By Brent Gloy and David Widmar
Black Swan. Uncharted Territory. Unprecedented. While these terms have been used to describe COVID-19 over the last few weeks and months, they aren’t helpful to decision-makers trying to navigate weeks and months ahead of them. To think about what lies ahead for COVID-19 and U.S. agriculture, we’ve outlined four key sources of uncertainty and share a few thoughts.
What are Potential Macro Economic Impacts?
To break this down, one must consider various time-frames. In the short run, attention will focus on the duration and magnitude of the current economic constraint in place. The impact of these will be staggering. Goldman Sachs recently forecast a 6% decline in GDP for the first quarter and a 24% decline in the second quarter. With this, historically low unemployment rates will surge higher, up to 9% per Goldman’s forecast. Other forecasts are even more bearish (for example, here).
The intermediate run will focus on the recovery of global economies. In the U.S., this will likely correspond with COVID-19 concerns peaking and businesses starting to reopen. In the U.S., the same Goldman Sachs forecast pointed to 10-12% economic growth in the last half of 2020. This will create a wild whiplash of economic indicators. Watch for how governments respond to the economic headwinds. In the U.S, the Federal Reserve will undertake many different kinds of efforts to stimulate the economy and keep credit markets functioning while Congress will likely provide large fiscal stimulus packages. You can expect a lot of uncertainty both with respect to what will be done and how well anything that is done will work.
In the longer run, we should also consider the implications of where the U.S. economy will be in 12-18 months. One thing is known, conditions won’t just simply “revert” to where they were just a few months ago. There will be lots of changes, but untangling where things might go will take some time.
For agriculture, keep the following measures in mind:
- Exchange Rates – the U.S. dollar has recently strengthened, a headwind for exports.
- Interest Rates- While the Fed has acted to lower short-term interest rates, longer terms rates (here and here, for example) have turned higher in recent weeks.
- Inflation – Will the whiplash of economic activity eventually fuel higher rates of inflation?
Where do Commodity Prices go from Here?
It’s been a rough month for commodity prices. From oil to grains and livestock, everything has trended lower. The decline in corn and soybean prices will take $50-$90 per acre out of crop budgets as producers head into planting. This, of course, comes come as the farm economy continues to deal with eroding financial conditions, even with significant MFP payments. The additional stress is concerning.
It’s worth keeping in mind the markets- all markets- are dealing with a massive amount of uncertainty. This uncertainty has translated into downward pressure on all commodity prices. As uncertainty begins to resolve in the coming weeks and months, the outlook on usage and demand will have more clarity. As such, markets will begin to focus on production and growing season issues as well as how demand might evolve.
Impacts on Demand for Ag Products?
In the intermediate to longer run, the demand for some agricultural products will be impacted by changes in consumer incomes. The Great Recession corresponded with a sharp decline in Americans’ consumption of meat. While the impacts varied, per capita consumption of all meat – chicken, poultry, and beef – turned lower. In particular, beef consumption took nearly ten years to recover to pre-recession levels.
A related impact will be the possible shift of where consumers eat, home vs. away from home. In the U.S., a decline in dollars spent away from home was observed in the last economic downturn.
Outside of food, ethanol markets will also feel the pain associated with plunging oil prices.
These headwinds would be offset by any upside potential from African Swine Fever (ASF) opportunities and Phase One trade deal benefits. These factors were a source of optimism for U.S. agriculture just weeks ago.
Supply Chain Impacts?
One of the unique challenges with the COVID-19 situation is the widespread shuttering of factories and production. This started in China but has now extended to the U.S. and the rest of the World. One staggering example of this is most automobile manufacturing in the U.S. has shut down. While the current focus has been on food and grocery stores, don’t be surprised if supply chain impacts expand and linger. Initial challenges will focus on the workforce, but the supply chain will also need to ‘refill the pipeline’ once work resumes. While admittedly a broad category, it is hard to know how or where issues might creep up.
The decisions made during the COVID-19 outbreak will be studied for years to come. The rapid pace of unfolding events, the potential of asymmetric outcomes (think really bad outcomes from doing nothing and the economic consequences of severe behavioral constraints), and minimal data have made the decision-making process difficult. There will be many Monday Morning Quarterbacks, but those truly interested in learning from the situation will have to consider the decisions made in the context of the information known at that time. At present, it appears that there is widespread adoption of the precautionary principle — using absolute caution in order to avoid a disastrous outcome. It will be interesting to see how decision-makers modify their approach as more information and better data are obtained about the situation.
One of the most challenging data points has been in nearly every headline- the number of reported U.S. cases. Initially, limited testing capacity meant that the number of actual cases – people actually infected – was likely under-reported. As testing capacity expanded, want does it mean if the number of cases increases? It becomes difficult to separate out the number of newly infected versus the share being captured by testing. Making the data even more complicated, New York City and Los Angeles are now limiting tests to only situations when the diagnosis is needed for treatment. This is all to say the underlying data are complicated and not as straightforward as we might think.
Wrapping it Up
“As we know, there are known knowns; these are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns- the ones we don’t know we don’t know.” Donald Rumsfeld (our emphasis)
In conclusion, it feels like there are very few things we know today. Most of what we read and hear are known-unknowns and fear of unknown-unknowns. The uncertainty and never-ending stream of bad news can be hard to navigate. In the coming weeks and months, the World will – with a little luck- be able to move forward with more known-knowns.
Finally, we pulled together some additional thoughts about COVID-19 for AFN subscribers a few days ago. You’re welcome to watch that discussion below: