Home > News > CoBank Releases 2019 Year Ahead Report-Forces that Will Shape the Rural Economy

The U.S. economy is still performing well by most key measures. However, consumers, investors, companies and other market participants have become more wary about the near-term future with seemingly good reason. Global and U.S. economic prospects are weakening and the agricultural economy shows few signs of an imminent comeback, according to a comprehensive 2019 outlook report from CoBank’s Knowledge Exchange Division.

“Trade uncertainty, rising debt levels and market volatility are threatening to derail the global economy and creating difficult operating environments for U.S. agriculture,” said Dan Kowalski, vice president of CoBank’s Knowledge Exchange Division. “Trade is the outsized risk. Unresolved disputes with Mexico, Canada, Europe and China are the greatest collective threat to the U.S. economy in 2019.”

The CoBank outlook report examines 10 key factors that will shape agriculture and markets sectors that serve rural communities throughout the U.S.

Global Economy: Trade-Induced Slowdown to Hit U.S Shores
The global economy is slowing and the effects will spread to U.S. shores in 2019. World economic output hit an 8-year high in 2018, powered by both advanced economies and emerging markets.

But challenges mounted in late 2018 and risks are decisively weighted to the downside for the coming year. Trade is the biggest risk, as the world’s two largest economies test each other’s willingness to accept economic pain. Trade policy between the U.S. and China will remain the leading risk to the global economy. The rising of debt levels is another undercurrent that threatens to derail the global economy. Total global debt levels (all public and private debt) are now more than three times greater than in 2001.

U.S. Economy: Slowing Growth, Accelerating Risk
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. Therefore, we can expect a delicate balance of consumer strength to offset a slowing housing market and weaker business investment to keep the U.S. economy growing between 1.75 and 2.25 percent in 2019.

Monetary policy: Thinning Margin for Error
The world’s largest economies were widely expected to grow in concert in 2018. That growth did not materialize. As a result, the major central banks are now attempting to guide their economies through very different stages of the economic recovery. Japan is committed to stimulating its economy for the foreseeable future. The European Central Bank will not raise interest rates until at least the third quarter of 2019. China’s economy is slumping and its central bank has indicated that it’s ready to loosen monetary conditions as needed. Gross domestic product forecasts have been cut over the past month amidst a darkening outlook for the U.S. and Chinese economies. If this slowing materializes, it will become very difficult for the Federal Reserve to raise rates this year absent a spike in inflation.

U.S. Government: Split Congress, More Opposition
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. One of the final bills out of the 115th Congress reauthorized the Farm Bill. HR 2 passed the Senate and the House by very large bipartisan margins, showing that Congress can still work together when there is strong constituent support and engagement on an issue.

The Administration’s efforts on trade have many in agriculture nervous. The agriculture industry will be very focused on the need to get the United States-Mexico-Canada Agreement (USMCA) completed. Further, it is imperative that the U.S. negotiates a resolution to the trade dispute with China and reach successful conclusion to conversations with Japan, the EU and a post-Brexit U.K. There is work needed to re-establish these major trade relationships before any further damage is done to U.S. agriculture.

U.S. Farm Economy: Higher Costs and Debt to Hamstring Producers
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 crop yields to make up for low commodity prices and rising costs. To steady the agricultural economy, and boost revenues, the sector is dependent on substantive breakthroughs in trade policy. Strong land values remain the positive for farmers and ranchers, although land values could face downward pressure.

Ag Trade Policy: Seeking Resolution
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. Three significant trade-related issues must be solved this year to restore some normalcy to agricultural markets: Legislative approval of USMCA, removal of the steel and aluminum retaliatory tariffs and substantive improvement of trade relations with China. Progress in negotiations on all fronts 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 Department of Agriculture’s (USDA) latest projections.

Grain, Farm Supply and Biofuels: The Rise of Competition
2019 will be a year of new and intense competition for the grain, farm supply and biofuels 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 U.S. Global crop production has been increasing for decades, but abundant U.S. supplies and a protracted trade dispute with China has enhanced foreign opportunities. Brazil’s projected record crop, Argentina’s production rebound and continued agricultural expansion in Eastern Europe will further inundate a bloated market. Trade dynamics will also impact an ethanol industry that is already struggling. Large supplies have caused some producers to cut output amid negative margins. Competition will also increase in the farm supply sector, squeezing margins. Ag retailers will also face price hikes from a more concentrated supplier base.

Dairy and Animal Protein: Output Grows Again
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.

Of the three major animal protein species, beef appears to be weathering the animal protein oversupply situation best, with favorable fed cattle prices and historically high packer margins resulting from tight processing capacity. Conversely, the pork and poultry sectors reflect the impact of plant expansions which will deliver double-digit increases in processing capacity for both species by 2020.

Rural Electricity: Data Analytics Become a Necessity 
2018 will go down as 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 that includes automated controls, tailored rate structures, enhanced customer engagement and sophisticated data analytics.

Rural Communications: Electric Co-Ops Gain Appetite for Broadband
Over the last few years, electric distribution cooperatives have been building fiber networks, causing some angst in the rural LEC community as they fear this will lead to increased competition. For 2019, rural America should expect to see a continuation of these network builds, but the risk of co-ops overbuilding in rural LEC markets is low. Their primary focus is to build networks in underserved markets for the benefit of their own operations, and their customers.

Silver Lining 
The global and U.S. economic prospects are weakening, and the agricultural economy shows few signs of an imminent comeback. There are silver linings, however, and many of them hinge directly on the prospect of favorable trade developments, particularly with China.

“There is a 50 percent probability that some form of a deal with be struck with China by the second quarter of 2019,” said Kowalski. “Also, there’s a 50 percent probability that most or all the tariffs will be lifted on U.S exports in the first half of the year. Should that scenario develop, our outlook will improve considerably.”

The report, “The Year Ahead: Forces That Will Shape the U.S. Rural Economy in 2019” is available at cobank.com.

Source: AgriMarketing

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