Depending on who is asked, COVID either dropped a bomb on global markets or simply exposed existing vulnerabilities. Either way, the world is still dealing with the fallout, in addition to new and multiplying global challenges. While recovery may well be in the cards for some segments of the agricultural commodity supply chain, others appear to be charting an entirely new and uncertain course.
In a time when price volatility, strained supply chains and general uncertainty make sound forecasts increasingly difficult to realize, experts’ analysis has become more important than ever.
Here are four more key take-aways from USDA’s 2023 Agricultural Outlook Forum:
1. Some supply chain issues may wane by year-end
Strained supply chains may be old news in 2023, but experts said challenges may linger for a while longer even as some categories are expected to move toward recovery this year.
Bill Rooney, vice president of strategic development at Kuehne + Nagel, shared a more positive outlook for sea logistics for the second half of the year. While the first half will likely be characterized by a weaker cargo market and global economy, Rooney said he expected improvements in the cargo market and economic conditions to usher in “back-to-normal operations” in the second half.
With “more geopolitical interventions now than ever before,” supply chain disruptions including rail supply chain problems are inevitable, said William W. Wilson, professor of agribusiness and applied economics at North Dakota State University. Even if current issues improve, he expected elevated ag prices and volatility to persist for two to three more years.
“Supply chain problems are likely improving, but we will continue to see challenges with labor, fuel and oil and other inputs to supply chains,” he said.
2. Ukraine will continue to drive volatility, tightness across grains and oilseeds
Prices for grains, fertilizer and energy have declined over the past eight months, but are still high relative to price levels over the past five years. One of the many impacts of the war in Ukraine was the massive change to established trade flows necessitated by export reductions. Ukraine exported 5.3 million fewer metric tons of wheat in the 2022/23 marketing year compared to the year prior and 4.5 million fewer metric tons of corn.
With no clear end in sight, the war continues to disrupt global trade flows and supplies, said Joseph Glauber, senior research fellow at the International Food Policy Research Institute. Global ending stocks of wheat—excluding China—are already at their lowest level since 2007/08 and corn is at its lowest since the 2012/13 marketing year.
Ultimately, the war’s effects will be felt into the 2023/24 marketing year with Ukrainian wheat and corn production and supplies projected to fall, further throttling exports. “Tight stocks and continued disruption of Ukrainian supplies mean volatility will likely continue in global markets until 2023 crops are determined in the second half of the year,” said Glauber.
3. Forecast shift to El Nino could bring welcome change after “triple-dip” La Niña
As of March 14, La Niña has officially ended its three-year streak. Oceanic and atmospheric indicators have now moved toward neutral conditions, at least for the time being. The latest government forecasts still suggest a 50% chance that El Niño conditions may be met later this year.
“We know the climate is a little bit more different than previous generations had to deal with,” said Mark Brusberg, chief meteorologist at USDA in a discussion of previous outcomes following La Niña years. Though recent severe drought conditions in the Western U.S. corresponded with La Niña weather patterns, a reversal into El Niño territory does not mean guaranteed rainfall for the West.
A move away from La Niña conditions could spell good news for Argentinian corn yields following this year’s historic drought, as yields usually benefit from wetter conditions after a La Niña growing season. Still, crop yields in other growing regions show no discernible pattern between La Niña and El Niño years, making accurate forecasts difficult. Examples include Australian wheat and Brazilian soybeans.
4. 2023 expected to be a defining year for federal policy
Close attention will be paid to several looming policy decisions in the U.S. this year, among them the U.S. Environmental Protection Agency’s June 14, 2023 deadline on issuing final biofuel blending requirements for 2023. “June Renewable Volume Obligations (RVOs) will determine much of the domestic growth in U.S. soybean demand for the next three years,” said Scott Gerlt, chief economist at the American Soybean Association.
The EPA had published its proposed Renewable Fuel Standard volume targets for 2023, 2024 and 2025 in early December 2022, surprising the vegetable oils industry with targets well below expectations. Lumped together, announced renewable diesel capacity and current biodiesel capacity far surpass the EPA’s current renewable volume obligations.
Monetary policy will also remain in focus amid a strong U.S. dollar, continued inflationary pressure and rising interest rates.
Animal Protein Demand
In 2022, meat sales reached a record $87 billion, a 6% increase over the previous year. This happened despite a 3% volume decline, about 600 million units, year-over-year. Data included fresh beef, chicken, pork, and turkey.
“I think overall, it is clear consumers are willing to spend more at the meat counter,” Earnest said. “Beef demand has been exceptional.”
For context, retail beef consumption declined from 2009-2015 as prices climbed an average 7% per year, according to USDA data compiled by CoBank. In response, retail beef prices slowed from 2015-2017, rising 2% on average.
Since the pandemic, beef disappearance has not slowed, despite retail prices increasing 9% or more each year.
Animal Protein Production
Protein production is expected to moderate after years of growth. Beef is going through significant supply constraints after intense drought forced ranchers to sell off their cattle herds. Cattle slaughter increased more than 11% in 2022 compared to the prior year. The national herd count was down 3% as of Jan. 1.
Pork is seeing a moderate rebound. Despite hog inventories being down, growth in the breeding herd size suggests potential growth in the back half of 2023. Rising feed costs are hampering chicken growth this year after stronger than expected production in 2022.
Summer Grilling
For a bacon cheeseburger, meat cuts and formulations are looking favorable ahead of the summer months. Beef grind formulations are above historical norms, but lower than when they peaked in 2020, especially for 50s. Recent data show they are going for less than $125 per hundredweight. Meanwhile, the pork belly primal is down 20% compared to a recent 5-year average. It is valued at roughly $100 per hundredweight.
For middle meats, such as ribeye and brisket, prices are above the 5-year average from 2017-2021, but lower than what they were in the fourth quarter. Ribeyes have declined in value since January 2023, but are starting to rebound. They are valued at roughly $450 per hundredweight. Briskets steadily declined last year, but they remain 17% above the 5-year average. Recent data show briskets valued less than $200 per hundredweight.
Audience Poll
What animal protein will be most popular this grilling season? Most attendees selected beef as their favorite, followed by chicken and pork. Michael Nepveux, Lead Protein Analyst at Stable, and Earnest agreed with the audience consensus.
Overall
Macro conditions are continuing to pressure consumer spending, but so far, meat demand has been stronger and more resilient than expected. Earnest said the grilling season will be full of challenges as producers continue to adjust to inflation.
