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At the end of 2022, CoBank – one of the largest private providers of credit to the U.S. rural economy – released its 2023 Year Ahead report, “Forces that will Shape the U.S. Rural Economy.” While the financial services firm does not predict an immediate recession, it notes that historically, “inflation above 5% has never been tamed without incurring a recession.”

“As financial conditions continue to tighten, we expect the U.S. economy will steadily soften through the first half of 2023, ushering in a brief, modest recession,” says Dan Kowalski, vice president of CoBank’s Knowledge Exchange. “The unemployment rate could rise as high as 5%, indirectly leading to a decline in consumer spending. Without this softening in the labor market and the associated slowing of wage gains and spending, it will be difficult to stabilize prices.”

The CoBank 2023 outlook report examines several key factors that will shape agriculture and market sectors that serve rural communities throughout the U.S.

Global economy: No escaping this slowdown

After two years defined by a strong economic rebound from the pandemic, the global economy will sputter in 2023. A persistent energy crisis in Europe, China’s messy exit from zero-COVID and higher interest rates globally will reduce world economic growth to a crawl. Europe, likely already in recession, will muddle through the winter with sufficient energy supplies. China, much less impacted by Russia’s invasion of Ukraine, will continue to struggle with the impacts of COVID. Greater Asia will be negatively affected by sliding global demand for goods. Emerging markets will keep the global economy growing in 2023 as advanced economies collectively will be stagnant and could even shrink.

U.S. economy: Some pain is necessary

The labor market remains very tight, consumers are still spending aggressively and corporate profit margins have hit record levels despite high inflation. If a recession is coming, it will take several months for these factors to reverse course, delaying any potential recession until at least second quarter 2023. Even then, it is unclear how readily businesses would lay off workers after experiencing such extreme staffing challenges over the past two years. The structural loss of more than 2 million workers since 2020 is contributing to higher inflation for both goods and services. However, the void their exit left could also cushion the economy from the worst of a downturn in 2023.

Monetary policy: More tough decisions ahead

The Federal Reserve’s job will not get any easier in 2023. In nine months, it has raised its federal funds rate from zero to more than 4%. As some economists argue that inflation is falling and the Federal Reserve has done enough, Chair Powell and the Federal Open Market Committee will make even tougher decisions about when to halt rate increases. The trickiest aspect of its inflation fight is that there is no playbook or rule of thumb to tell when to pause rate hikes. The Federal Reserve’s preferred inflation measure, the personal consumption expenditures index, has fallen from its peak of 7% to 6%. That’s still much too high for comfort and Chair Powell has said there is greater risk in stopping too early than raising rates for too long.

U.S. government: Unique midterm results muddy Farm Bill’s path

The 118th Congress convened in January, marking the official beginning of the Farm Bill reauthorization effort. With a Sept. 30 sunset for the current Farm Bill, Congress will have just nine months to pass the next bill. Some interest groups are lined up to address consolidation in farming and agribusiness. Other groups will push policies to direct more resources to small and beginning producers. Ultimately, the Senate will have the upper hand in this debate and the policies that arise in the bill will impact agriculture for the next decade to come.

U.S. agricultural economy: Farm margins will tighten

Despite the global pandemic and a steady barrage of disruptive challenges, the U.S. agricultural economy has fared quite well for the last three years. However, in 2023, producers and related industries will begin to show financial strains. A relentless series of adversities, including skyrocketing production costs, steeply higher interest rates and weakening demand, will increasingly pressure farm income and margins. The ongoing drought and increasing political tensions with China – the U.S.’s largest agricultural export market – present additional risk.

Grain, farm supply and biofuels: Momentum builds for biofuels

Grain elevators and merchandisers face a mixed picture for the year ahead. The good news for U.S. farmers is that global grain and oilseed supplies are exceedingly tight. Ukrainian grain production and exports are still below average, providing underlying support for grain prices. Ag retailers begin 2023 on strong financial footing but face several challenges. Labor shortages and rising wages will negatively impact margins. Wholesale fertilizer costs will rise during the first half of 2023 as cooperatives absorb higher barge and rail costs and compete with export markets for limited supply. The outlook for biofuels is very strong, supported by positive policy and demand tailwinds from 2022. Ethanol will benefit from greater usage of E15 and growing demand for corn oil.

Animal protein: Production to moderate despite a tailwind of enthusiasm

Most U.S. animal protein industry segments have posted phenomenal financial performance over the past three years. However, this era of broad profitability will likely come to an end in 2023. The high costs of feed, labor and construction support the prevailing cautionary attitude toward expanding animal production. On the demand side, consumers are reeling from rapidly declining real wages, a trend that’s likely to continue well into 2023.

Dairy: Milk supplies to gradually grow as demand base shifts

After a year of stronger profits that allowed producers to pay down debt, dairy producer margins will come under pressure in 2023. Despite record-high milk prices earlier in 2022, herd expansion has been minimal among the major exporting countries and this trend is expected to continue in 2023. Dairy product prices will eventually moderate in response to the gradual growth in global milk supplies. Domestic demand for U.S. dairy products, particularly higher-priced brands, will face headwinds as consumers trim grocery spending.

Specialty crops: Drought, labor shortages, strong U.S. dollar among headwinds

Specialty crop growers and processors face a multitude of headwinds in 2023. Costs of water, labor, fertilizer and other inputs are rising while a strong U.S. dollar and weakening global economy drag on the U.S.’s ability to sell products abroad.

Rural communications: Crosscurrents set the stage for the rural communications market

The rural communications market is heading into 2023 with numerous crosscurrents. The increasing importance of broadband helps insulate the industry against economic weaknesses. However, new headwinds are emerging from a weakening economy, tightening capital markets and aggressive network-build activity across a wide range of market actors. The biggest risk to network builds in 2023 will be the tight labor market and ongoing supply chain issues. This is of particular concern for smaller broadband operators competing against larger national telecommunications companies for resources.

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