Economic Tidbits

COVID-19 & Nebraska Ag

As the coronavirus, or COVID-19, continues to spread, the economic impacts are starting to be felt worldwide.

In response, the world’s central banks have reduced interest rates, Congress has passed legislation dedicating $8.3 billion towards thwarting the outbreak, and California, New York, and Washington have declared state of emergencies. Equity and commodity markets have responded with wild, day-to-day swings, there’s a growing list of corporate profit warnings, and travel advisories are in effect—all of which have contributed to economic uncertainty. The outbreak begs the question: what are the potential economic implications for Nebraska agriculture? Right now, there are more questions than answers, but one can foresee what some of the impacts might be. A short list is below:

  • Slowing U.S. and world economic growth due to the outbreak will reduce the demand for U.S. agricultural products. The Organization for Economic Cooperation and Development (OECD) has lowered its projected growth in global gross domestic product from 2.9 percent to 2.4 percent, the lowest level since the financial crisis. Less economic growth means less demand. However, at this time, it’s difficult to foresee the length and severity of any slowdown and how much impact it will have on the demand for agricultural products.
  • The one-half percentage point reduction in interest rates, and the anticipation of more rate cuts, could mean lower borrowing costs for farmers and ranchers. It has already been reported that 30-year mortgage rates on housing loans are at record low levels. Lower interest rates should support land values and shore-up equity on balance sheets. Lower interest rates could also mean a lower value for the dollar as it becomes less attractive to investors. A lower dollar makes U.S. agriculture goods more attractive overseas.
  • Consumption of beef and other meat protein could be particularly impacted due to slowing food service traffic as people stay home and do not venture out to eat. According to National Cattlemen Beef Association, beef has 99 percent penetration within the U.S. foodservice industry and represents 16 percent of total food purchases made by restaurant operators. It could also impact seasonal purchases for grilling as consumers pull back on spending. Moreover, major overseas markets for U.S. beef like Japan and South Korea are currently in the throes of the COVID-19 outbreak which will affect purchases of U.S. beef.
  • While it appears the outbreak in China has peaked, and the Chinese economy is slowly returning to its pre-virus activity level, the impacts in China have several implications for Nebraska agriculture. First, Chinese purchases of U.S. agricultural goods under the Phase 1 agreement have yet to materialize in any significant way due to the outbreak. This is particularly troublesome for Nebraska soybean and pork producers as China is a major buyer of these goods. Chinese pork purchases were surging prior to the outbreak, and while still high, have fallen in recent months. Potential Chinese purchases of corn, ethanol, and distillers dried grains have also likely been impacted. Congestion at Chinese ports due to the inability to offload shipped goods has created logistical problems and increased transportation costs, particularly for refrigerated containers used to ship meat and fresh products. This means shipments will be slow to ramp up when China starts buying. China is also a major chemical supplier so the outbreak could also affect the availability of critical crop protection products in the U.S.
  • The Trump administration has sent mixed messages on whether it will issue another round of Market Facilitation Payments (MFP) in 2020 to assist producers affected by trade disputes. There’s growing speculation the virus outbreak and its impacts on world trade, along with this year being a presidential election year, could mean another round of MFP payments will be forthcoming.
  • The collapse of oil prices due to the coronavirus and the fallout between Saudi Arabia and Russia over oil production levels should mean lower fuel prices for farmers and ranchers but will pressure margins for Nebraska’s ethanol producers. After a brief period of positive margins last fall, ethanol margins had already turned negative coming into 2020.

The length and severity of the COVD-19 outbreak will ultimately determine the magnitude of the economic impacts for Nebraska agriculture. Unfortunately, the economic slowdown caused by the virus comes at a time when agriculture is already struggling to generate positive returns.


You may also like