Can the U.S. avoid a recession altogether? Economists are projecting that, in fact, the U.S. can expect to avoid a recession.
Real Gross Domestic Product (GDP) continues to grow, but at a reduced rate, and unemployment is projected to increase through the first quarter of 2025. These factors taken together indicate this should lead to inflation continuing to moderate, reaching the Federal Reserve’s (Fed) 2.0% target. This in turn will allow the Fed to relax monetary policy and to reduce interest rates later in 2024.
The Fed raised its target rate range to 5.25-5.5% in July, and at their September and November meetings opted to hold that range. By holding that range, they continue to assess cumulative tightening and monetary policy since there is an expected lag time to see the results of said actions. It is estimated that Core Inflation, which excludes energy and food, will decrease to 4.0% year over year (YoY) fourth quarter, will slow to 3.0% second quarter of 2024 and fall to 2.8% by year-end 2024, putting the rate of inflation well on its way to the Fed’s goal.
The job market held up remarkably well throughout 2023, despite tightening monetary policy. The job market has continued to show positive gains with 165,000 jobs in August, 297,000 in September and 150,000 in October. While these are well below 2022 job growth of 399,000 per month on average, it remains evident that the labor market has remained strong and giving the Fed confidence as it drives policy towards avoiding a recession.
On the other hand, the housing market has been a contradiction at times. Housing affordability fell this summer to the worst levels since 1985 due to the cost of homes and the high interest rates. Potential sellers are unwilling to give up the low interest rates on their existing mortgages, which in turn is keeping inventory low and supporting high prices. The low inventory of existing homes has helped to support the single-family new construction starts. After a small correction earlier in 2023, tied to increase in interest rates, new construction has rebounded in the third quarter to an estimated annual pace of 961,000 new housing starts.
Global Economic Outlook
The global economic recovery from the COVID-19 pandemic has remained slow and uneven, partly due to Russia’s invasion of Ukraine. Economic activity continues to fall short of pre-pandemic levels.
Monetary policy has tightened down in effort to reduce inflation and withdraw from fiscal support given the high debt loads held by individual countries and economies. The U.S. and Switzerland both acted decisively to resolve debt ceiling issues and financial turbulence in 2023 which helped the global economic outlook. Actions such as these have little room for error but are needed by the Central Banks to relieve financial stress, restore price stability and to continue to push inflation lower.
One of the major forces that continues to hold back global recovery is the ongoing conflict between Russia and Ukraine. The conflict has disrupted supply chains and impacts the movement of commodities such as fertilizer and grains, as well as oil. And now further disruption to the world’s economy could result from the war between Israel and Hamas. If the conflict expands and escalates, it could bring Israel into conflict with Iran, a supplier of arms and money to Hamas. This could push oil prices to $150 per barrel and put major pressure on the world economy. Two major oil producing regions in or on the verge of war, threatens the global economy.
AGRICULTURAL ECONOMIC OUTLOOK – Q4 2023 – WASDE November Report
Corn – The November 2023 World Agricultural Supply and Demand Estimates (WASDE) report for 2023-24 corn calls for larger production numbers along with higher domestic use and exports, but also larger ending stocks. The corn production forecast increased 1.9 bushels for an estimated 174.9 bushels per acre average. This takes total production 170 million bushels higher to 15.2 billion bushels and 11.1% YoY growth. The estimated usage of corn for feed and ethanol were both increased along with exports, but these increases still fell short of the estimated production increase. This results in higher ending stocks domestically and lowers season-average corn price to $4.85 per bushel, or a drop of 10 cents per bushel from last month’s report.
Globally, corn/coarse grains are facing a similar situation to U.S. corn with increased production and increased ending stocks. China is sitting on stockpiles of non-tradeable corn and Brazil is coming off a record corn harvest. These two factors coupled with the large sorghum crop, a similar coarse grain and alternative to corn, with production predicted at 322 million bushels, which is up 71.3% from last year.
Soybeans – The updated outlook for 2023 U.S. soybeans indicates increased production and increased ending stocks. This year's crop is estimated at 4.13 billion bushels, up 25 million from the previous month, however crush and exports have remained unchanged. This will drive ending stocks higher to 245 million bushels. The US season-average price for soybeans remains unchanged from last month at $12.90 per bushel. Soybean oil price is was reduced 2 cents to 61 cents per pound, with meal remaining unchanged at $380 per short ton.
