US Economic Outlook
With inflation cooling and the job market weakening, will the Federal Reserve act and begin cutting rates? Economists believe so. The July unemployment rate increased .7% from the 2023 average up to 4.3%. Historically the “Sahm Rule” indicated that an increase of .5% in the unemployment rate was indicative of an impending recession. However, a notable difference this time may be the recent increase in immigrants seeking jobs. Monthly payroll gains for July were 114,000, which is 65,000 lower than June and the second lowest since January 2021. The unemployment rate is expected to climb in 2024Q4, with stabilization in 2025 at an estimated 4.6%.
Along with the softening job market, inflation has continued to cool over recent months. The 3-month annualized and the year-over-year rates for core PCE inflation have both improved consistently. Specifically, the year-over-year rate dropped to 2.6% in June. Although, there was a pop in inflation at year-end 2023, it is anticipated inflation will continue to cool and reach core PCE inflation rate of 2.3% in 2025, on target with fiscal policy set by the Federal Reserve.
As the Fed looks to relax fiscal policy and cut rates, focus turns to the November elections. It is anticipated that the fiscal 2025 budget will not be finalized before the September deadline, but that a continuing resolution will be passed to avoid a government shutdown which would be detrimental for both parties. Looming national debt must be addressed by either party’s fiscal policy to maintain both near and long-term fiscal stability.
Agricultural Economic Outlook – August WASDE and ERS Outlook Report
Corn: August’s report revises yield estimates for corn 2.1 bushels higher than last month, a record corn crop of 183.1 bushels per acre. This is driven by strong yields coming from Illinois, Iowa, Indiana, Missouri, Nebraska, and South Dakota. The revised estimate drives 2024/2025 production up to15.1 billion bushels, 47 million bushels higher than previously estimated. Along with the higher supply number comes some good news from higher projected corn use domestically, up 15 million, and higher exports, up 75 million. The higher exports estimate is due to U.S. competitiveness in the world market due to low commodity prices. Even though ending stocks are projected lower, this month’s report lowered the season average corn price received by producers to $4.20 per bushel. This is not good news for corn producers, who have been already shown reluctance to sell the 2023 crop due to low prices with 61% of the 2023/2024 crop held in on-farm storage versus the norm of 55% of the crop held.
Soybeans: This month’s report revised the 2024/2025 soybean crop higher, with increases in both acres harvested, an additional 1.0 million acres, and increased yields, 1.2 bushels additional per acre, to 53.2 bushels per acre. If realized this will be an 11% increase over 2023/2024 crop, with projected ending stocks up to 560 million bushels. The USDA revised their season average soybean price received for the 2024/2025 crop 30 cents lower than last month, now estimating $10.80 per bushel for soybeans. As producers begin to harvest this soybean crop, traders will look to the export market which has been adversely affected by a lack of China demand and trade uncertainty given the election. There is potential for exports to improve as China’s economy recovers, increased European demand for US soybeans as the Deforestation-free Supply Regulation goes into effect January 2025, and future rate cuts by the Fed improving the US dollar against the Brazilian real.
Pork: While summer hog prices and producer margins were improved over earlier in the year, they did not rise to the levels suggested by summer futures mid-Q2. Some producers did use the improved futures to lock in higher prices for sales made in late Q2 through the end of the year using various hedging tools including Livestock Risk Protection (LRP) policies, forward contracts, futures, and options.
Over the past few months, the USDA Pork Cutout and CME Lean Hog Index prices have been stable, but both are likely to fall, as they seasonally do, for the remainder of the year. Recently improved futures prices and lower feed costs (primarily corn and soybean meal) have provided a better opportunity to hedge small profits or, at worst, decrease losses for Q4 and Q1 2025. Feed costs are considerably lower than earlier this year or at any point in the last 3 ½ years. A weakening US dollar has helped support exports which remain solid and should be higher for 2024 than 2023. Domestic demand appears to be improving as evidenced by reduced cold storage pork inventories this summer.
Improving domestic demand has been a key focus of the National Pork Board as it invested considerable resources in new customer segmentation and targeted marketing strategies. The June USDA Quarterly Hogs and Pigs Report showed an increasing inventory of market hogs, up 2% from a year ago and slightly above Q1 levels. The US breeding herd was reported down 3% year-over-year at just over 6.0 million sows and down slightly from Q1. The increased inventories of hogs to be sold through the remainder of 2024 is expected to put downward pressure on prices, but perhaps not as sharply as in Q4 of 2023. Producers continue to focus efforts on productivity, cost-control, price risk management, and biosecurity.
Dairy: Milk production in the US continued to decline in July with total pounds declining 0.3% year-over-year, marking the 13th consecutive month of contraction. USDA reported a dairy cow inventory of 9.325 million head in July, a 43,000 head decrease in milk cows from the prior year. Dairy slaughter rates have also dropped significantly, 7.5% year-over-year, as producers try to maintain herd sizes. However, a scarce heifer supply and high beef prices are continuing to limit producers’ ability to expand. Scarce heifer supply has driven the cost of replacements to record high levels, as much as $4,000/head, making it difficult to expand cow numbers and requiring more capital for dairies not raising their own.
A tighter milk supply has factored into improved dairy commodity and milk prices in Q3. Class III prices over the last three months have averaged $20.62. This, along with elevated futures prices, has pushed the overall 2024 Class III futures average to $19.29. Class IV prices averaged $20.50/CWT for the first eight months of the year and the Class IV futures average for the year is AT $21.21. Large crop yields forecasted by the USDA will likely continue to push down feed costs. This, coupled with the improved milk prices, should boost producer margins for 2024 and into 2025.
Confirmation that at least three dairies in California have reported HPAI in their herds caused milk prices to surge since that state produced 18% of U.S. milk and cheese output last year, with the eight counties in the San Joaquin Valley housing 16% of the nation’s milking cow herd. A widespread outbreak in California is likely to have a major impact on milk and dairy product production, with Class IV Milk particularly affected as the state contributed 32% of U.S. butter production and 42% of total U.S. NDM output in 2023.
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