10 Forces Shaping the U.S. Rural Economy

A new report from CoBank says 2020 will have its challenges, but there are reasons for optimism. ( AgWeb )

A new report from CoBank says 2020 will have its challenges, but there are reasons for optimism.

With 2019 winding down, now is a perfect time to reflect on the past year and make expectations for the year ahead. While the challenges of this year will take a long time to forget, it does provide a silver lining.

“2019 is going to be a year that's going to make a lot of years from now on look a lot better,” says Tanner Ehmke, economist with CoBank. “We can have a fresh start in 2020, and things are starting to look a lot better.”

Several global and economic factors point suggest farmers should be optimistic about the year ahead, according to a 2020 outlook report from CoBank’s Knowledge Exchange division.

Listen in as Ehmke discusses the report with Clinton Griffiths on AgriTalk:

The report examines 10 key factors shaping agriculture and U.S. rural economies. 

1. Global Economy: Less Trade, Slower Growth

After a year of trade tensions, declining GDP and the slowest global economic growth since the depths of the financial crisis, the world’s leading economies hope to turn the page in 2020, according to Dan Kowalski, vice president of CoBank’s Knowledge Exchange division. The prognosis, however, offers little to support such optimism. 

A leveling off of trade tensions would allow global economic growth to bottom out in early 2020 before showing signs of life later in the year, he report. However, the vulnerable state of the global economy makes it susceptible to contraction if trade conditions worsen. That would increase the risk of global recession from the current forecast of 30% to 50%, according to CoBank.

2. U.S. Economy: Expansion for Those Left Behind

The U.S. economy will enter 2020 decisively split — powered by a resilient and confident consumer, but hamstrung by a risk-averse business sector that has stopped investing.

“Most current signals indicate the overall domestic economy is on firm footing, thanks almost exclusively to the consumer,” Kowalski reports.

Another full year of positive economic growth is not certain, as the risk of recession in 2020 stands at roughly 25%, according to CoBank. 

3. Monetary Policy: Sustain and Prepare

All eyes will be on the central banks as the world inches closer to the end of the longest period of economic growth in history. After three rate cuts in 2019, the U.S. Federal Reserve is holding a more conservative stance with its target rate near 1.5%. This has been positive for the ag economy. 

“Now what does the Fed do in the year ahead? They stated that they're really going to need to see some really strong inflation if they're going to raise rates,” Ehmke says. 

4. U.S. Government – Policy and Trade Up in the Air 

Agricultural policy at the federal level has been wrought with uncertainty and volatility. 

“Trade has been an ongoing saga for a year and a half,” Ehmke says. “Hopefully this phase one agreement is going to be a step forward for the ag economy.”

Other positive policy forces at play are progress with Japanese trade agreements and the United States–Mexico–Canada Agreement (USMCA).

“These are all things that with the momentum moving in the right direction,” he says.

5. U.S. Farm Economy – Trade Uncertainty Lingers 

Without a substantive U.S.-China trade deal, the U.S. agricultural economy will continue to struggle with trade uncertainty in 2020 as questions linger as to whether USDA will continue to soften the blow of the trade war for farmers and ranchers with government payments. 

Amid persistently low commodity prices and rising costs, U.S. farmers and ranchers continue to struggle with low and declining working capital, Ehmke says. However, stable farm real estate values have helped farmers. 

The 2019 LandOwner/Pro Farmer cash rent and land values survey, which polls U.S. landowners and farmers found 55% of respondents expect land values will remain unchanged in 2020. That’s up from last year’s 48%. In addition, only 34% expect land values will decline in 2020, down from 48% in 2018.”

The resiliency of farmland values, despite the steep drop in net farm income over the years, has allowed farmers to restructure debt and address tight cash flow and liquidity crunches, Ehmke explains.

6. Specialty Crops – Labor and Water in the Spotlight 

Fruit, nut and vegetable markets will continue to face rising production costs in 2020 due to mounting regulations, particularly as they relate to controls over groundwater in California. These challenges could cause acreage shifts between crops of varying water needs, according to CoBank. 

7. Grain, Farm Supply and Biofuels – Time to Transform 

Challenges for the grain sector will persist in 2020, reports Ken Zuckerberg, lead economist, grain and farm supply at CoBank. This is fueled by commodity price pressure, policy uncertainty and export weakness amid growing global supply abundance, especially for corn and soybeans. U.S. wheat producers and exporters, though, may benefit from an improved export pace in 2020 with the Russian wheat crop struggling. 

Biofuels also face challenges in 2020, he says. U.S. ethanol production, according to the U.S. Energy Information Administration, is expected to fall by 1.9% in 2019 to 15.8 billion gallons and remain flat in 2020.

8. Dairy and Animal Protein – Exporting Your Way to Success

With dairy and animal protein production looking toward another year of increased production in 2020, a rebound in exports will be critical to profitability in both sectors, says Ehmke and Will Sawyer, lead economist, animal protein at CoBank. 

Per capita consumption of animal protein in the U.S. will likely set a new record in 2019. Overall dairy consumption in the U.S. will remain strong in 2020 as Americans continue eating more cheese and butter, but fluid milk will likely continue its long-term decline. 

Strong demand and rising exports, though, will not erase financial stress at the farm level, Ehmke and Sawyer report. Producers of beef, pork, poultry and dairy will likely experience stress from higher feed costs due to lower crop yields this fall.

9. Rural Electricity – Demand Grows for Cleaner, Lower-Cost Power

Companies throughout the electricity supply chain are likely to face heightened, simultaneous demands for cleaner and less expensive power generation in 2020. These pressures reflect the intense popular concern about climate change, wealth and income inequality, and slowing economic growth—three issues which Americans rank as equally important in recent polling. In many rural communities, these concerns are likely to manifest in more numerous and more vehement calls for greater renewable power generation. For utilities, the task of justifying multi-million dollar expenditures on new renewable resources will be easier in 2020 as the unsubsidized costs of solar, wind, battery energy storage, and flexible natural gas-fired resources continue to decline.

10. Rural Communications – Investors Have Come to Buy 

Rural and regional telecommunications operators will become targets in 2020 for investors and strategic buyers as the pool of available mid-sized fiber transport companies dries up, according to Tom Binet, senior economist, power energy and water at CoBank. Demand for these companies has been so strong that valuations are reaching levels that were unthinkable a few years ago. 

Read the full report: Forces That Will Shape the U.S. Rural Economy in 2020