Ag Insights: General Outlook

by Maureen O’Shea-Fitzgerald, Rob Goodling, Jacob Lantzsch, Philip Taylor

It’s difficult to ignore the impact that the world and United States economy has on agriculture within the Horizon Farm Credit territory, which includes 100 counties in Delaware, Maryland, Pennsylvania, Virginia, and West Virginia. The following is a review of key economic factors and their influence on the agricultural industry. 

International Perspectives 

Global Inflation and Supply Chains Normalize 

The 6.8% estimated global inflation rate for 2023 is continuing a trajectory lower from the highs of 2022 to an estimated 5.8% inflation rate in 2024 and 4.4% in 2025. This trend is showing a faster fall in inflation than previous estimates have shown. The world is trending slowly back toward pre-2020 levels of both inflation and Gross Domestic Product (GDP) growth, as shown in Figure 1.1. Emerging markets, such as Asia, continue to have higher GDP growth, as well as higher inflation. 

Figure 1.1: Global Inflation Trends Month over Month with Seasonal Adjustments 

(Source: International Monetary Fund, World Economic Outlook Update, January 2024.) 

Supply chain constraints, which were greatly impacted during the COVID-19 pandemic, have mostly returned to normal levels. Ship container freight costs are comparable to pre-2020 costs, while other modes have also reduced in cost but remain higher than pre-2020 costs to adjust for inflation. Most mainstream items — cars, equipment, and parts — have returned to normal inventory levels and lead times, except niche items. To streamline the constraints, manufacturers have shrunk their offerings especially around specialty items. These effects can be felt with older equipment electronics as the components could be unavailable sooner than what was seen in the past. Manufacturers continue to experience smaller interruptions on certain components as they search for vendors to fill holes left by sanctions on Russia, as well as some manufacturers choosing not to use Chinese businesses as suppliers. 

Global Conflicts Continue to Disrupt 

Global conflicts impact the United States, and specifically the agricultural sector, in many ways. Below is an overview of a few current global headlines and their effects on agriculture. 

The Israel-Hamas war has been in the headlines since October 2023after Hamas launched a surprise attack on southern Israel from the Gaza Strip. While the war has imposed significant impacts in many ways, there has not been a large impact from a global agricultural perspective. Both Israel and countries in the Gaza Strip do not contribute greatly to agricultural imports or exports. However, there is concern that increased tensions in the Middle East could escalate and affect oil prices. A slight rise in global oil prices was seen following the initial outbreak of this conflict, but quickly returned to pre-conflict levels as fears around a larger Middle Eastern conflict subsided.   

As the war in Ukraine enters the start of its third year, the markets have already adjusted to the impacts. With no real progress being made to end this war, it is unlikely it will affect markets in 2024. The most noticeable impact in the three-year conflict was felt in European countries that purchased cheap grain from Ukraine, which drove grain prices down for European farmers. This was one of the many issues European farmers protested recently related to the war. 

Protests by European farmers have made major headlines across the world. As outlined in a recent article by American Farm Bureau Federation, European farmers are using the protests to urge European Union officials to address issues over prices and bureaucratic rules. Some of the biggest issues being protested include environmental regulation, trade deals, and pricing. While the European protests have not directly impacted the U.S. yet — as production hasn’t increased or fallen due to the protests — there could be future impacts on the U.S.

U.S. Economy 

Consumer Price Index Drops 

Nationally, inflation is seeing some positive trends, with Consumer Price Index (CPI) dropping significantly in Q3 2023 and Q1 2024. The high inflation from 2021 through most of 2022 left a lasting impact on the current economy, with CPI during that period above the 5% mark, as depicted in Figure 2.1. For many goods and services, Americans are paying significantly more compared to this time three years ago. While some groups of products are seeing a negative current rate of inflation, like the energy sector, products or services — like medical costs, utilities, and labor — are not likely to recede from their inflated positions in early 2024.  

In its current view of the economy for 2023 to 2025, the U.S. Congressional Budget Office expect inflation to slow over the next two years and approach the Federal Reserve’s target rate of two percent. 

Figure 2.1: 12-month percentage change of Consumer Price Index (all items), not seasonally adjusted, for past 20 years 

Source: U.S. Department of Labor Statistics

Consumer Food Spending 

The U.S has historically enjoyed an abundant, safe, and inexpensive food supply. Figure 2.2 shows that during the 40-year period from 1960 to 2000, the share of Americans’ disposable income spent on food dropped from 17% to 10%. It remained below 10% until 2013 when food prices increased, partially due to the drought of 2012. In addition, food purchases away from home increased during this time and contributed to higher food spending. Since the pandemic of 2020, the share of disposable income spent on food has increased sharply through 2022. While no 2023 data is available, based on food inflation numbers for 2023, it is expected that the share of disposable personal income spent on food decreased in 2023 with a shift back to more food-at-home spending. 

Figure 2.2: United Stated Share of Disposable Personal Income Spent on Food, 1960-2022 

Despite inflationary rises in prices, consumers are still demanding animal proteins. This demand is not uniform across sectors. Multiple years of sub-optimal conditions for beef cattle has forced the beef market to contract from eight years of growth. High cattle prices with moderate increase in retail prices leave packers with tight margins for the foreseeable future. Poultry, specifically chicken, is poised for growth in 2024. Favorable grain prices should allow consumer prices for chicken to moderate, resulting in moderate growth. Concerns remain for supply disruptions from Highly Pathogenic Avian Influenza, which had limited impact in 2023. Pork has remained weak domestically but has found some ground in exports which help to maintain its slight increase in production in 2024. 

