The Farm Economy: Overall Trends
The United States general economy continues to perform well, but we are likely to see growth slow over the next six to twelve months. Despite the solid economic growth over the last several years, there are challenges on the horizon that could slow the economy or even contribute to a recession.
The ongoing trade disputes and increased tariffs with major trading partners around the globe are one cause for concern. While the problems with agricultural exports are well established, the general economy is taking a hit as well. While some U.S. manufacturers are benefiting from a more protected U.S. market, others are facing both higher prices for imported raw materials, and diminished international markets due to foreign countries’ retaliatory tariffs on U.S. exports. Threatened U.S. tariffs target consumer goods from China, which may lead to higher prices and place a drag on consumer spending.
The actions of the Federal Reserve remain a significant question mark. The U.S. central bank has been gradually tightening monetary policy and raising interest rates over the past few years, but rates remain low by historical standards. While the prospect of the Fed raising rates further seems to have dissipated, at least for the remainder of this year, more rate increases would be necessary to bring the U.S. to a “normal” interest rate environment. The current situation leaves the Fed with limited tools to respond to an economic slowdown. Nonetheless, some market analysts predict up to a 50-basis point rate cut by the end of 2019.
The current federal budget creates a spending cliff in FY 2020 (starting in October 2019), as the temporary lifting of spending caps goes away. Congress will be faced with the choice of continuing aggressive deficit spending, or to allow some kind of gradual decrease. The current state of partisan politics in Washington leads one to assume that this will be a contentious issue. If the spending caps revert, this will require significant budget reductions. While this may be desirable long-term from the perspective of managing Federal debt levels, it will create an additional drag on the economy.
While a recession is not in the current forecast, we are likely to see slowing U.S. and global growth for the second half of 2019 and into 2020. Economic forecasts suggest GDP growth declining from the 3.1% seen in Q1 2019, to between 1.7 and 2.0% for the remaining quarters of the year, and 1.4-1.7% for 2020.1 Positive growth, to be sure, but significantly slower than what we have seen over the past two years.
Overall U.S. inflation came to a relatively modest 1.8% in May 2019 (year-over-year).2 However, this follows several years of roughly 2% inflation, and some expenses have increased at a more rapid pace, including labor costs. Average U.S. hourly earnings increased by 3.2% during 2018.3 Minimum wage increases in many states and a tight labor market means that finding and retaining workers has grown more costly.
Another area of rising costs has been energy and related expenses, though they have moderated somewhat in 2019. After reaching a high of $70.98/bbl in 2018, crude oil prices declined and are expected to average $59.29/bbl for 2019.4 Diesel fuel is projected to average $3.11/gal nationally, seven cents below 2018’s average.5 Anecdotal reports, however, indicate that prices for many supplies influenced by energy costs from plastics to cardboard boxes have increased.
Transportation costs (and availability) are a factor as well not just because of fuel costs, but also because of a continuing nationwide driver shortage, and the implementation of electronic driver logs for long-haul truckers, which has driven expenses higher.
Continued trade disputes and tariffs between the U.S., China and other nations has had a major impact on the agriculture industry. Many sectors of U.S. agriculture, forestry and commercial fishing are highly dependent on exports. Even for those producers whose products are not directly exported, the price they receive domestically may be heavily influenced by international trade. In addition, prices of some imported goods from China as well as Europe have already started to reflect import tariffs.
The impact of rising input costs, low commodity prices, and sluggish markets for many farm products has taken a toll on the ag economy. National farm loan delinquency rates have been trending higher for the last five years in a row, after reaching a low in 2014. Still, at the end of 2018, the delinquency rate for non-real estate farm loans was 1.84%, below the 30-year average rate of 2.26%.1 Farm bankruptcies have also ticked up, but remain well below levels seen in the 1980s and early 1990s.
1 Deloitte Insights, Fannie Mae, Yahoo Finance
2 US Bureau of Labor Statistics
3 US Bureau of Labor Statistics
4 U.S. Energy Information Administration
5 EIA, National retail average