CoBank Quarterly Economic Outlook: Trade Talks, Record Rains Upend Agriculture

DENVER, June 28, 2019 /PRNewswire/ -- The world economy continues to slow amid the ongoing U.S.-China trade war. Hopes are for talks to resume soon between the U.S. and China, but confidence in the trade war ending in 2019 is dimming. Additionally, persistent rainfall across the U.S. has significantly disrupted the agriculture sector. Federal aid of $16 billion for additional trade relief and $3 billion for disaster relief, will help soften the blow for farmers, but not ag retailers. 

The latest Quarterly Rural Economic Review from the CoBank Knowledge Exchange Division indicates that global economic development continues to slide as tariffs drag on global trade and manufacturing. Trade disputes still loom between the U.S. and China, the EU, Japan and Mexico, and progress has been slow, with no major trade victories yet.

The report states that the U.S. economy has been performing well, but there are warning signs despite impressive GDP growth in Q1 at 3.1%. Much of the growth was supported by an increase in inventories as companies braced for an escalation in the trade war with China. The pace of investment spending, manufacturing, and demand for capital goods have all eased in recent months, and the slowdown trend is widely expected to persist through the remainder of the year.

Financial stress for many in agriculture continues to build amid unprecedented uncertainty from trade disputes and weather disasters. Nearly all sectors of agriculture were affected last quarter by the inundation of spring rains that kept farmers out of fields throughout the U.S. The amount of acreage lost to prevented planting will remain the major unknown in the months ahead for ag commodities markets.

Grain, Biofuels and Farm Supply

Trade continues to create headwinds for U.S. grains and oilseeds. Domestic demand has not kept up with last year's large corn supplies, but soybean crush has remained robust, taking advantage of low soybean prices.

Wet weather in the Midwest has significantly reduced corn production expectations. Corn planting progress has been the slowest on record due to the soaking-wet spring. The weather is also worrying some ethanol producers and has created headaches for the farm supply sector. Ethanol producers, already enduring one of the longest low-margin periods in years, are now facing the prospect of limited corn availability and higher corn prices. Ag retailers will continue to contend with the weak farm economy following a difficult fall agronomy season.

Animal Protein

The U.S. animal protein sector continues to be affected by factors largely outside of the control of producers and processors. Weather, African Swine Fever, and trade threats have disrupted the U.S. animal protein sector. In particular, the outbreak of African Swine Fever will impact not just pork but the overall animal protein trade for years to come.

An expected decline in Chinese pork production will spur a surge of beef, pork, and chicken imports into China as it tries to fill a shortfall in animal protein supply that no single pork-producing country will be able to fill. Hog prices and feed costs indicate healthy margins for producers through 2020, but that could change quickly if pork exports do not pick up.

Through the first four months of the year, chicken exports were down approximately 1% but leg quarter prices have increased from 28 cents per pound at the beginning of the year to near 50 cents per pound. With more normal weather expected for the rest of the summer and this fall, and with new poultry plants ramping up production, signs point to protein supply growth to pick up in the second half of 2019. The most significant development for U.S. chicken exports would be the reopening of China, which banned U.S. poultry four years ago over avian flu, but is expected to reopen if a trade deal between the U.S. and China is announced.

Specialty Crops

Weather conditions throughout much of California this past spring have been colder and wetter than normal. While a relief after years of drought, the volume and timing of the precipitation has created problems, particularly for strawberries and cherries. Significant losses are expected in the California cherry crop, particularly early season varieties. Colder and wetter weather in core strawberry production areas dashed earlier estimates of increased production yields from newer varieties. Year-to-date domestic origin strawberry shipments are 10% below last season.

Telecommunications

President Trump's recent executive order that is likely to effectively ban U.S. telecommunications operators from buying Huawei-made telecom equipment is expected to impact rural telecom operators more severely than other operators in America. A prohibition against Huawei network technology may force operators to seek replacement equipment from alternative vendors. Congress has introduced a bill that would provide up to $700 million to help telecom carriers remove Huawei equipment from their networks. However, CoBank estimates that the actual costs are likely to top $1 billion.

Read the full Quarterly U.S. Rural Economic Review: Stalled Trade Talks, Record Rains Upend Agriculture.

About CoBank

CoBank is a $138 billion cooperative bank serving vital industries across rural America. The bank provides loans, leases, export financing and other financial services to agribusinesses and rural power, water and communications providers in all 50 states. The bank also provides wholesale loans and other financial services to affiliated Farm Credit associations serving more than 70,000 farmers, ranchers and other rural borrowers in 23 states around the country.

CoBank is a member of the Farm Credit System, a nationwide network of banks and retail lending associations chartered to support the borrowing needs of U.S. agriculture, rural infrastructure and rural communities. Headquartered outside Denver, Colorado, CoBank serves customers from regional banking centers across the U.S. and also maintains an international representative office in Singapore.

For more information about CoBank, visit the bank's website at cobank.com.

Forward-Looking Statements

Certain of the statements contained in this news release that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual future business may differ materially and adversely from our expectations expressed in any forward-looking statements. Forward-looking statements are typically identified by words such as "believe," "expect," "anticipate," "intend," "estimate," "plan," "project," "target," "may," "will," "should," "would," "could," or similar expressions. Although we believe that the information expressed or implied in such forward-looking statements is reasonable, we can give no assurance that such projections and expectations will be realized or the extent to which a particular plan, projection or expectation may be realized. These forward-looking statements are based on current knowledge and subject to risks and uncertainties. We encourage you to read our Annual Report and Quarterly Reports located on the bank's website at www.cobank.com. We undertake no obligation to revise or publicly update our forward-looking statements for any reason.

SOURCE CoBank

Related Links

http://www.cobank.com