Market Outlook

Winter Market Outlook:

2021 Recap

By Matthew Naeyaert, GreenStone Capital Markets Senior Credit Analyst,

Throughout the past year the U.S. economic recovery has been remarkably strong coming out of the COVID-induced recession of 2020.

However, the rate of expansion slowed substantially in the third quarter of 2021 as gross domestic product (GDP) grew at an annual rate of 2.1% according to the U.S. Bureau of Economic Analysis. This reading came on the heels of strong, annualized, GDP growth of 6.3% and 6.7% in the first and second quarters, respectively. The deceleration in growth was primarily attributed to widespread labor shortages and worsening supplychain bottlenecks. As has been the case over the past 18 months, future economic expansion will continue to depend heavily on the course of the virus, particularly the impact of any potential new variants. The U.S. labor market has consistently added jobs in 2021 with average monthly gains of 555,000 through November.

The November report from the Labor Department reported the economy added 210,000 jobs in the month and the unemployment rate fell to 4.2%. Additionally, the labor force participation rate increased to 61.8%, the highest level since March 2020. Also noteworthy is the 4.8% year-over-year increase in average hourly wages, which is likely incentivizing more people to re-enter the workforce. Inflation continues to be a hot topic as U.S. consumers experience price increases across a broad range of categories. The Labor Department reported that the Consumer Price Index (CPI) increased by 0.9% in October from the prior month, a considerable jump from the 0.4% monthly increase in September. Further, on a 12-month annualized basis the index rose by 6.2% in October, representing the largest 12-month increase in the CPI since November 1990. The data demonstrated the increases were broad-based with rising prices for energy, shelter, food, and new and used vehicles being the largest contributors. The higher rates of inflation in 2021 have been attributed to the swift and robust economic recovery, aided by government stimulus and a strong job market. The U.S. economic expansion has been led by stronger than anticipated consumer spending on goods and services, which has resulted in supply-chain bottlenecks providing further demand pressures and driving up prices. The Federal Reserve has maintained its accommodative monetary policy throughout 2021 in order to support the U.S. economy’s recovery and promote the Federal Reserve’s two goals of maximum employment and price stability (i.e. inflation at the rate of 2% over the longerrun). Specifically, the Federal Open Market Committee (FOMC) has kept the target range for the federal funds rate at 0.00% to 0.25% and completed asset purchases of $120 billion per month. At its November meeting, the FOMC acknowledged that substantial further progress has been made towards its goals (most notably inflation increases) and therefore it would be reducing the pace of its asset purchases by $15 billion each month beginning in November. The Committee also communicated its wish to completely end its monthly asset purchases prior to lifting interest rates. Consequently, at the announced pace of

The U.S. economic expansion has been led by stronger than anticipated consumer spending on goods and services, which has resulted in supply-chain bottlenecks providing further demand pressures and driving up prices.

$15 billion fewer purchases per month, interest rates would likely not be lifted until the second half of 2022. The U.S. housing market has experienced a surge in prices in 2021 with the S&P CaseShiller National Home Price Index projecting a 15.6% increase in home prices for the year. The primary drivers for the price appreciation have been strong demand, particularly from Millennial homebuyers, and a shortage of both new and existing homes for sale. For perspective on this shortage, according to Freddie Mac the U.S. housing market had a supply deficit of 3.8 million units entering 2021. In an attempt to meet this imbalance, single-family starts are projected to increase this year by 4.6%, to 1.15 million, and multifamily starts are forecast to increase by 17.1% to 460,000. While benefiting from the strong demand, homebuilders are contending with supply logjams and labor shortages which will lead to extended project timelines and will keep builders busy into 2022 and beyond. Moving to agriculture, the USDA is forecasting an all-time record level of U.S. agricultural exports in fiscal year (FY) 2022. The most recent forecast is for total agricultural exports to equal $175.5 billion, a 1.9% increase over the previous record set in FY 2021. The two commodity groups contributing most significantly to the increase are livestock/poultry/ dairy, and soybeans/soybean products. Exports of livestock, poultry, and dairy are forecast to grow by 4.6% with gains across all major commodities except pork. Soybean and soybean products exports are projected to improve by 2.8% due to increased demand from China; however, these products face a significant headwind from the expectation of a large Brazilian harvest in early 2022. The U.S. dairy industry has endured both milk price volatility and rising feed costs throughout 2021. While milk prices have shown more stability in the second half of the year the industry continues to face higher input costs from elevated feed prices, as well as rising labor and energy costs. These challenges, combined with strong beef prices, have led to a 1% reduction of the milking herd to 9.42 million from its peak in May, resulting in lower production forecasts for the end of 2021. In consideration of these trends, USDA is projecting an all-milk price of $18.50 per cwt for 2021. Looking forward into 2022, the all-milk price is forecasted to increase to $20.25 per cwt due to increased demand from both domestic and export markets. U.S. pork production is expected to total 27.7 billion pounds in 2021, a 2.2% decrease from 2020. This reduction is due to lower dressed weights and lower hog slaughter numbers, driven by a decline in processor demand for hogs. The reduced demand from hog processors is attributed to constraints on slaughter capacity due to ongoing labor shortages as well as court-imposed restrictions of line speeds at several processing plants.

