The forces that will shape the rural economy in 2022

The US economy is set to slow in 2022 compared to 2021, but economic growth will continue at a much above average rate. Consumers have fueled the economic recovery since mid-2020 and this will continue into the coming year. Consumer spending is expected to grow another 4% to 5% in 2022 and GDP is expected to grow by around 4.5%, according to a full outlook report for the coming year from CoBank’s Knowledge Exchange.

“The COVID-19 omicron variant is shaping up to be the wild card of early 2022 and it could delay the rebalancing of the U.S. economy,” said Dan Kowalski, vice president of Knowledge Exchange at CoBank. “If omicron disrupts the service sector, the majority of consumer spending will go to goods, exacerbating supply chain and inflation problems. However, at this early stage, we expect omicron to have only a modest impact on the economy. “

The CoBank 2022 Outlook report examines several key factors that will shape the agriculture and market sectors that serve rural communities in the United States.

Global economy: fragile growth

If the global economy is to do well in 2022, it will do so despite three significant headwinds: a persistent pandemic, monetary tightening in the United States, and slower growth in China.

As we enter the third year of the pandemic, the COVID-19 virus still controls the global economy, and it will likely remain so for much of the first half of the year. The continued threat of viral mutations that could elude vaccines will keep economic uncertainty exceptionally high.

Nonetheless, strong consumer demand in much of the developed world will keep the economy buzzing.

US economy: supply and labor chains will improve, inflation may not

The pandemic has dramatically changed the way our economy works, with the biggest impact coming from what we consume. Until October, in 2021, Americans spent 18% more on goods and about 1% less on services than in 2019.

Compounded by a labor shortage, it’s easy to see why supply chains have become one of the pandemic’s greatest economic challenges – demand has dramatically exceeded the capacity of our existing system.

Fortunately, we have probably experienced the worst bottleneck, which is expected to diminish over the coming year. For most consumers and businesses, a key goal in 2022 will be to combat the effects of inflation. Operating and input costs will remain high for businesses into early 2022, and they will continue to look for ways to pass these costs on to consumers.

Monetary policy: difficult decisions are approaching

The coming year will be perhaps one of the most difficult monetary decisions the Federal Reserve has faced in more than a decade. President Powell has acknowledged that inflation could remain high until 2022, and the Fed is now expected to step up its cut in monthly securities purchases.

The Fed will want to prolong the economic recovery as long as possible before raising interest rates. But he will also be aware that the longer inflation stays high, the greater the likelihood that it will lead to a perpetual cycle of higher prices and wages. Both President Powell and President Biden will want to prevent this from happening.

US government: spending and partisan control will dominate in 2022

As the nation looks into a new year, the federal political apparatus is very focused on a few key factors that will impact the ability of the administration to lead and Congress to legislate. COVID-19 has persisted much longer than everyone expected and continues to cast a shadow over Capitol Hill.

While the House passed the Build Back Better bill, the Senate failed to propose the bill, a key item on the president’s agenda.

The House and Senate agriculture committees are planning watchdog hearings in 2022 to begin planning for the farm bill for 2023. While this is important and timely work, the widely anticipated change Partisan control of Congress following the 2022 election could make much of this work superficial. Legislative expectations are expected to be modest for 2022.

US agricultural economy: rising costs, trade battle with China to tighten agricultural margins

The US agricultural economy will continue to struggle with the dysfunctional supply chain and cost inflation issues that emerged in the summer of 2021. Historically high prices will be more than offset by the increased structure of commodities. costs for almost all crop production, including row crops, fruits and vegetables, and hay.

CoBank economists do not anticipate a significant drop in farm-level costs until the third quarter at the earliest. The expected drop in direct government payments in 2022 will result in further compression of farm income tax returns. The biggest wildcard for American agriculture is export sales to China, currently the largest export market for American agricultural products.

Specialized crops: Pressed by labor, drought, transport

Rising labor and transportation costs, compounded by ongoing drought and water restrictions in the western United States, will dominate the specialty crop industry in 2022. Labor agriculture has not been immune from the “great resignation” resulting from the pandemic.

The fruit and vegetable acreage in the United States will continue to shift to mechanically harvested crops that require less manual labor. Prices for fruits, nuts and vegetables will rise due to lower harvests caused by ongoing drought conditions in the western United States

Fruit and vegetable processors and distributors, meanwhile, will be encouraged to expand their supply networks outside the United States, particularly to countries like Mexico and Chile.

Cereals, agricultural supply and biofuels – Inflation and volatility create mixed outlook

The grains, agricultural supply and biofuels sectors enter 2022 in the face of a mix of inflationary headwinds, supply chain bottlenecks and high energy prices that present challenges but also some opportunities.

CoBank economists see the near-term outlook as mixed for grains, difficult for agricultural supply and positive for biofuels. Biofuels enter 2022 with tremendous momentum as the ethanol-fuel complex is in full swing thanks to strong consumer demand and rising gasoline and ethanol-fuel prices.

Beyond ethanol, 2022 is expected to see further development of soybean crushing and soybean oil refining capacity to support the expected growth of renewable diesel.

Animal protein: meager supplies and high demand boost prices

The Bureau of Labor and Statistics consumer price index for all meats, poultry, fish and eggs hit an all-time high in October, up 12% year-over-year. As restaurant and grocery store prices adjust, consumption-level meat inflation is expected to continue well into the new year.

While higher retail prices could limit consumption growth, squeezing cattle supplies, lingering problems with broiler breeders and sow herd reductions are expected to support favorable processor margins to at least. in the first half of 2022. Although beef exports were strong in the second half of 2021, the collective America’s Protein Opportunity for China may have already reached its peak.

Dairy products: Producer margins improve, but logistics hamper exports

Milk supplies in the United States and around the world will tighten in 2022 as dairy farmers reduce herd sizes in response to inflationary cost pressures. The cross-flow of resilient domestic and global demand for dairy products with slower growth in milk supply will drive up milk prices in 2022. Combined with lower feed costs after the big harvests of corn and soybeans, producer margins will finally improve. However, the high costs of labor, construction and freight will limit the potential for upward margin and restrain the growth of dairy production. For dairy processors, a more restricted availability of milk will mean that some processors will be in a hurry.

Rural electricity: manage at the periphery of the network

As the demands of electricity consumers change rapidly and redefine the relationship between buyers and sellers, all eyes will be on advanced technologies. These consumer-accessible resources are already disrupting the century-old one-way energy flow of suppliers.

The challenge with advanced technologies is that they create a two-way flow between providers and consumers and disrupt the predictable amount of demand that consumers might need. Electric co-ops have a proven track record of agility and may be better positioned to work with consumers to beneficially manage the proliferation of advanced technologies.

Rural communications: competition in the cable market intensifies

With bipartisan support to bridge the digital divide, the government funding floodgates are expected to open in 2022. The Infrastructure Investment and Jobs Act includes $ 65 billion in broadband funding, of which $ 42.5 billion will be allocated to states to build networks in unserved and underserved areas.

Cable operators have experienced strong growth in the number of broadband subscribers in recent years due to consumer trends and limited competition from telecommunications companies. But the competition should start to heat up in 2022.

About Keneth T. Graves

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