Report: Forces that will shape the U.S. rural economy in 2020
The U.S. rural economy will continue to face headwinds in 2020 and is expected to underperform relative to the economy of urban America, according to a recent report by CoBank.
Since 2014, GDP growth in rural counties has averaged almost 1 percent less than in urban counties. That trend is likely to continue without a significant upswing in agricultural commodity prices, energy exploration, rural manufacturing and other industries upon which rural economic growth depend.
Despite that bearish prognosis, there is room for optimism, according to a 2020 outlook report from CoBank’s Knowledge Exchange division. The U.S. farm economy has demonstrated its resiliency in the face of trade wars, extreme weather and other disruptive events. While the downside impact of trade disputes and tariffs will remain severe for many, some agriculture sectors will see stronger exports and higher prices. Rising animal protein and dairy exports will be a bright spot for producers in 2020.
“Most current signals indicate the overall domestic economy is on firm footing, thanks almost exclusively to the consumer,” said Dan Kowalski, vice president of CoBank’s Knowledge Exchange division. “However, without a meaningful U.S.-China trade deal, the U.S. agricultural economy will continue to struggle with uncertainty in 2020.”
The CoBank 2020 outlook report examines 10 key factors that will shape agriculture and market sectors that serve and impact rural communities throughout the U.S.
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. The prognosis, however, offers little to support such optimism. Consumer strength the world over has prevented further slowing in the global economy.
The direction and severity of the U.S.-China trade dispute will continue to have the most significant influence on the world economy in 2020. A levelling off of trade tensions would allow global economic growth to bottom out in early 2020 before showing signs of life later in the year. However, the vulnerable state of the global economy makes it susceptible to contraction if trade conditions worsen.
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. Now that stimulus effects from the 2017 tax reform and the 2018 spending bill have faded, the economic expansion will show its age, losing steam in the coming year. There is evidence that since 2017 more people, including those in rural communities, have broadly shared the benefits of economic growth, despite the continual rise in wealth inequality.
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. Japan and Europe are still stimulating their economies with negative interest rates and quantitative easing. After three rate cuts in 2019, the U.S. Federal Reserve is holding a more conservative stance with its target rate near 1.5 percent. China has the most room to maneuver with its short-term rate just under 3 percent. All these accommodative stances are made possible because inflation remains inexplicably low despite tightening labor markets. Federal Reserve Chair Powell’s role in 2020 is to keep the late stage expansion going while simultaneously preparing for the recession that will arrive sooner or later.
U.S. Government – Policy and trade up in the air
Agricultural policy at the federal level has been wrought with uncertainty and volatility. The trade environment for 2020 remains hazy as well. Beyond a possible U.S.-China phase one deal, more progress with China will be a challenge. As a result, it is difficult to see trade as a bright spot in 2020.
The atmosphere in Washington today has given way to progress on agricultural labor legislation and the USMCA. But a protracted partisan fight over impeachment is on tap in the Senate. This rancor makes it difficult to advance legislation that helps agriculture, which would give either side a win for the hotly contested 2020 election. Market Facilitation Program payments to farmers helped make up for persistently low commodity prices in the last year.
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.
However, stable farm real estate values have helped farmers.
Farm debt, already at record levels, is expected to continue climbing, as credit quality in farm loans declines, particularly for grain and dairy producers. However, stable farm real estate values have helped farmers. 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.
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. Regulations under the state’s Sustainable Groundwater Management Act (SGMA) are about to go into effect and could potentially cause acreage shifts between crops of varying water needs.
Other government action in 2020 could have a favorable impact on specialty crop growers. The Farm Workforce Modernization Act currently being debated in Congress is a hopeful sign for an improved regulatory environment for agricultural labor. If passed, it would help ease the tight labor supply plaguing agriculture.
Grain, farm supply and biofuels
Challenges for the grain sector will persist in 2020, 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. U.S. ethanol production, according to the U.S. Energy Information Administration, is expected to fall by 1.9 percent in 2019 to 15.8 billion gallons and remain flat in 2020. The outlook for farm supply companies is mixed and continues to be heavily influenced by weather. To improve its value proposition, this sector is actively pursuing vertical and horizontal consolidation.
Dairy and animal protein
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. 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. Producers of beef, pork, poultry, and dairy will likely experience stress from higher feed costs due to lower crop yields this fall.
Producers of beef, pork, poultry, and dairy will likely experience stress from higher feed costs due to lower crop yields this fall.
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.
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.
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. Demand for these companies has been so strong that valuations are reaching levels that were unthinkable a few years ago.
Mergers and acquisition activity in rural markets should be brisk as the growth in data traffic offers attractive returns for investors, and opportunities for strategic buyers to gain scale and access to new markets. 2020 will also bring the launch of the Rural Digital Opportunity Fund (RDOF), the latest broadband incentive program from the Federal Communications Commissions and its largest effort to close the urban-rural digital divide.
Read the the full report here: 2020 The Year Ahead: Forces That Will Shape the U.S. Rural Economy.