Inflation, Labor Shortages, Supply Chain Continue to Challenge U.S. Agriculture

BY GARY LATTA

On Wednesday, March 22, the U.S. Federal Reserve continued its battle to tame inflation by raising key interest rates another one quarter point amidst concerns that higher borrowing rates might elevate the anxiety surrounding the collapse of two major banks.

While the Fed assures the country that the banking system is stable, it also warns that the collapse of these banks is likely to spawn tighter credit conditions, weighing on economic activity, hiring, and inflation. The Fed also signaled they may be nearing the end of their crusade of raising interest rates to tame inflation. Policymakers hinted of perhaps one more increase in their key rate, from its current 4.9% up to 5.1% in the next few months.

In its March 22 statement, the Federal Reserve stressed that its battle to tame inflation was far from over, but it expressed confidence that it can ease inflation by raising loan rates a bit more, while simultaneously relieving the anxiety gripping the banking system with emergency lending programs and other measures.

Business analysts caution that these latest moves by the Feds will cause some small and mid-size banks to become more cautious in their lending, which will further slow borrowing and investments. Traders on Wall Street are hoping that slower growth and a weaker economy will encourage the Fed to begin lowering interest rates later this year. The U.S. economy remains stable and strong, with a low 3.6% unemployment rate.

European banks have reacted to the collapse of the two U.S. banks by taking similar measures. Following the U.S. announcement, the Bank of England was preparing for its 11th straight rate hike to tame its annual inflation rate of 10.4%. UK food inflation in February hit its highest level in more than 45 years (up 18.2% through the year), and it is the sharpest rise since the late 1970s. The European Central Bank has taken similar action where inflation is running at 8.5% across the EU.

Inflation, interest rates, energy costs, labor shortages, climate change, supply chain, extreme weather, and other high input costs continue to challenge U.S. agriculture, from farming to manufacturing, and in retailing. While overall inflation in the U.S. show signs of abating, food prices remain an exception. Americans are cutting back on many non-essential items to free up their money for food.

During interviews at Reuters, executives at Walmart and other retailers explained how Americans are shifting their shopping habits and searching for bargains in the face of the highest inflation in a generation. At Walmart, the world's biggest retailer by revenue, Americans are still spending, but are more “choiceful, discerning, thoughtful,” global CEO Doug McMillon told Reuters. Food cost increases have outstripped broader inflation for nearly a year in the U.S. and remain the most stubborn of all the categories, according to Walmart.

In the March Food Price Outlook, the USDA reported that food prices are expected to grow more slowly than in 2022, but still at above-historical average rates. In 2023, food-at-home prices are predicted to increase 7.8%, while food-away-from-home prices are predicted to increase 8.3%. Dairy product prices are predicted to increase 6.4% in 2023.

USDA Food Price Forecasts for 2023

In its latest Food Prices and Spending report, the USDA explained that retail prices reflect not only increases in farm prices, but many other costs and component increases picked up along their way to consumers:

“Retail food prices partially reflect farm-level commodity prices, but packaging, processing, transportation, and other marketing costs, along with competitive factors, have a greater role in determining prices on supermarket shelves and restaurant menus.”

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Food-at-home prices increased 11.4 percent in 2022 compared with 2021

Another noteworthy chart (on the next page) in the USDA’s report shows the share of disposable income spent on food in the U.S. over the past 60 years. The drop in percentage share spent on food has been quite dramatic since the early 1960s, especially for at-home food expenditures. Much of this trend has been driven by a combination of advancements in agricultural productivity and annual increases in disposable personal income.

In this latest Food Prices and Spending report, the USDA shows that the all-food CPI climbed 20.4% from 2018 through 2022, and was a greater increase than the all-items CPA, which was 16.5%. Food price increases were greater than other key categories, like housing, medical care, recreation, education, and apparel, and were only eclipsed by the remarkable 26.4% increase in transportation costs.

Domestic dairy demand was quite strong in the U.S. last year, despite higher prices. The March issue of the Livestock, Dairy, and Poultry Outlook reported that January 2023 domestic use for dairy products had slipped compared to the same month in 2022 on both a milk-equivalent milk-fat basis and skim-solids basis. While overall domestic use showed a slip in January this year compared to January last year, restaurant sales are showing signs of improvement. According to the National Restaurant Association, operator optimism regarding sales in 2023 is growing as more consumers are dining out. The USDA believes the expected expansion in restaurant performance in the next six months of 2023 may help reduce the expected large supplies of cheese. We could add increased butter to this assumption mix since restaurants also use lots of butter.

According to the U.S. Dairy Export Council (USDEC), 2022 was the third straight record year for volume and the second highest year for dollar value. Export volume has now reached the equivalent of 18% of U.S. milk production. Export value in 2022 was up 25% to $9.6 billion (it was the first time it has ever crossed the $9-billion mark). In recent years, U.S. dairy prices have been price competitive on the global stage. Considering the fact that oth- er international dairy exporters continue to face headwinds and lackluster production growth, U.S. dairy is poised to become the leader to meet growing global demand.

USDEC reports the top markets by product in 2022 were: Mexico accounted for 27% of U.S. cheese exports, 43% of NFDM/SMP, and 30% of U.S. MPC; China accounted for 30% of U.S. whey sales and 26% of lactose; Canada represented 43% of U.S. butterfat sales; and Taiwan accounted for 38% of U.S. fluid milk and cream exports. Mexico is the #1 market for U.S. dairy products, followed by Southeast Asia. Southeast Asia is a group of 11 countries that include Brunei, Burma (Myanmar), Cambodia, Timor-Leste, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand, and Vietnam.

Congress has been busy lately examining the many parts of the Farm Bill and holding hearings and listening sessions across the country. The current Farm Bill was enacted in 2018 and is supposed to expire at the end of September. The Farm Bill is a massive complex collection of issues beyond what space will allow for discussion here. There are many excellent sources on the internet which go into detail. Essentially, the Farm Bill authorizes spending in two categories: mandatory and discretionary. The charts below portray mandatory outlays that make up about 99% of discretionary spending that is spread out among four major titles: conservation (6.8%), commodities (7.3%), crop Insurance (8.9%), and nutrition (76%).

In figure 2, with nutrition removed, we see the sub-sections