Following two consecutive quarters of negative gross domestic product (GDP) growth, GDP grew by a 2.6% annualized rate in the third quarter of 2022. Much of the gain came from a large upswing in trade, while beneath the surface the economy is still losing momentum in both growth and inflation.
Real consumer spending continued to soften, and construction spending was very weak with the climb in interest rates. However, investment spending remained firm in the third quarter report. Other indicators such as strong demand for automobiles and a tight labor market provide reason for some optimism around future economic activity. However, with substantial fiscal headwinds remaining in place, a strengthening U.S. Dollar, and higher interest rates, GDP growth is likely to continue to be very soft. As of this writing, August and September manufacturing and services Purchasing Managers’ Indexes have confirmed broad-based weakening in the economy.
The October jobs report showed the economy continues to make progress in easing labor market tightness. The recent pace of job growth remains firm at 261,000 but has moderated, and wage growth continues to run at a more modest pace of 0.4% month-over-month. Private sector job gains were broad-based with the manufacturing, professional services, and health care sectors showing the strongest growth. With the unemployment rate at 3.7% as of October in combination with job openings remaining stable and continued progress on job gains, a more balanced labor market could help dampen some wage-related inflationary pressures.
All measures of inflation continue to surprise expectations to the upside. After a string of upside surprises throughout 2022, the September Consumer Price Index rose 0.4% month-over-month. The September Consumer Price Index report also indicated that year-over-year inflation eased slightly to 8.2% in September, down from 8.3% in August. While energy prices have moderated from their peak levels earlier in the year, other areas of inflation, such as food prices, services, and housing remain elevated.
Growth in global trade volume is expected to slow to 1.0% in 2023 and global GDP is expected to increase by 2.3% in 2023. Trade and output will be weighed down by several related shocks, including the Russia-Ukraine war, high energy prices, inflation, and monetary tightening. Global energy prices rose 78% year-on-year in August while food prices were up 11%, grain prices were up 15%, and fertilizer prices were up 60%. The Russia-Ukraine war has pushed up prices for primary commodities, particularly fuels, food, and fertilizers. In the second half of 2022, global energy prices were up 78% year-over-year, led by natural gas, which was up 250%. A 36% increase in the price of crude oil over the same period was small by comparison but still significant for consumers. While the supply situation for grains may not be as dire as some had feared at the start of the Russia-Ukraine war, it is still a cause for concern.
Persistent inflationary pressures have caused the Federal Reserve to accelerate its policy rate hiking trajectory. At its November meeting, the Federal Open Market Committee announced another 0.75% increase in the federal funds rate to a targeted range of 3.75%-4.00%. In its updated market guidance, the committee is now signaling that the magnitude of the overall rate increases needed to tame inflation could potentially be higher than the 4-5% range it signaled in September. The tone of the committee remains hawkish with a focus on taming inflation that runs well above its 2% target. Strong job growth and persistent excess demand for labor suggest a soft landing is still possible. However, aggressive tightening by the Federal Reserve keeps the likelihood of continued recessionary trends elevated through the coming year.
The USDA forecasts total farm cash receipts to increase 21% to $525 billion in 2022. Total crop receipts are forecast to increase by 15%, with a 31% increase in soybean receipts, a 17% increase in corn receipts, and a 34% increase in wheat receipts accounting for most of the forecasted growth in crop cash receipts. Total animal product receipts are expected to increase by 28% with increases in receipts for all commodity categories.
Total production expenses are forecast to increase by 18% to $437 billion in 2022. All categories of expenses are forecast to be higher in 2022, with feed and fertilizer purchases expected to see the largest dollar increases. Farm sector equity is expected to increase by 10% to $3.34 trillion in 2022. Farm sector assets are forecast to increase 10% in 2022 to $3.84 trillion driven by increases in the value of farm real estate. Farm sector debt is forecast to increase 5% in 2022 with debt-to-asset levels improving slightly to 13% in 2022 from 14% in 2021. Working capital is forecast to fall by 3% in 2022.
