Even as the Federal Reserve struggles to get inflation under control, the agriculture and energy sectors “have gained unexpected levels of pricing power” due to lingering global supply challenges, according to a quarterly report from CoBank.
“Agricultural production and transportation issues are still most severe in the Black Sea, but drought in Europe, Asia, and the Americas is making grain supply and logistics all the more uncertain,” the report says.
The report notes grain prices continue to be volatile due to the war in Ukraine as well as a weakening global economy, falling energy prices and continued drought in the western United States.
The conflict in Ukraine "‘remains dynamic — and generally bullish for wheat — as Russia’s efforts to annex certain regions of Ukraine increase the risk that Ukraine’s grain exports (allowed by the Aug. 1 deal brokered by Turkey) will fall short of expectations,” the report says.
Domestic nitrogen prices have dropped sharply in the second and third quarters because of falling natural gas prices. But NPK prices are rising because of the war in Ukraine and U.S. fall applications will push prices up further, according to the report.
The report notes Canada and the Netherlands have announced goals for cutting fertilizer usage to reduce greenhouse gas emissions. While the United States is unlikely to follow suit in the near term, farmers still may reduce fertilizer usage by increasing soybean production.
“To support the expected growth in renewable diesel fuel, acres will likely shift from corn (which is nitrogen-intensive) towards soybeans (which typically require potash and phosphorus only),” the report says.
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CoBank analysts see overall demand for animal proteins remaining relatively strong. Exports have slipped 7%, but that’s due to supply chain constraints rather than slowing global demand, the report says.
Dairy producers have expanded herds somewhat this year but still haven't reached last year's numbers. Producers “remain hobbled by high feed and labor costs and tight heifer availability, which is limiting herd growth despite positive margins,” the report says.
The report also calls attention to the struggle between states in the Colorado River basin over shrinking water supplies.
The negotiations over rights to Colorado River water hold “enormous implications,” the report says. “Farming communities throughout the Southwest anxiously await the results as a third La Niña weather year portends more drought.”
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