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High interest rates, strong dollar take a toll on agriculture

CoBank quarterly report indicates challenges and opportunities for farm and rural sectors

The combination of high interest rates and a strong U.S. dollar is beginning to take a disproportionate toll on rural industries such as agriculture, forest products, mining and manufacturing, according to a new quarterly report from CoBank’s Knowledge Exchange.

While the U.S. economy is outperforming expectations, the rest of the world—Europe and China, in particular—has fallen short. As a result, the dollar is stronger than previously anticipated. Because most international transactions are conducted in dollars, this means U.S. exports become more expensive and imports cheaper.

aircropsRice production in the U.S has rebounded after last year’s small harvest, and an export ban on white rice in India may mean new business for U.S. producers. A new report from CoBank dives deeper into this market as well as other commodities and rural industries. “The challenge for agriculture and other rural industries that rely heavily on global markets is their export partners simply can’t afford to buy U.S. products,” said Rob Fox, director of CoBank’s Knowledge Exchange. “When you combine the loss of exports with a general slowdown in the U.S. economy, it’s a double whammy for rural America.”

Each Knowledge Exchange update covers key industries represented by CoBank, a cooperative bank serving agribusinesses such as MFA Incorporated across the nation. Here is a summary of the latest report:

Grains, Farm Supply & Biofuels 
Historically low water levels on the Mississippi River are limiting grain movement heading into peak fall harvest season. Higher barge rates on the river are pressuring interior basis values for corn and soybeans. Winter wheat planting is underway in the U.S. with acreage expected to be down slightly as prices languish below expected breakeven costs of production.
Fertilizer prices weakened in the third quarter, with anhydrous ammonia and potash prices falling 30% and 15%, respectively. Prices for natural gas, used as both feedstock and production input, dropped by about 7%. The fall fertilizer application season should be fairly normal for regions with an orderly harvest.
Fuel ethanol production was very strong during the third quarter, averaging 16.1 billion gallons compared to 15.4 billion during the second quarter of 2023. A strong summer travel season and attractive fuel ethanol prices were key demand drivers. Renewable diesel and other biofuel capacity continues to grow, having increased by 26% or 800 million gallons since January 2023.

Animal Protein & Dairy
Limited supplies of market-ready cattle suppressed beef availability throughout the third quarter. USDA estimates total U.S. beef output will be down 5% in 2023 and expects an additional 7% decline in 2024. Tight supplies continued to churn the wholesale beef market, but with fed cattle prices up 30% compared to last year, packer margins came under pressure. Despite rising prices, consumer demand for beef has remained steadfast.
The U.S. Supreme Court decision to uphold California’s Proposition 12 spurred a rally in the pork market. Pork cutout values increased 41% from May-July, countering weak prices earlier in the year. Hog prices also rallied, with nearby futures climbing 36% from late May through early August. Rising production and fading interest have since cooled the market.
Chicken markets were tepid at the beginning of the third quarter. Severe margin compression combined with high input costs caused some producers to reconsider longer-term production goals. Any growth will be limited given the announcements of six plant closures this year.
Faced with low milk prices and high feed costs, dairy farmers sent more cows to slaughter to take advantage of record-high beef prices. Futures markets indicate that the final quarter of the year could be much better, with projected Class III milk prices at $17.30 per hundredweight.

Cotton & Rice
USDA is expecting U.S. cotton production will drop 9.2% year-over-year, landing at its lowest level in 10 years. Export demand has been lethargic as the strong U.S. dollar and slowing global economy diminish sales.
India’s export ban on white rice shocked world markets in July. Asian rice prices quickly climbed to a 12-year high. However, the price response in the U.S. has been muted with domestic rice production making a major recovery from last year’s small harvest. With much of India’s exportable rice now offline, new business has materialized for U.S. exporters.

More information can be found in the full report online at cobank.com/knowledge-exchange/quarterly.

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