California Ag Network

Tag: CoBank

  • Dairy Supply Chains Will Need to Adjust as Consumer Behavior Changes

    COVID-19 is dramatically affecting consumer habits and dairy supply chains as food service demand plummets and grocery sales surge. Consumers struggling with job losses and economic uncertainty quickly returned to buying basic dairy products like fluid milk, commodity cheese and butter.

    A new report from CoBank’s Knowledge Exchange indicates that consumer behavior will be different for the next 12 to 18 months than it was pre-pandemic, and as that behavior takes root, dairy supply chains will need to adjust from farm to fork.

    “The dairy industry is coping with some new realities, largely driven by the decrease in food service demand and restaurant sales,” said Tanner Ehmke, manager of CoBank’s Knowledge Exchange. “The challenge for dairy supply chains will be adapting to focus on meeting demand trends based on evolving consumer behavior as we navigate through an uneven reopening.”

    As consumers heeded the stay-at-home advisories, they increased purchases of products that in recent years had fallen out of favor. Processed cheese sales increased by nearly 20% during the eight weeks ending May 31. White milk sales gained more than 10% during the same period. Cereal is also doing well with sales up almost 15%.

    Even as restrictions have begun lifting, polling has shown widespread reluctance among consumers about immediately returning to normal activities like restaurant dining and business travel. In late April, a Business Insider poll found just 9% of Americans believed they would resume their routine exactly as it was before the lockdowns, with only 16% saying they would resume “almost all” of their activities.

    At a minimum, it will take some time for sit-down restaurant traffic to look anything like it did before the pandemic. Forecasts from Open Table suggest that the U.S. could lose up to 25% of its restaurants.

    Any structural reduction in restaurant sales has potential product mix implications for dairy processors and converters. For instance, firms that specialize in making or packaging products for food service accounts will need to retool, making different types of cheese or filling different-sized sour cream containers for at-home consumption.

    Much of the price volatility experienced over the past 90 days has more to do with massive supply chain disruptions than major changes to aggregate demand and supply. Perishability played a big role in the upheaval. As demand spun toward retail, food service operators disposed of fresh products that now have to be replenished for reopening. 

    Some buyers are asking if suppliers can develop and provide extended shelf life alternatives. Movement in that direction would presumably help on the supply side, giving manufacturers and dairy farmers more supply cushion.

    A world with more extended shelf life manufacturing options might mean less dumping of milk than took place in April. Business models may also be readjusted from just in time inventory practices to having more inventory stored in warehouses.

    Grocers are also cutting down on product selection to enhance operational efficiency. Published reports say that the popular Wegman’s supermarket chain, for example, has cut its offerings from about 52,000 products to 30,000 products.

    Data from Nielsen shows that for the four weeks ending June 13, supermarkets carried nearly 7% fewer dairy items than the year prior. For dairy companies and other food marketers, that could mean fewer line extensions, fewer opportunities to differentiate, fewer chances to test new concepts. 

    As the economy reopens, potential changes in consumer habits, the level of social distancing that remains in place, and the level of disposable income will again reshape dairy supply chains long term. 

    Read the report, “Dairy Supply Chains Adapt as Consumers React to COVID-19,” at cobank.com.  

    About CoBank

    CoBank is a $158 billion cooperative bank serving vital industries across rural America. The bank provides loans, leases, export financing and other financial services to agribusinesses and rural power, water and communications providers in all 50 states. The bank also provides wholesale loans and other financial services to affiliated Farm Credit associations serving more than 70,000 farmers, ranchers and other rural borrowers in 23 states around the country.

    CoBank is a member of the Farm Credit System, a nationwide network of banks and retail lending associations chartered to support the borrowing needs of U.S. agriculture, rural infrastructure and rural communities. Headquartered outside Denver, Colorado, CoBank serves customers from regional banking centers across the U.S. and also maintains an international representative office in Singapore.

  • Forces That Will Shape the U.S. Rural Economy

    CoBank Releases 2019 Year Ahead Report – Confluence of Key Factors Suggest Downside Economic Risk

    The U.S. economy is still performing well by most key measures. However, consumers, investors, companies and other market participants have become more wary about the near-term future with seemingly good reason. Global and U.S. economic prospects are weakening and the agricultural economy shows few signs of an imminent comeback, according to a comprehensive 2019 outlook report from CoBank’s Knowledge Exchange Division.

    “Trade uncertainty, rising debt levels and market volatility are threatening to derail the global economy and creating difficult operating environments for U.S. agriculture,” said Dan Kowalski, vice president of CoBank’s Knowledge Exchange Division. “Trade is the outsized risk. Unresolved disputes with Mexico, Canada, Europe and China are the greatest collective threat to the U.S. economy in 2019.”

    The CoBank outlook report examines 10 key factors that will shape agriculture and markets sectors that serve rural communities throughout the U.S.

    Global Economy: Trade-Induced Slowdown to Hit U.S Shores

    The global economy is slowing and the effects will spread to U.S. shores in 2019. World economic output hit an 8-year high in 2018, powered by both advanced economies and emerging markets. But challenges mounted in late 2018 and risks are decisively weighted to the downside for the coming year. Trade is the biggest risk, as the world’s two largest economies test each other’s willingness to accept economic pain. Trade policy between the U.S. and China will remain the leading risk to the global economy. The rising of debt levels is another undercurrent that threatens to derail the global economy. Total global debt levels (all public and private debt) are now more than three times greater than in 2001.

    U.S. Economy: Slowing Growth, Accelerating Risk

    The U.S. economic expansion is set to become the lengthiest in history this summer. But clouds forming on the horizon suggest more modest growth in 2019 and greater concerns for 2020. Therefore, we can expect a delicate balance of consumer strength to offset a slowing housing market and weaker business investment to keep the U.S. economy growing between 1.75 and 2.25 percent in 2019.

