A few months ago, it seemed possible to suggest that COVID-19 might be declining and some sense of normalcy returning to our lives – at least for those of us who are vaccinated and received boosters. But as we look ahead to 2022 and the newest variant sweeping across the globe, it’s clear that the virus and related labor and supply disruptions will still have a major impact on the economy for at least the foreseeable future.
But that’s certainly not the only factor to watch as we peer into our crystal balls for the new year in farm country. Demand is high for most farm commodities and protein, boosting revenue projections but also leading some to worry about adequate supplies and the potential impact of even higher food prices.
“Demand since the pandemic has struck has been amazingly strong,” says Dan Basse, president of AgResource Company. “Retail beef prices were at $8/lb. last week. We’ve never seen that before and it’s all related to disposable income levels rising.”
He believes that world grain and meat demand will stay relatively strong into 2022.
“This is the first time the world produced a record large grain crop and we used more than what we produced. That is giving us a very clear signal that agriculture production needs to expand,” Basse noted on Agri-Pulse Open Mic.
But there are also headwinds ahead that can cut into potential upsides.
Inflation is having a major impact, the supply chain is still not functioning efficiently, input prices are skyrocketing and there’s a lot of uncertainty over agricultural trade. And let’s not forget the weather.
“Agricultural commodity prices have increased by around 28% in the last year and by 40% above pre-pandemic levels,” noted Berry Marttin, a member of Rabobank’s Managing Board, in their annual outlook report. “The increase in agricultural commodity prices is also exacerbated by other inflationary pressures in the economy, such as the astronomical rise in gas prices ahead of the northern hemisphere winter, labor scarcity, rising rents, and a rapid increase in prices of inputs like fertilizer, crop protection products, and machinery, among others. Yet inflationary pressures are not the only challenge.”
We’ll likely see fewer Covid-related disruptions, the Rabobank economist noted, but when it comes to commodity prices, “any sense of normalcy looks unlikely, and inflation in this space is almost certainly not just ‘temporary.’ Any significant drop in agricultural futures prices will likely be met by significant pent-up consumer hedging, which has been restricted in this period of high prices. 2022 will start from a position of low stocks in many agricultural commodities, which should lead to heightened volatility.”
Unsurprisingly, Rabobank analysts titled their annual outlook report for 2022: “Hell in the Handbasket.”
In a similar year-ahead outlook report, CoBank’s Knowledge Exchange team of economists project that the U.S. farm economy will continue to struggle with supply chain dysfunction and cost inflation. And they don’t project any significant pullback in farm-level costs until at least the third quarter of 2022.
CoBank’s Rob Fox explained that, for crop producers, fertilizer prices are currently double the 10-year average and some crop protection chemicals, which are often imported, “have become nearly impossible to source at any price due to ocean transport congestion.
“The recent cost increases alone on just those two inputs equates to about $0.70/bushel for a corn producer – a roughly 15% increase in the total cost of production. Additional cost increases for labor, machinery, fuel, and seed must be factored in as well,” Fox wrote.
“So, while corn futures prices in the $5.50/bushel range for late 2022 delivery seem to be attractive at first glance, a deeper analysis projects modest profit margins for next year. The same general story of historically strong prices being more than offset by increases in cost structure holds for nearly all crop production including row crops, fruits and vegetables, and hay.”
The outlook is more positive for livestock producers. CoBank’s Fox wrote that livestock producer margins should continue to be generally favorable overall, with the effect of shrinking beef cattle supplies finally showing up in higher prices at the producer levels.
“Hog and poultry producers should both enjoy another good year, though perhaps not like the exceptional 2021. After a very difficult year, dairy producers will benefit from tighter global milk supplies and lower protein feed costs,” he added.
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The Rabobank report also noted that food inflation is likely to remain high, “with uncertain social consequences.”
“Like a spiral, the higher commodities prices go, the more buyers want to stock up, to avoid shortages and disruptions ahead and guarantee normal operations,” the report said.
“For key food staples like wheat, exporting countries have been increasing export taxes to cool domestic prices, while importers have been trying to front-load their import programs to keep food inflation under check,” explained the Rabobank economists. “Amid the pandemic – still peaking in parts of the world – keeping a good supply of agricultural commodities, and food staples like wheat in particular, is a critical government goal to avoid further discontent.”
Keep in mind that the “farm” portion of food prices is generally a small percentage, but that doesn’t mean that fingers won’t conceivably be pointed at producers – especially by those who are least able to afford the higher food prices or government officials looking to place blame.
Rabobank projected that it is “highly unlikely that food prices will go back to the five- or ten-year average in 2022, as commodity prices are now supported by inflation in the general economy,” including high shipping costs, energy and fertilizer prices, as well as a shortage of labor in many countries.
“Urea prices in the U.S. Gulf, for example, are up 272% year over year, posing questions about how much fertilizer will be used in places where farmers do not have access to finance and/or struggle financially.”
Rabobank’s inflationary outlook runs counter to the views expressed by the Biden administration and some other economists who insist that inflation is transitory and will start to ease next year, once supply chain disorders can be solved. Earlier in December, President Biden told reporters that the reason for inflation is that “we have a supply chain problem that is really severe.”
“I think you’ll see it change sooner, quicker, more rapidly than people think,” Biden told reporters in early December. “Every other aspect of the economy is racing ahead.”
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