A new report sees few reasons for optimism in the U.S. agricultural sector, pointing to the global slowdown impacting demand, the continued trade war with China and flooding in the nation's farm belt.
"U.S. agriculture will face challenges in 2019 as slowing domestic and global economic growth rates, trade talks continue and weather casts uncertainty in the short- and long-term markets," the latest quarterly rural economic review from CoBank's Knowledge Exchange division said.
According to CoBank, U.S. commodity markets remain focused on negotiations between U.S. and China to resolve the trade war that has caused retaliatory tariffs on a wide range of U.S. farm products, including soybeans and pork. And the ratification in Congress of the trilateral U.S. Mexico Canada Agreement, a replacement for NAFTA, also faces hurdles.
The U.S. Department of Agriculture said in a report Monday it expects China's demand for oilseeds and related products to grow in the current marketing year but at a slower pace due to African swine fever. The disease has devastated domestic hog production in Asia's largest economy, reducing the need for feed.
For calendar 2018, the U.S. shipped $3.14 billion worth of soybeans to China, down 74 percent from 2017, when it was $12.25 billion, according to WISERTrade data.
"Soybean exports to China are still well under where they were in 2017 before the trade dispute started last year," Dan Kowalski, vice president of CoBank's Knowledge Exchange division, said in an interview Monday. "So we're still far away from where we need to be."
The report said "a slowing global economy may force animal protein and dairy sectors to scale back planned production increases as the year unfolds." It also raised concern for grain demand and points out the continued financial stress of American farmers.
"U.S. agricultural producers and markets are in for a challenging year with economic uncertainty," Kowalski wrote in the report.
CoBank said the agriculture sector is "still seeking relief" and adds that the poor fall weather and wet start to the year affected the Midwest and could result in "elevated risk" for some industry players.
"Until agriculture turns around for the Midwest, when it comes to grain commodities and some of the proteins and dairy, we know that there's going to be a negative impact on the ability for those local communities to generate economic growth," Kowalski said.
Rural communities are feeling the pinch as U.S. net farm income remains well under peak levels set in 2013 during record prices for some major crops.
"Fortunately, before we came through this multiyear downturn things were really good in agriculture, so that's carried over and enabled a lot of producers to cut back and weather the storm," said Kowalski. "But that will become increasingly difficult for producers ... if things are the way they have been for much longer."
According to Kowalski, if farmers go through the growing season and see major crop prices at about the same level, that could result in more agricultural producers exiting the sector.
Dairy farms in the upper Midwest have been especially hit hard by the current agricultural downturn, and some smaller operators have been forced into Chapter 12 bankruptcy. But Kowalski said milk prices could potentially increase in the second half of the year, helping struggling dairies.
Kowalski said the dairy and protein sectors are generally more sensitive to the global economies than corn and soybeans so the current economic slowing is a concern.
"Beef is the most expensive commodity to consume," he said. "So when you're looking at a potential downturn in the global economy, beef is the most responsive to that, and then it would be pork and chicken, because of the premium nature of the prices."
About 14 percent of U.S. beef gets exported overseas, and for pork it is over 20 percent, according to the U.S. Meat Export Federation.
Kowalski said certain Asian markets such as Japan have been strong for U.S. beef, but the global slowdown threatens growth. U.S. pork exports to South Korea shattered records last year and were up 40 percent in terms of volume but could slow if consumers pull back in that market.
"There is going to have to be an adjustment, but we don't foresee it being a major step down in what we export," he said.