Market Outlook Fall 2020
Matthew Naeyaert, GreenStone Senior Credit Analyst, Capital Markets, and Nick Jablonski, GreenStone Credit Manager, Capital Markets
Dollar sign and clouds
To no one's surprise, the U.S. economy experienced a significant contraction during the second quarter as the result of the COVID-19 pandemic and the resulting government policies aimed at slowing the spread of the virus. Real GDP declined by a staggering 32% on an annualized basis during the quarter, an all-time record. While this was certainly an eye-opening figure, more recent economic data is signaling that third quarter GDP will show significant improvement as the U.S. economy has begun to recover over the course of the summer.
Economic Recovery
Two of the strongest areas of the economic recovery have been in consumer spending and the housing market/residential investment. The significant fiscal stimulus provided by the Federal Government was a boon to consumer spending and helped mute the impact of the record job losses experienced earlier this year. The housing market and overall residential investment have also shown stability despite the unprecedented stress seen in the labor market. This relatively strong housing market environment looks poised to continue for the remainder of the year as the combination of historically low interest rates and shifting consumer preferences have buoyed home prices. While the GDP outlook for the third quarter is much improved compared to the severe slump seen in Q2, many several uncertainties still exist.  Most notably, an increase in COVID-19 outbreaks, slow progress regarding vaccine developments, and reduced fiscal stimulus could all potentially cause economic activity to remain depressed for the remainder of this year and into next year. 

Labor Market
The U.S. labor market has followed a similar trend as the overall economy throughout 2020, with the unemployment rate spiking sharply to 14.7% in April before experiencing improvement in the months that followed. The August 2020 report from the U.S. Bureau of Labor Statistics showed that nonfarm payrolls rose by 1.4 million in August and the unemployment rate fell to 8.4%, below 10% for the first time since the beginning of the pandemic. The retail, leisure and hospitality, professional and business services, and health services sectors have all experienced dramatic rebounds in hiring over the last several months. While the most recent employment data does show meaningful improvement, it is important to note that more than half of the jobs lost since February have still not returned and the pace of the labor rebound appears to be moderating. Moving forward, the consensus forecast is that payroll growth will be largely stagnant as the economy looks to slowly regain its footing. 
Federal Reserve Chair Jerome Powell recently announced changes to the Federal Open Market Committee’s (FOMC) long run targets and monetary policy strategy. Mr. Powell specifically announced a change in the committee’s targeted inflation goal. The FOMC will now “seek to achieve inflation that averages 2 percent over time”, indicating they will allow inflation to exceed their 2% target if the inflation rate had been averaging below 2% for a period of time. While the FOMC is still maintaining their long-term inflation target of 2%, the move signals that the Fed will prioritize the achievement of full employment over preventing inflation from rising above 2% in a given period. Many observers take this pronouncement to suggest that the Fed will likely keep interest rates near 0% for longer than previously anticipated in an effort to provide accommodative monetary policy and support the economic recovery. 

Turning to Agriculture, forecasts for U.S. corn and soybean production are pointing to a record year. According to the National Agricultural Statistic Services’ (NASS) survey results, estimates for total corn planted and harvested acres are 92 million acres and 84 million acres, respectively, both of which are up 3% from last year. Combined with an estimated yield forecast of a record high 181.8 bushels per acre, total U.S. corn production is projected to equal 15.3 billion bushels, representing a 12% increase from 2019. Nationwide over 60% of corn acres are in good to excellent condition. Michigan corn acres currently trail the national average with roughly 50% in those two categories, while Wisconsin corn acres are well above the average at just below 80%. Forecasted production of soybeans are also calling for a record 5.1 billion bushels, a 13% increase from last year. According to the NASS survey results, total soybean planted, and harvested acres are projected to equal 83.8 million and 83.0 million, respectively, and the average yield forecast is 53.3 bushels per acre which would be an all-time record. Across the country soybean acres in the good to excellent categories is just above 65%, and again Michigan is below the national average at roughly 60% and Wisconsin is above average at over 80%. The primary reason for the disparity between Michigan’s crop progress versus the U.S. average and Wisconsin is due to dry conditions throughout the growing season as approximately 20% of the state’s counties experienced abnormally dry conditions during the summer months.  