The United States farm real estate value, a measurement of the value of all land and buildings on farms, averaged $3,800 per acre for 2022, up 12% from 2021. The United States cropland value averaged $5,050 per acre, an increase of 14% from the previous year. The United States pasture value averaged $1,650 per acre, an increase of 12% from 2021.
Several lasting snow events across the upper Midwest in mid-November brought fieldwork to a halt, according to the USDA. Corn producers reported there was plenty of corn for grain left to be harvested, but harvest progress slowed as snow remained; moisture content at harvest was reported as 18 percent. Winter wheat emergence progressed ahead of its 5-year average and remained in good to fair condition; growth and development of wheat and other cover crops were at a standstill due to the cold weather. Soybean harvest was nearly complete, with reporters indicating only few scattered acres remained unharvested.
In its November Crop Production report, the USDA increased its yield forecast to 29.1 tons per acre. This reflects a 12% decline from last year’s record high of 33.2 tons per acre and would be the lowest since 2014/15 (27.3 tons). With the yield decrease, 2022/23 sugarbeet production is reduced to 33 million short tons. With the percentage of sugar recovered from the sliced sugarbeets and the quantity of sugar extracted from molasses unchanged from prior estimates, beet sugar extracted in crop year 2022/23 is projected at 4.5 million short tons raw value. This would imply an 8% reduction from the prior crop year.
The USDA’s all-milk price forecasts for 2022 and 2023 have been lowered due to recent downward trends in dairy product prices and larger expected milk supplies in 2022. The all-milk price forecast for 2022 is $25.50 per cwt while the all-milk price forecast for 2023 is $22.60 per cwt. The milk production forecast for 2022 has been raised, but the 2023 forecast is unchanged as lower expected milk cow numbers offset higher yield per cow. The U.S. dairy herd is projected to be 10,000 cows fewer in 2023 at 9.4 million head. The 2023 forecast for milk per cow is 24,350 pounds, 30 pounds higher. The projection for 2023 milk production remains unchanged at 229 billion pounds.
Wholesale price forecasts for Cheddar cheese, butter, NDM, and dry whey are $1.97, $2.45, $1.40, and $0.48 per pound, respectively. With lower projected wholesale prices for cheese and steady prices for dry whey, the Class III milk price forecast for 2023 is $19.65 per cwt. Due to lower NDM price forecasts more than offsetting higher butter prices forecast, the Class IV milk price projection for 2023 is $20.35 per cwt. The all-milk price forecast for 2023 is $22.60 per cwt, a decrease of thirty cents.
The Quarterly Hogs and Pigs report issued by USDA on September 29, 2022, showed year-over-year lower September numbers in all important inventory categories, as well as for all breeding metrics. In particular, the report showed that the inventory of all hogs and pigs was more than 1% last year, while the inventory of breeding animals was 1% below a year ago. The reduction in breeding numbers was the ninth consecutive quarterly decline since September 2020, meaning that in two years the U.S. inventory of breeding animals has lost approximately 181,000 head.
In addition to continued reductions in breeding animals, the September report showed that farrowings for the summer quarter, as well as producers’ farrowing intentions for the fall and winter quarters, were both below those of a year earlier. Continued reductions in breeding inventory numbers, farrowings and intended farrowings are notable, given positive producer returns published by Iowa State University. Producer reluctance to expand production capacity may be a collective response to perceived uncertainty about the U.S. and world economies and to the potential implementation of State laws—in California in particular— that could affect most U.S. hog production models.
Confirmations of Highly Pathogenic Avian Influenza (HPAI) in meat turkeys continue to be reported, with a case involving 18,500 meat turkeys as recently as November 10th. In total, 2.5 million commercial turkeys have been depopulated in the second wave and 5.6 million were lost in the first. Based on recent HPAI losses, forecast fourth-quarter turkey production was adjusted down to 1.3 billion pounds. This would make the 2022 annual production forecast 5.2 billion pounds, a decrease of 7% from 2021. Forecast 2023 production is 5.6 billion pounds, an increase of 8% from 2022 but less than 1% above 2021 production.
To view the article in the online 2023 Winter Partners Magazine, click here.
