The U.S. economy has performed strongly, exceeding fourth quarter 2023 predictions in terms of disinflation and gross domestic product (GDP) growth, showing resiliency in overcoming economic shocks from COVID-19, trade conflicts with China, geopolitical issues, and surging inflation.
The Federal Reserve’s response was aggressive with the highest round of interest rate hikes over the past 40 years. Thus, moving forward into 2024 and 2025, the economic outlook is optimistic.
The forecast is for the Fed to cease interest rate hikes, due to further cooling of inflation and tightening of the labor market. The Fed will likely begin to cut rates mid-2024, with the expectation that 25 basis point cuts will follow at roughly every other meeting. Consumers are expected to cut back on spending as unemployment increases. Job growth is projected at 2.5 million jobs in 2024 after a strong first quarter, with a slow-down projected thereafter. In 2025, anticipated job growth drops to 1.3 million - equal to a 4.0 percent unemployment rate in the first quarter of 2025.
Real GDP grew at a 3.3 percent annualized rate in the fourth quarter of 2023, lower than the previous quarter’s 4.9 percent, but defying predictions that Americans would tighten spending. Consumption of goods remains high in comparison to disposable income. Consumers have continued to spend as real wages increased due to the strong employment market and disinflation. Core inflation is expected to be 3.4 percent year over year in the first quarter of 2024, continuing to slow to 2.4 percent by the fourth quarter of 2024 and likely to remain there into 2025. Keeping longer-term inflation in check is critical to maintaining economic stability.
The November 2024 elections will certainly impact the economy, with results determining the fiscal path forward. Increased defense spending, and decreased discretionary non-defense spending, is likely. The federal deficit widened from 4.4 percent of GDP in 2022 to 5.8 percent in 2023. Deficit management will affect growth and long-term economic stability.
Global Economic Outlook
Inflation has fallen faster than expected with 80 percent of the world economies projected to see lower annual average headline and core inflation in 2024. Globally, headline inflation is expected to fall to 5.8 percent in 2024 and to 4.4 percent in 2025. This decline is the result of favorable global supply developments, easing tightness in job markets, and major central banks raising interest rates.
Global growth is projected at 3.1 percent in 2024 and 3.2 percent in 2025 due to anticipated resilience in the US, several large emerging markets and developing countries. Government and private spending, along with disposable income gains, supported consumption as households spent their pandemic savings. China’s growth is now projected to be higher as their economy fared better than anticipated in 2023 and due to their increased spending on natural disaster capacity building.
One of the largest risks to global growth is commodity price spikes due to geopolitical issues which affect food, energy, and transportation costs. The conflict in Gaza could encompass the region that produces 35 percent of the world’s oil exports and 11 percent of gas exports. The war in Ukraine affects the Red Sea which accounts for transport of 11 percent of all global trade.
Another risk to global economic recovery is extreme weather events. Together with the El Nino phenomenon, these events could cause food price spikes, further food insecurity, and jeopardize global disinflation.
The central banks’ top priority must be fiscal policies that continue to strike the right balance – not lowering rates too quickly, nor delaying the reduction of rates too long. Fiscal consolidation will be necessary to deal with deficits that have grown above pre-pandemic levels. Extreme tax hikes and/or spending cuts could result in slower than expected growth.
Agricultural Economic Outlook – February World Agricultural Supply and Demand Estimates (WASDE)
While the news is optimistic for the general economy, it is not as good for the U.S. farm sector. The USDA projects net farm income for 2024 to be 25.5 percent lower. Most of this decrease will be in the crop markets, with the protein industries seeing a smaller decline. Record harvests in Brazil and Russia have filled trade gaps created by Ukraine’s declining exports, and along with the surging U.S. dollar and higher interest rates, have put pressure on agricultural commodity prices. Lower commodity prices are concerning; however, compressed margins are the real concern. Fertilizer prices have come down, but other costs have remained high or increased.
Corn: February’s report projects that lower 2023/2024 industrial use will lead to larger ending stocks by approximately ten million bushels to 2,172 million bushels compared to 2022/2023 ending stocks of 1,360 million bushels. The season-average price received by producers is unchanged from the previous report at $4.80 per bushel - compared to average price received by producers of $6.00 per bushel 2021/2022 and $6.54 in 2022/2023. Global coarse grain production is anticipated to be lower for 2023/2024 by 3.8 million tons with no change in consumption. Ending stocks for 2023/2024 are projected to be 348.47 million metric tons, an increase over global ending stocks of 337.8 in 2021/2022 and 330.09 in 2022/2023.
