With slaughter rates up year over year, lean hog prices have not seen their normal seasonal increase. USDA estimates indicate the industry is drawing down future hog availability which should help support prices. January 2023 saw overall U.S. exports increase 9% year over year with noticeable increases by Mexico (5% YOY) and China (37% YOY).
Farm Inputs: Fertilizer prices have continued to fall through the Q1 2023. This price drop is helped by the fertilizer production coming back online in Europe. There were planned fertilizer production outages in 2022 to build up their natural gas reserves. In addition to those plants coming back online for fertilizer production, overall usage of natural gas was lower in Europe and US due to unseasonably warm weather reducing demand for residential and commercial heating. Q1 2023 showed limited field work and pre-planting activity thanks to substantial rainfall and snowfall in the month of March which eased demand for both fertilizer and fuel.
To view the article in the online 2023 Summer Partners Magazine, click here.
