Economic recovery remains fragile, but rural industries show signs of improvement
Although the U.S. economy has been improving since late spring, progress has slowed measurably and will likely remain sluggish through the end of the year, according to the latest analysis by CoBank’s Knowledge Exchange division.
With COVID-19 cases stubbornly high—especially in rural areas—and cooler temperatures forewarning a return to the indoors, the quarterly report by CoBank indicates economic progress ahead will be slower than the gains already achieved.
However, essential rural industries are finding new ways to survive and even thrive, despite the pandemic, said Dan Kowalski, vice president of CoBank’s Knowledge Exchange division.
“The good news, at least from an economic standpoint, is that many rural industries have begun to turn the corner,” Kowalski said. “This is particularly true in agriculture. A weaker, steady dollar has supported a price recovery in most agricultural commodities.”
The U.S. ethanol sector continued to recover during the third quarter to a new baseline level equaling roughly 90% of pre- COVID demand. Recent developments surrounding E15, small refinery exemptions, federal relief and another delay on Brazilian import duties appear to be incremental positives for ethanol.
Large grain sales to China along with recent reductions in ending stocks and expected production have provided a rally for U.S. grain farmers. Strong export sales were a major driver of recent positive commodity price performance. However, China has a propensity to announce but not close grain purchases, so whether those imports will happen remains a lingering question.
Farm supply retailers navigated through a volatile, yet successful, growing season. Harvest has been strong despite crop damage and stress caused by extreme storm activity and dry weather. Direct government payments to agriculture producers throughout 2020 could result in higher prepayments to farm supply cooperatives during the fourth quarter in advance of the spring 2021 planting season.
The U.S. beef complex ended the third quarter in a far better position than where it started. Over the last three months, boxed beef cutout has climbed 5%. This helped lift cattle prices by 10% since the low around Independence Day. Profitability for cattle feeders has improved to break-even levels on a cash basis, and packer margins have remained elevated.
Renewed optimism for trade is the bright spot for the U.S. pork sector after exports slowed significantly over the summer. Germany discovered African swine fever (ASF) in wild boars, leading many markets to ban pork exports from Germany. Lean hog futures have spiked on this news. Hog producers are expected to lose $7 per head in the coming quarter and see positive margins of $15 to $20 per head in the first half of 2021.
Dairy markets remained mired in volatility last quarter with milk and cheese prices ending on a strong note. The recovery in milk prices has already incentivized more dairy production on the farm. Federal programs also helped provide financial cushion for some struggling dairy producers last quarter.
The reopening of restaurants in the third quarter was welcome news for specialty crop producers and processors with food-service contracts, although the expected rise in COVID-19 cases this fall could cause greater uncertainty. Produce sales at retail grocery stores, however, remain above year-ago levels and are expected to remain higher than prior years for the foreseeable future.
Much more information is available in the full report at cobank.com. Each quarterly update covers key industries represented by CoBank, a $152 billion cooperative bank serving agribusinesses such as MFA Incorporated across rural America.
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