Recession. What does that word actually mean, and if we’re in one, what are the implications for the agricultural economy?
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This is not a fun topic to discuss. Recession, the loss of consumer confidence, and the damage the pandemic is wreaking on the livelihoods of producers are all topics economists do not enjoy observing. However, discussing the intersection of the economy and agriculture in a way that prepares producers and businesses is what our agency is designed for. So today we’re going to talk about recessions and the impacts they have on agriculture.
What is a recession?
I have a little dictionary of economics that sits on my desk. I took a look at ‘recession’ and the first definition is ‘An imprecise term used to denote a sharp slowdown in the rate of economic growth or a modest decline in economic activity…’. The definition goes on to discern between a recession, a depression, and a slump, but that’s the general idea. It’s not very precise. However, when you dig a little deeper you find that a consecutive two-quarter decline in real GDP is generally the technical definition of a recession.
That being said, according to the technical definition, we can’t know whether or not we are in a recession yet. The reality though is that we will likely see back-to-back declines in GDP for Q1 and Q2. In fact the International Monetary Fund (IMF) projects that 2020 output will decline 3.0% compared to 2019. You can find their full World Economic Outlook projections here.
Table 1. Change in GDP and other Global Economic Indicators
My generation’s (Millennials) experience with recessions is tied to the Financial Crisis that followed the ’08 market collapse. What did that look like?
Figure 1. IMF Chart of Real GDP Growth for Select Global Economies
As you can see in the chart above, the financial crisis of 2008 perpetuated a decline in GDP. Growth fell below 0% for consecutive quarters, and so we were in a recession. The worrisome part about the chart; the same pattern has emerged in the most recent set of IMF data on the right-hand side.
What does a recession mean for agriculture?
The precise economic impact to producers and consumers is so difficult to estimate that economists will be studying this ‘Great Lockdown’ long after we are all gone. Initial impacts are only beginning to emerge, and secondary impacts will follow. The truth is, there are known unknowns as well as unknown unknowns. However, we do already understand severe impacts that were precipitated by these global lockdowns.
The prices for most commodities have been hit hard. However there are a couple that are seeing severe pressure due to time and external industry forces. Cotton is particularly sensitive to recessions and economic slowdowns. While we are consuming more cottonseed, cotton is still produced as a majority fiber crop. Cotton’s end-use is in durable goods like clothing, furniture, and car interiors. As expectations of future income decline, consumers are more likely to save their money or spend it on necessities; food, fuel, and housing. They are less likely to spend discretionary income on the goods for which cotton is an input.
All livestock and livestock product prices are seeing extreme volatility. The percent price changes in the opening price change displays do not tell the full story. While current live cattle futures are only down 8% compared to pre-pandemic prices, they’ve fallen significantly further and only seen a slight rebound in the interim. A similar pattern has been the story in feeder cattle, hogs, and poultry. As the markets panicked on the Saudi-Russia oil dispute, a result of lower travel from COVID-19, livestock prices followed. Ensuing lockdowns in the U.S. meant fewer purchases in restaurants and more expenditures on food in grocery stores.
The type and form of animal products we consume has changed overnight as well. Recessionary spending on food is different than stable or expansionary spending. As a rule of thumb, the greater a person’s income, the greater their expenditures on animal proteins. Additionally, as income increases buyers transition away from cuts like ground beef to cuts out of the loin primal cut. So, the products they are purchasing are lower-value. These trends lead to pressure in livestock markets during a recession.
The collapse in corn price has been driven in a unique way during this (what will become a) recession. While people tend to go on fewer vacations and travel less when their income is lower, people are still required to travel to work, school, and family functions. The unique nature of this lockdown and ensuing recession means that travel has decreased even further than a normal recession. As transportation has all but evaporated, the price of almost every fuel type has plummeted, resulting in additional pressure on ethanol and corn price.
The truth is that we are almost certainly in a recession. Jobless claims have grown exponentially, and in an economy driven almost entirely by consumer spending, keeping everyone at home will cut a main revenue source. However, there are bright spots in the agricultural market. If you are currently calving or recently calved you have some breathing room for conditions to improve before fall sales. Wheat prices have benefited from wheat’s role in staple products like pasta and frozen foods, although prices are still not above breakeven in many regions. If you protected yourself with hedges on live or feeder calves prior to the collapse in price, you likely breathed a sigh of relief.
The two components of the profit equation are revenue and costs. If we can’t control (increase) revenue, we have to focus on the cost side. Fuel costs are down. Do you have capacity for on farm storage of fuel? Can you hedge your harvest-time fuel needs now? Feed costs are down. Can you consider additional supplementation strategies for summer calves to increase gains? If you grow a food product are there direct-to-consumer options you can consider? Dr. Mark Welch says frequently “Let’s do our best to make this a bad year, and not our last year.” We’re addressing a lot of these questions at AgriLife, and some of my posts will include an analysis of these very options. In the meantime, if you have a specific question, or want to walk through a budgeting and impacts decision please do not hesitate to email me at email@example.com.