“As we enter the third year of the COVID-19 pandemic, the virus is still in control of the economy. However, labor and supply chain challenges should improve slowly through the year, while cost inflation will continue to burden the US and farm economies.”
The CoBank economists view the short-term outlook as mixed for grain, challenging for farm supply and positive for biofuels.
“Biofuels enter 2022 with considerable momentum as the fuel ethanol complex is revving on all cylinders driven by strong consumer demand and higher gasoline and fuel ethanol prices. Beyond ethanol, 2022 should see the continued build-out of soybean crushing and soy oil refining capacity to support the expected growth in renewable diesel.”
Looking at farm-level costs in the US the CoBank team does not anticipate any significant pullback on those until Q3, at the earliest.
“The expected decline in direct government payments in 2022 will further squeeze farm income statements.”
For crop producers, fertilizer prices have recently spiked to record highs and are currently double the 10-year average, said the analysts. Meanwhile some crop protection chemicals, which are often imported, have become nearly impossible to source at any price due to ocean transport congestion, they reported.
“While corn futures prices in the $5.50/bushel range for late 2022 delivery seem to be attractive at first glance, a deeper analysis projects modest profit margins for next year. The same general story of historically strong prices being more than offset by increases in cost structure holds for nearly all crop production.”
Looking at logistics, West Coast port gridlock and the shortage of containers and drivers will continue into the second half of 2022, said the economists.
“This will particularly impact US animal protein and dairy exports headed to Asia. South America and Oceania will continue to capture a larger market share in Asian markets as US exports move to less congested Gulf and eastern ports, which better serve European and Middle East and North Africa markets.”
Incredibly strong consumer demand for meat products negated fears this year that a higher feed cost environment would limit processor margins, said the team.
“The story for 2022 is consumer-level meat inflation."
The US Bureau of Labor and Statistics’ consumer price index (CPI) for all meats, poultry, fish, and eggs hit an all-time high in October, up 12% YoY. As restaurant menus and grocery prices adjust, consumer-level meat inflation is likely to continue well into the new year, commented the analysts.
The report outlined that US livestock producer margins should continue to be generally favorable overall, with the effect of shrinking beef cattle supplies finally showing up in higher prices at the producer levels.
Swine and poultry producers should both enjoy another good year, though perhaps not like the exceptional 2021. After a very difficult year, dairy producers will benefit from tighter global milk supplies and lower protein feed costs.
Exports to China
The single biggest wildcard for US agriculture is export sales to China, currently the largest export market for US farm products, stressed the analysts.
US meat exports to China have been growing steadily since 2016, but as the Phase One trade agreement with China sunsets in 2021, it is unclear if the US will remain a primary source for China’s protein needs, said the team.
“China has rapidly rebuilt its domestic hog supplies after the African Swine Fever outbreak of 2018-19, and domestic hog and pork prices have dropped sharply in recent months, corresponding with notable declines in pork and poultry shipments.”
Mexico will remain a top destination for pork and poultry exports in 2022, but the analysts said it was unlikely that it would be able to absorb the entire deficit from reduced opportunities in China.
Although beef exports have been robust during the second half of 2021, the collective US protein opportunity to China may have already peaked, they added.