Economic outlook: Inflation remains high as recession looms

Persistent inflation suggests an additional rate hike in May is likely, strong labor market delays economic slowdown.

Turmoil in the commercial banking sector over the past month has created a new and unpredictable variable in the U.S. economic outlook. For now, the situation appears to be contained and the economic impacts have been relatively modest.

According to a new quarterly report from CoBank’s Knowledge Exchange, inflation remains the biggest economic challenge ahead. Even as general inflation moves in the right direction, headline inflation is still at 5% year-over-year. That’s well above the Federal Reserve’s 2% target and points to the likelihood the Fed will raise rates again in May.

“Several indicators point to an oncoming recession, with inverted bond yields being the most closely watched,” says Dan Kowalski, vice president of CoBank’s Knowledge Exchange. “But predicting the timing of that slowdown has been particularly tricky in the face of a resilient labor market. We still expect a shallow, relatively short recession in 2023, but probably not before late in the third quarter or into the fourth.”

Here's an update on economic activity in different areas of agriculture:

Crops

Grain prices finished the quarter down due to the ongoing war in Ukraine, lower corn and soybean production in Argentina, and a weakening global economic outlook. The drop in U.S. corn prices spurred a Chinese buying spree, helping to close the gap between actual accumulated exports and USDA’s projections. Soybean oil was the standout losing ag commodity in the first quarter, dropping 20% and continuing a precipitous fall that began in December 2022.

The deteriorating global economic outlook is weighing heavily on cotton markets. Global cotton consumption is forecast to drop 11% between marketing years 2020/2021 and 2022/2023. That would be among the worst performances in the last 10 years. Disposable income growth rates in developed economies remain stagnant, and lackluster demand for cotton seems inevitable.

Farm supplies

Fertilizer prices continued to fall. Nitrogen prices may be nearing a low point for 2023, as higher natural gas prices are forecasted by summer. Farm supply cooperatives saw less agronomic activity in the first quarter due to substantial rain and snowfall in March, which has limited fieldwork and other pre-planting activities. But the outlook for the sector is generally favorable this year following a year of record profits in 2022.

Ethanol

Ethanol production and profitability were in line with long-term averages during the first quarter as lower corn and natural gas costs helped margins. On the policy front, legislation reintroduced in the U.S. Senate could support higher blends of ethanol. If enacted into law, the act will mandate automobile manufacturers to design vehicles that use cleaner fuels and fuel retailers to offer higher-octane options.

Livestock

Cattle markets ended the first quarter strong. Consumer demand for beef over the past three years has been remarkable, but resistance to higher prices has recently surfaced. With packer margins pressured by stronger cattle prices and weaker cutout values, production has eased lower.

Hog prices were relatively flat, missing out on their normal seasonal momentum. The industry appears to be drawing down future availability which should lead to higher prices later in the year. U.S. pork exports came under pressure in 2022, but the trade picture appears to be improving.

Chicken producers had a difficult start to 2023, but things are looking up for the sector as prices have increased and beef production comes under pressure. U.S. broiler meat exports reached 630 million pounds during January, a record high for the month and a 13% increase year-over-year.

Milk prices are succumbing to additional milk supply with the seasonal pressures of the spring flush combined with an additional 12,000 cows added to the U.S. herd in February. The increased milk supply, combined with ongoing weak domestic demand, pushed down prices earlier in the quarter. Cheese manufacturers are producing a record amount of cheese as milk supply builds. The export pace for all dairy products remains robust.