If the forecasted level of net farm income is realized, it would be its highest level since 2013.

U.S. pork exports are expected to decline by 1.2% this year to 7.2 billion pounds, largely because of lower shipments to China. Average hog prices for 2021 are forecast at $67.45 per cwt, 56.2% higher compared to 2020. However, prices peaked in the second quarter at $80.92 per cwt, and have been on a declining trend since with a projected fourth quarter price of $57.00 per cwt. In 2021 annual broiler production is forecast to total 44.8 billion pounds, representing a nearly 1.0% percent increase over last year. This growth is driven by marginally higher total slaughter and increased average live weights. Prices are up considerably with average annual wholesale bird prices at 99.7 cents per pound, a 36.2% increase over last year. Strong price support is provided by exceptional demand for a broad range of items including bonelessskinless breasts, wings, and tenders. Wholesale egg prices are projected to average 116.8 cents per dozen in 2021, which is 4.1% higher than the 2020 annual average. Total U.S. egg production in 2021 is forecast to equal 8,077 million dozen, a 2.4% increase over last year. Producers are still working through the COVID-impacted flock reductions from 2020, as the table layer flock was didn’t achieve year-over-year growth until July 2021. Despite the smaller flock size, total egg production is still forecast to increase as younger layer flocks are more productive. Foreign demand for U.S. egg exports has been extremely strong in 2021 with total egg exports increasing by 18.7% through the first three quarters, driven by large increases in shipments to South Korea (+52,856 thousand dozen), Japan (+8,989 thousand dozen), Hong Kong (+4,637 thousand dozen), and Canada (+4,064 thousand dozen). Whole frozen turkey prices are projected to average $1.231 per pound in 2021, a 15.6% increase over 2020. For the second year in a row, average prices have achieved year-over-year growth in each quarter leading to the strong growth in the average annual price. Total U.S. turkey production in 2021 is forecasted to decline by 2.28% to 5,612 million pounds due to decreased turkey placements and slightly lower average weights. Turkey exports are estimated to drop minimally by just 0.8%; however, this is on the heels of an 10.6% reduction in 2020 due to lower shipments to Mexico, the number one export market for U.S. turkeys. According to the USDA, net farm income, the broadest measure of profits, is forecast to total $116.8 billion in 2021, a 23.2% increase compared to 2020. The projected increase in farm income is driven by growth in receipts for both crop and animal/animal product sectors, which will outpace the growth in production expenses. Price improvements, rather than quantity changes, account for the vast majority of growth in cash receipts across both livestock and crop commodities. If the forecasted level of net farm income is realized, it would be its highest level since 2013. Farm sector equity is forecast to total $2.81 trillion in 2021, which equates to a 2.8% year over year increase. Farm assets are expected to increase to $3.26 trillion, or 2.8%, which is primarily driven by increases in the value of farm real estate. Total farm sector debt is forecast to increase by 2.9% to $454.1 billion in nominal terms, but when adjusted for inflation will be reduced by 0.8%. The increased debt level is the result of higher levels of real estate debt, while nonreal estate debt is essentially unchanged. Due to these dynamics, the farm sector’s debt-to-asset level will experience little change and working capital is forecast to increase by 9.6% in 2021. ■