Can demand for ag products withstand a recession?
The idea that demand for ag products is somewhat recession-proof due to people’s need for food, fiber and fuel could be tested in the months ahead.
Dan Basse, president of AgResource Co., predicts economic headwinds could increase through the year and into 2023. But commodity prices could remain fairly strong due, in part, to tight crop supplies, strong demand and the very inflation the Federal Reserve is attempting to tame.
“The supply side is bullish, but the macroeconomics are bearish due to recessionary pressure,” Basse told attendees of the Land Pro fall seminar in Morris.
Either way, it could be a bumpy ride ahead with a continuation of large price swings in the commodity markets. Risk management will remain critical to farm planning.
“I think we’ll have extremely volatile markets moving forward” with prices ranging anywhere from $10 to $18 per bushel for beans and $5 to $8 for corn, he said.
On the supply side, the world needs another 25 million to 27 million acres of farmland in the next five years to meet demand, according to the analyst. Drought in China, Europe, South America and the U.S., along with the war in Ukraine, took a large bite out of anticipated crop production this year.
Adverse spring conditions also resulted in 6.4 million prevent-plant acres in the U.S. this season, about triple the amount (2.1 million) recorded in 2021.
“It all gives us the biggest global grain supply shock since World War I (1914),” Basse said. “Big harvests are needed to return grain stocks-to-use ratios back to comfortable levels.”
Meanwhile, 19 new soybean crush facilities are being built in the U.S. to produce renewable diesel. The expected large bump in domestic soy demand will create the need for an additional 20 million acres of beans in the U.S. by 2026.
“Renewable diesel will be a big deal for ag,” Basse said. “It adds about 630 million bushels of annual crush capacity by 2026. It’s pushing crush margins higher.”
However, the Fed’s reaction to all the inflationary pressure could bring the U.S. economy to a screeching halt.
The Federal Reserve implemented several rounds of interest rate hikes and plans more in an attempt to slow demand and ease inflation from a recent level of 8.6% back to a target range of around 2%.
“The Fed has promised to put the inflation genie back in the bottle,” Basse said. “If we trip into a recession (as a result), a lot of things become unsettled quickly.
“History shows when food and fuel (prices) are rising at the same time, it’s typically followed by a recession,” he continued. “It leads us to believe by later this year, in the fourth quarter, or by the first quarter next year we’ll be in a recession.”
Food price inflation jumped to nearly 10% this year, something most people haven’t seen in a generation, the analyst noted.
“We are not at a global food crisis yet, but we’re on the doorstep of one if we have another weather calamity this year,” Basse said. “South American crop production has never been more important.”
Estimates suggest South American farmers could boost crop plantings by 3-4% this fall in response to tight crop supplies and strong prices around the world. And it will likely take similar price incentives to get U.S. farmers to boost crop plantings next spring in the face of record-high input costs.