The dairy industry has been significantly impacted by the COVID-19 pandemic as consumers dramatically changed their consumption habits, thereby causing food service demand to plummet and sales at grocery stores to rise sharply. As a result of these changes the dairy supply chain experienced significant disruptions as the industry attempted to adapt to rapidly changing market dynamics. These shifting dynamics caused unprecedented price volatility in wholesale Cheddar cheese prices, which translated into large moves in Class III milk prices. The Class III milk price briefly plummeted to a low of $12.14 per cwt in May before surging back to $24.54 in July. Dairy farmers responded to the low prices in May by reducing milk production, with a 0.5% year-over-year decline seen during May (represents the largest April to May decline in history). However, dairy farmers also reacted to the futures price rebound, with production increases amounting to a 0.5% year-over-year jump seen in June 2020. The imbalance in dairy supply and demand appears to have leveled out a bit, at least for the time being, with the most recent USDA forecasted Class III milk price for 2020 and 2021 at $17.40 per cwt and $16.10 per cwt, respectively. Like all areas of the economy, the long-term outlook for the dairy industry is still uncertain and will be dependent on consumers’ disposable income and buying behavior. Ultimately, those producers with a low cost of production and a well thought out risk management plan will likely continue to outperform. 
Export volumes, particularly to China, continue to garner significant attention within the agricultural community. In particular, purchases of U.S. soybeans are being closely watched and interpreted as potential signs as to whether China will be fulfilling their Phase 1 commitments under the trade agreement that was finalized in January 2020. According to FAS’ latest report, new-crop soybean sales to the world currently stand at a total of 660.5 million bushels, with 377.4 million (57%) of these bushels headed directly to China. These figures have garnered a lot of attention because at this point last year only 164.2 million bushels of 2019/20 new-crop export sales had been recorded, with just 7.1 million bushels headed directly to China. Even more importantly, this year’s soybean export indicators are significantly higher than they were at this point in 2017, the last “normal” trade year, when a total of 258.4 million bushels of 2017/18 new-crop sales had been recorded with 113.7 million of such bushels sold to China. In total, 14.9% of total estimated 2020/21 soybean production had been purchased for export as of August, which is significantly higher than the 4.5% of the new-crop 2019/20 production that had been purchased through the same week in 2019. It’s also well above the 5.9% of the new-crop 2017/18 production that had been purchased through the same week in 2017. 
While these strong early season sales do not necessarily guarantee an increase in exports for the full year or an improved pricing environment, especially given the expectation of record high production, they do they do provide tailwinds for the industry and hint at strong international demand for many U.S. agricultural products. Ultimately only time will tell if large new-crop sales commitments turn into actual exports that help China successfully fulfill its 2020 Phase 1 commitments, however, at this point the USDA is projecting soybean exports to total $20.4 billion, a 26% increase compared to last year, largely due to expected strong demand from China and reduced competition from Brazil. 
Exports of U.S. pork have been similarly strong, despite supply chain disruptions in the U.S. resulting from coronavirus. From January through May 2020 pork exports rose 21% above the prior year, but according to Dr. James Mintert at Purdue University, “it’s pretty clear that pork exports would have been even larger if it were not for the disruptions that took place as a result of COVID-19 cases, which led to processing plant closures and production slowdowns, as well as weakness in some major importers economy’s”. It comes as no surprise that rising pork exports to China are almost entirely responsible for the year-to-date increase in U.S. pork exports. 
During the first 5 months of 2020, U.S. pork exports to the Chinese mainland rose by a whopping 427% compared to 2019, totaling nearly 1.1 billion pounds in 2020 compared to 202 million pounds in 2019. 


To view the article in the online 2020 Fall Partners Magazine, click here

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