'Year Ahead Report' suggests slowing economic growth, growing ag debt
Expect trade uncertainty, rising debt levels and market volatility to continue creating difficult operating environments for U.S. agriculture in 2019. That’s the outlook from a wide-ranging report compiled by CoBank, a $128-billion cooperative bank serving rural America.
“Trade is the outsized risk,” said Dan Kowalski, vice president of CoBank’s Knowledge Exchange Division. “Unresolved disputes with Mexico, Canada, Europe and China are the greatest collective threat to the U.S. economy in 2019.”
The report, “The Year Ahead: Forces That Will Shape the U.S. Rural Economy in 2019,” offers a look at these 10 key factors:
- Global Economy — The global economy is slowing and the effects will spread to U.S. shores in 2019. World economic output hit an eight-year high in 2018, but challenges and risks are decisively weighted to the downside for the coming year. Trade policy between the U.S. and China will remain the leading risk to the global economy.
- U.S. Economy — The U.S. economic expansion is set to become the lengthiest in history this summer. But clouds forming on the horizon suggest more modest growth in 2019 and greater concerns for 2020. We can expect a delicate balance of consumer strength to offset a slowing housing market and weaker business investment.
- Monetary Policy — The world’s largest economies were widely expected to grow in concert in 2018. That did not materialize. As a result, major central banks are attempting to guide their economies through very different stages of recovery. Gross domestic product forecasts have been cut amidst a darkening outlook for the U.S. and Chinese economies. It may become very difficult for the Federal Reserve to raise rates absent a spike in inflation.
- U.S. Government — With a split Congress, finding consensus over the next two years to move large legislation will be difficult, but there are reasons for managed optimism. The 115th Congress reauthorized the Farm Bill, yet the administration’s efforts on trade have many in agriculture nervous. There is work needed to re-establish major trade relationships before any further damage is done.
- U.S. Farm Economy — With agricultural commodity markets depressed by global supply abundance and ongoing trade disputes, farmers and ranchers face the arduous task of cutting production costs. However, continually rising costs in agriculture are expected to squeeze producers, causing further margin erosion and financial stress in 2019. Farmers should not bank on a fourth consecutive year of above-trend yields to make up for low commodity prices and rising costs.
- Ag Trade Policy — Ongoing tariffs and trade negotiations continue to hang over the U.S. ag economy with no clear sign of resolution, clouding agriculture’s trade outlook for 2019. Progress in negotiations is likely to be slow, which spells more pain for months to come. As a result of the trade war, the value of total U.S. agricultural exports in 2019 is expected to fall to $141.5 billion, down $1.9 billion from 2018, according to the USDA’s latest projections.
- Grain, Farm Supply and Biofuels — In 2019, expect new and intense competition for the grain, farm supply and biofuel sectors. These competitive changes will benefit a few while hurting many along the supply chain. The most impactful competitive pressure will come from outside the United States. Abundant U.S. supplies and a protracted trade dispute with China have enhanced foreign opportunities. Ag retailers will also face price hikes from a more concentrated supplier base.
- Dairy and Animal Protein — In 2018, the U.S. animal protein sector began suffering from the same oversupply and weak margins that have plagued U.S. dairy producers since 2015. Despite the less-favorable profitability environment, the protein and dairy sectors will continue to expand production in 2019, prolonging the margin squeeze. Beef appears to be weathering the animal protein oversupply situation best.
- Rural Electricity — Last year was a turning point for the role data analytics will play in transforming the rural electric co-op industry. Optimization of the grid offers many benefits in cost savings and member relations. However, if co-ops do not harness the power of data to unlock value, third-party providers will step in to provide this service. Co-ops cannot afford to delay adopting strategies for a more distributed future.
- Rural Communications — Over the last few years, electric distribution cooperatives have been building fiber networks, causing fear about increased competition. For 2019, rural America should expect to see a continuation of these network builds, but the risk of co-ops overbuilding is low. Their primary focus is underserved markets to benefit their own operations and their customers.
The full report is available at cobank.com.
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