Interest Rates and Construction Costs Plateau 

In its Budget and Economic Outlook: 2024 to 2034, the Congressional Budget Office (CBO) projects interest rates to decline in the second quarter of 2024. However, Chairman Powell of the Federal Reserve Board indicates an unlikely reduction in rates until later in 2024. Interest rates, therefore, are expected to maintain their elevated level from recent historical lows during 2010 through 2021. Fifty years of bank prime loan rates (Figure 2.3) demonstrate that even despite interest rate increases during the past two years, the current rate is below historical levels prior to 2010.  

Figure 2.3: Bank Prime Loan Rate Changes – 1975-2024 

(Source: https://fred.stlouisfed.org/series/PRIME#) 

The U.S. Bureau of Labor Statistics reports that the annual price growth in residential construction goods cost dropped over 10% in 2023 from 15% to 1.3%. While this is good news, the downside is that the price level rose significantly in 2021 and 2022. More broadly, construction costs are expected to remain elevated in 2024. Figure 2.4 demonstrates the increase in ready mix concrete from 1982 (base year) through 2023. In 2024, construction costs are expected to hold near 2023 year-end levels, however, those levels are historically high in the short term. 

Figure 2.4: Producer Price Index (PPI) Commodity Data: Ready Mix Concrete Base = 1982 

(Source: https://data.bls.gov/pdq/SurveyOutputServlet) 

Fuel and Labor Costs Remain Elevated 

The current unemployment rate hovers below 4%, remaining at or near historical lows dating back to 2004, according to the U.S. Bureau of Labor Statistics. The wage growth tracker, maintained at the Federal Reserve Bank of Atlanta, shows the rate of wage growth slowing in 2023 after several months of rapid growth. The average hourly earnings of all private employees continued to rise at a consistent linear rate in 2023, as seen in Figure 2.5. From pre-pandemic levels when the average rate was $28.55 per hour to the February 2024 level of $34.57 per hour, the average annual increase was 1.5%. U.S. employers will be able to find workers but will need to pay higher wages or offer other compensation to entice workers to change jobs. Farm employers will continue having challenges finding and keeping good workers, particularly those competing with businesses offering strong entry level hourly rates. 

Figure 2.5: Average Hourly Earnings of All Employees, Total Private 

https://fred.stlouisfed.org/series/CES0500000003# 

Like labor, issues with fuel continue to ripple throughout the economy. When the cost of fuel increases, the cost to manufacture and transport goods increases the cost of those goods. One bright spot on the economic horizon is the retail price of gasoline and diesel fuel. Figure 2.6 shows that both are expected to decrease in 2024 and 2025, according to a January 2024 report by the U.S. Energy Information Administration. Unfortunately, those prices are not expected to return to pre-2022 levels. As mentioned previously, CPI inflation for energy decreased 5% from 2022 to 2023. This current forecast for 2024 and 2025 indicates the rate of reduction will be slower. 

Figure 2.6: Monthly U.S. retail fuel prices (Jan 2019-Dec 2025).  

Source: U.S. Energy Information Administration 

Farm Economy Recedes 

GDP & Ag’s contribution 

The CBO projects the growth of real GDP — inflation adjusted) —   will slow from 3.5% in 2023 to 1.5% in 2024, primarily due to generally higher interest rates due to higher-than-expected GDP growth in 2023. For 2025 through 2034, the CBO expects a moderate 2.01% average GDP growth rate. Figure 3.1 provides the CBO’s historical Real GDP growth and growth projections through 2034. 

Figure 3.1: Growth of Real Gross Domestic Product  

(Source: The Budget and Economic Outlook: 2024 to 2034 | Congressional Budget Office (cbo.gov)) 

How does agriculture contribute to GDP? According to USDA Economic Research Service (ERS), in 2022 agriculture, food, and related industries had a 5.5% share of the GDP, a slight increase from 2021. The output of America’s farms increased from 0.7% of U.S. GDP in 2021 to approximately 0.9% in 2022. Based on USDA 2023 data and 2024 predictions for reduced revenues and lower net farm income from agricultural operations, the short-term agricultural contribution to the GDP will likely stagnate. Figure 3.2 from USDA ERS shows the value added to U.S. GDP by agriculture and related industries. This contribution is expected to continue. 

Figure 3.2: Value added to U.S. GDP by agriculture and related industries, 2017-2022 

(Source: USDA ERS - Chart Detail) 

ERS Net Farm Income Projections 

Evaluating estimates for net farm income — an indicator of farm level profits — the USDA predicts an inflation-adjusted 27% drop in 2024 net farm income compared to 2023, and 40% below the record high realized in 2022. When evaluating the inflation adjusted net cash farm income, a similar reduction from both 2023 and 2022 levels is expected. Net cash farm income looks at cash income, including federal program payments, less cash expenses. It does not include adjustments for depreciation or changes in inventory. As shown in Figure 3.3, both metrics are poised to drop below the 20-year average. These lower expectations are based on predictions of lower ag commodity prices — more so in the crop sector than animal and animal products sector — higher than average production costs, and reductions in direct government payments. Initial reviews of 2023 profit positions of farms within Horizon Farm Credit’s territory suggest that 2023 was an average net farm income year, with expectations for 2024 to perform slightly below average. 

Figure 3.3: U.S. Net Farm Income and Net Cash Farm Income, Inflation Adjusted 2003-2024F