Dairy farmers are dumping milk, cattle ranchers are watching beef prices plumb new depths, crop prices are also falling and the entire agriculture economy is starting to feel the impacts of COVID-19. In states across the country, ethanol plants are idling, meat processing plants are closing or reducing capacity as workers stay home, and vegetable producers worry they may not have the labor force needed to harvest their crops.
Changes in consumer behavior and a shift away from restaurant and foodservice purchases have left shortages and oversupplies for key food and commodities. When state stay-at-home orders came into force and consumers dramatically increased their purchases of food, many grocery isles and shelves emptied. Overall Americans went from purchasing about 48 percent of their food from grocery stores to more than 90% in the span of a few weeks. Food wholesalers and processors had to scramble to fulfill the new demand, despite adequate supply coming from farmers, ranchers, and dairymen.
More recently, those supply bottlenecks have created oversupply at the farm gate, causing major price distortions and in some cases forcing producers to dispose of fresh products that can spoil.
“This is entirely a demand and supply chain problem,” said Don Shawcroft, president of Colorado Farm Bureau. “As restaurants close and curtail purchases, and consumers increase their buying at grocery stores, the food supply chain is scrambling to keep up. We’ve just never seen this kind of disruption before.”
Shawcroft stressed that the county has plenty of food, but the upheaval in the food distribution system is what is causing shortages at grocery shelves. This problem has been particularly impactful on the dairy shelf and in the meat case. Its also creating problems with commodity prices. In the past month, dairy prices have dropped 26-36%, corn futures have dropped by 14%, soybean futures are down 8% and cotton futures have plummeted 31%. Hog futures are down by 31%. Despite a dramatic rise in retail prices, money paid to cattle ranchers has fallen 25%.
Economists don’t expect a near-term turnaround in prices as the national and state-level response to COVID-19 is expected to create significant market uncertainty well into the summer months.
Problems with Fuel
With states in lockdown, no one is driving, leading to a huge drop in the demand for gasoline. Weekly demand is now at the lowest point since 1993. The national average price for gasoline is $1.92 per gallon, a full 81 cents cheaper than at this point last year. Oil prices have cratered due to major geopolitical events, further pushing the price of gasoline lower.
The drop in fuel prices is one bright spot for producers as it will cost them less to fill the tanks on their pickups and tractors. The cost of diesel can make up as much as 25% of on-farm energy costs and the national average price for diesel is now .54 cents cheaper per gallon than a year ago.
As a result, demand for ethanol is also at a record low. Ethanol plants in many parts of the country are idling or scaling back production as gasoline futures are now cheaper than ethanol which has dropped 35% in recent weeks. The plant closures threaten to have a larger cascade effect as rural communities cope with the loss of jobs and plant purchases. As dried distillers grains, a co-product of ethanol production and a key component of livestock feed dries up, local livestock producers have found themselves scrambling to find a replacement. A longer-term slowdown of the ethanol industry could spell additional trouble for corn prices, as supplies of the grain would rise as plants consume less.
Farmer Confidence Craters
Just a few months ago, the agriculture industry was bullish about the coming year. After 5 years of depressed commodity prices, challenges with natural disasters and global trade wars, farmers and ranchers were optimistic about a turnaround. That has all cratered in the last few weeks. Producer sentiment, as measured by Perdue University’s Ag Economy Barometer dropped by 28% between February and March, the largest ever monthly drop in the history of the index. A full 40% of producers say they are “very worried” about the impact of COVID-19 on their profitability in 2020.
The CARES Act provides $9.5 billion to the Agriculture Secretary for financial support to farmers and ranchers impacted by the coronavirus and $14 billion for the Commodity Credit Corporation. But USDA has not yet said how it will spend the money and producers are left to make key planting decisions without being able to project how they may be supported by the legislation.
Read more about the CARES Act and its provisions for the agriculture industry here.
Ultimately America has plenty of food, but contraction in the industry and further consolidation as a result of ongoing economic pressure could spell trouble for food prices in the future.
“We are worried about what happens two or three years down the road,” said Shawcroft. “The immediate crisis is a big problem, but where we find ourselves further down the road is harder to predict. That spells trouble for the ag economy, the rural communities they support, and for consumers as the grocery check-out.”