    Monetary policy: Thinning Margin for Error
    The world’s largest economies were widely expected to grow in concert in 2018. That growth did not materialize. As a result, the major central banks are now attempting to guide their economies through very different stages of the economic recovery. Japan is committed to stimulating its economy for the foreseeable future. The European Central Bank will not raise interest rates until at least the third quarter of 2019. China’s economy is slumping and its central bank has indicated that it’s ready to loosen monetary conditions as needed. Gross domestic product forecasts have been cut over the past month amidst a darkening outlook for the U.S. and Chinese economies. If this slowing materializes, it will become very difficult for the Federal Reserve to raise rates this year absent a spike in inflation.

    U.S. Government: Split Congress, More Opposition

    With a split Congress, finding consensus over the next two years to move large legislation will be difficult, but there are reasons for managed optimism. One of the final bills out of the 115th Congress reauthorized the Farm Bill. HR 2 passed the Senate and the House by very large bipartisan margins, showing that Congress can still work together when there is strong constituent support and engagement on an issue. The Administration’s efforts on trade have many in agriculture nervous. The agriculture industry will be very focused on the need to get the United States-Mexico-Canada Agreement (USMCA) completed. Further, it is imperative that the U.S. negotiates a resolution to the trade dispute with China and reach successful conclusion to conversations with Japan, the EU and a post-Brexit U.K. There is work needed to re-establish these major trade relationships before any further damage is done to U.S. agriculture.

    U.S. Farm Economy: Higher Costs and Debt to Hamstring Producers

    With agricultural commodity markets depressed by global supply abundance and ongoing trade disputes, farmers and ranchers face the arduous task of cutting production costs. However, continually rising costs in agriculture are expected to squeeze producers, causing further margin erosion and financial stress in 2019. Farmers should not bank on a fourth consecutive year of above-trend crop yields to make up for low commodity prices and rising costs. To steady the agricultural economy, and boost revenues, the sector is dependent on substantive breakthroughs in trade policy. Strong land values remain the positive for farmers and ranchers, although land values could face downward pressure.

    Ag Trade Policy: Seeking Resolution

    Ongoing tariffs and trade negotiations continue to hang over the U.S. ag economy with no clear sign of resolution, clouding agriculture’s trade outlook for 2019. Three significant trade-related issues must be solved this year to restore some normalcy to agricultural markets: Legislative approval of USMCA, removal of the steel and aluminum retaliatory tariffs and substantive improvement of trade relations with China. Progress in negotiations on all fronts is likely to be slow, which spells more pain for months to come. As a result of the trade war, the value of total U.S. agricultural exports in 2019 is expected to fall to $141.5 billion, down $1.9 billion from 2018, according to the Department of Agriculture’s (USDA) latest projections.

    Grain, Farm Supply and Biofuels: The Rise of Competition

    2019 will be a year of new and intense competition for the grain, farm supply and biofuels sectors. These competitive changes will benefit a few while hurting many along the supply chain. The most impactful competitive pressure will come from outside the U.S. Global crop production has been increasing for decades, but abundant U.S. supplies and a protracted trade dispute with China has enhanced foreign opportunities. Brazil’s projected record crop, Argentina’s production rebound and continued agricultural expansion in Eastern Europe will further inundate a bloated market. Trade dynamics will also impact an ethanol industry that is already struggling. Large supplies have caused some producers to cut output amid negative margins. Competition will also increase in the farm supply sector, squeezing margins. Ag retailers will also face price hikes from a more concentrated supplier base.

    Dairy and Animal Protein: Output Grows Again

    In 2018, the U.S. animal protein sector began suffering from the same oversupply and weak margins that have plagued U.S. dairy producers since 2015. Despite the less favorable profitability environment, the protein and dairy sectors will continue to expand production in 2019, prolonging the margin squeeze.

    Of the three major animal protein species, beef appears to be weathering the animal protein oversupply situation best, with favorable fed cattle prices and historically high packer margins resulting from tight processing capacity. Conversely, the pork and poultry sectors reflect the impact of plant expansions which will deliver double-digit increases in processing capacity for both species by 2020.

    Rural Electricity: Data Analytics Become a Necessity

    2018 will go down as a turning point for the role data analytics will play in transforming the rural electric co-op industry. Optimization of the grid offers many benefits in cost savings and member relations. However, if co-ops do not harness the power of data to unlock value, third-party providers will step in to provide this service. Co-ops cannot afford to delay adopting strategies for a more distributed future that includes automated controls, tailored rate structures, enhanced customer engagement and sophisticated data analytics.

    Rural Communications: Electric Co-Ops Gain Appetite for Broadband

    Over the last few years, electric distribution cooperatives have been building fiber networks, causing some angst in the rural LEC community as they fear this will lead to increased competition. For 2019, rural America should expect to see a continuation of these network builds, but the risk of co-ops overbuilding in rural LEC markets is low. Their primary focus is to build networks in underserved markets for the benefit of their own operations, and their customers.

    Silver Lining

    The global and U.S. economic prospects are weakening, and the agricultural economy shows few signs of an imminent comeback. There are silver linings, however, and many of them hinge directly on the prospect of favorable trade developments, particularly with China.

    “There is a 50 percent probability that some form of a deal with be struck with China by the second quarter of 2019,” said Kowalski. “Also, there’s a 50 percent probability that most or all the tariffs will be lifted on U.S exports in the first half of the year. Should that scenario develop, our outlook will improve considerably.”

    The report, “The Year Ahead: Forces That Will Shape the U.S. Rural Economy in 2019” is available at cobank.com.