Export markets for both U.S. corn and soybeans have felt resistance given both the strength of the U.S. dollar and strong export competition from Russia and Brazil. In addition, the political tension between the U.S. and China has reduced China’s interest in U.S. corn and soybeans. To turn the tide on the export markets to be more favorable for U.S. farmers it will take a poor Brazilian harvest, a resurgence of Chinese demand or a weakening of the U.S. dollar.
Farmers have been reluctant to sell corn at these lower prices, as they are flush with cash coming off the past two years of record farm earnings. They have been more willing to let go of soybeans, however, at current market prices. This has left elevators hungry for more corn and looking to capture profits through the large carry in the markets. Corn is expected to move in January, February, and March to generate the cash needed for the 2024 crop and to pay down operating lines of credit with high interest rates.
Dairy - The dip in Class III milk prices in June/July was more of a “V-bottom” as prices rebounded back up to $18.39 at the end of September. Dairy cow culls were strong through the summer due to high beef prices and the poor dairy profit margins. For the first eight months of the year, dairy producers sent 121,700 more cows to packing houses than the same time period in 2022. The dairy herd also shrunk by 32,000 head during this timeframe. With the rebound in Class III prices this fall, strong butter prices holding up Class IV and retreating feed costs, cull rates dropped significantly lower this fall. Dairy cow slaughter volumes in September were 20,000 head lower than the prior year and the lowest monthly total since 2014. Despite this drop, the dairy herd continued to contract, likely because fewer dairy heifers were available to replace cows sent to slaughter. As of July 1, there were 3.65 million dairy heifers on hand, which is the lowest mid-year tally since 2004. This tight heifer supply will limit rapid growth in the US milk-cow herd throughout next year. According to the November USDA report, monthly milk production was down for the fourth consecutive month compared to 2022. Although the report shows Michigan increased its herd size by 11,000 cows from 2022 to October 2023, the total number of milk cows on farms in the 24 major states was 8.91 million head, 19,000 less than October 2022 and 5,000 less than September 2023. Domestic consumption of whey protein concentrate is tightening inventories, but demand for cheese and milk powder has been less exciting, and concerns about a setback in U.S. consumer spending or a global economic slowdown continue to worry the trade. The forecast for the 2023 average milk price now sits at $17.10 with Class IV at $19.20 and an all-milk price of $20.70.
Pork – 2023 will be remembered by most pork producers similarly to the difficult years of 1998 and 2008 due to the sizeable losses per head suffered. Packer margins were also very challenged, particularly in the first half of the year, compounding profit issues for larger, integrated producers. While prices received for market hogs were much higher than in those years, they have been significantly below production costs this year. High feed costs remain the main profitability issue for producers in 2023. Those have moderated in late Q3 and into Q4, however key non-feed expenses such as labor have also risen this year. Hog futures prices have been quite volatile throughout 2023 and are likely to remain so, highlighting the need for margin protection/risk management. 2023 export demand has been strong, but domestic demand has lagged. 2023 US pork production has been above 2022 levels driven in part by improved productivity per sow. The 2023 losses are triggering some contraction of the US sow herd, which is providing optimism for summer 2024 profits, along with the recent drop in feed ingredient costs (corn and soybean meal).
Fruit - US apple production is estimated to exceed 10.5 billion pounds in 2023. Michigan again is expected to have a large apple crop, after a record production year in 2022 of 1.36 billion pounds. Apple growers continue to be cautiously optimistic that with higher level of supply, price will hold, and overall profitability will remain.
Production of Michigan tart cherries continues to decline statewide with an estimated 108 million pounds expected to be harvested in 2023. Weather in 2023, along with continued pressure from imports from countries like Turkey have contributed to this lower production number. The Traverse City region, which produces much of the tart cherry crop in Michigan, has seen aggressive tart cherry orchard removal over the last 5 years. Labor and production costs have also contributed to this decline in orchard acres and production. Overall profitability for the growers continues to be at or below breakeven.
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