Soybeans: The February report projects a higher ending stock for oilseeds given exports were down 35 million bushels last month, due to slow shipping and competition from Brazil. Ending stocks are forecast to be 315 million bushels for 2023/2024 compared to 274 million bushels in 2021/2022 and 264 million bushels in 2022/2023. The season-average price received by producers decreased by 10 cents to $12.65 per bushel. This is compared to average price received by producers of $13.30 per bushel 2021/2022 and $14.20 in 2022/2023. Globally 2023/2024 soybean ending stocks will be higher due to lower production and lower exports. Ending stocks for 2023/2024 are projected to be 133.37 million metric tons. This is an increase over global ending stocks of 117.47 in 2021/2022 and 122.36 in 2022/2023.
Dairy: The US Dairy industry contracted in 2023 as the USDA revised its estimate of milk production in 11 out of the 12 months, dropping 0.04% from 2022. USDA also reduced its assessment of the milk cow herd for every month, contracting by almost 50,000 head in 2023 and an additional 23,000 head December to January 2024. Producers have slowed cull rates, but with a limited replacement heifer herd, overall milk cow head counts have continued to decline. Milk yield in January was also short compared to the prior year, marking seven straight year-over-year declines in monthly milk output. In 2023, the US exported slightly more than 5.8 billion pounds of dairy products, which was 7.3% less than 2022 and the lowest annual volume since 2020. A sluggish global economy and uncompetitive prices worked against US exports. Despite exports to Mexico reaching a record high of nearly 1.59 billion pounds for the year, declines in exports to China (down 14%) and Canada (down 10.7%) had a significant impact. USDA distributed record-level payments via the Dairy Margin Coverage (DMC) and Dairy Revenue Protection (DRP) programs in 2023. These payments provided relief to farmers, particularly mid-year when Class III prices reached multi-year lows. However, slaughter totals during this period were some of the highest on record, and the payments did not prevent heavy culling or complete exits. Slaughter rates slowed beginning in September as the herd shrunk and milk prices began to improve. Looking ahead for 2024, feed costs have eased significantly. Conversely, milk prices for both Class III and Class IV futures are up in 2024 compared to 2023. Class III settled at $17.02 for 2023 and 2024 futures currently average $18.00. Class IV settled at $19.12 for 2023 and 2024 futures currently average $20.79. Overall, a drop in feed costs and an increase in milk prices should favorably impact producers for 2024. Herd growth, however, may be limited by the scarcity of replacements, and those needing to buy replacements may see a higher price.
Pork: Losses in 2023 resulted in a smaller US sow herd of six million (down 3 percent as of December 1, 2023, vs. one year ago), as well as lowered farrowing intentions for the first quarter. However, increased productivity per sow offset sow reductions so that pork produced, and pig inventory was largely unchanged. Thus far 2024 has brought much improved margins for producers, as well as an outlook for good profits for second and third quarters. This sharp improvement follows one of the most difficult years in decades for hog farmers and is needed to rebuild balance sheets and improve cash flow. Increasing hog prices and decreasing feed costs (primarily much lower corn and soybean meal prices) are simultaneously providing better opportunities for profits and driving increased hedging activity. Entering the last week of February, the CME Lean Hog Index rose to its highest point in the last 3 months at over $75/cwt. Quarter 2 and Quarter 3 hog futures contracts were at or near contract highs, with June, July, and August futures contracts nearing $100/cwt. Exports remain key to maintaining higher composite pork (Cutout) values and market hog prices. Export demand was strong in 2023 and is projected to increase in 2024, but at a slower pace.
While producers are becoming more optimistic, challenges remain including labor availability and cost, foreign animal disease threats like African Swine Fever (ASF), and increased interest costs.
Fruit: Higher costs and below break-even prices continue to trouble the Michigan Tart Cherry industry. A recent report from Michigan State University Extension estimates that the average cost to produce a pound of Tart Cherries in Michigan is $0.44. The average market return from 2007 to 2021 was $0.18 to $0.32 per pound. This is attributable to multiple factors, most notably higher labor, and operating costs. These factors combined with aggressive imports from countries like Turkey, have led to low liquidity and low repayment capacity among the Michigan producers.
The Michigan apple industry has had sizable crops in both 2022 and 2023. Not only was 2023 another sizable crop year (approximately 32 million bushels in 2023), but growing conditions were close to ideal in most locations, leading to high quality pack outs. Labor and other operating costs continue to be a concern for growers, along with continuing pressure from regulatory requirements. The Michigan apple industry is focused on marketing new varieties and spotlighting the importance of this industry to the state’s economy. Growers are anticipating the 2024 crop to return to average production.
To view the spring 2024 issue of Partners magazine in its entirety, click here.
