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Agriculture adapts to persistent supply chain disruptions

The U.S. economy is on a strong growth path, cash-rich consumers are spending robustly on both services and goods and roughly 80% of the U.S. adult population has now received at least one COVID vaccination shot. However, the country is still very much in the grips of the pandemic, and its negative influence has shifted from curtailing demand to derailing supply chains, according to a new quarterly report from CoBank’s Knowledge Exchange.

Lead times for manufacturing inputs recently reached record highs, the report said, putting supply chains in the worst condi­tions since the start of the pandemic. These disruptions, along with labor shortages, are adding significant costs to businesses, and consumers will likely feel these effects through higher prices for months to come.

“Supply chain snarls are likely to persist well into 2022, and so will elevated inflation,” said Dan Kowalski, vice president of CoBank’s Knowledge Exchange division. “The latest producer price index data for August was up 20% year-over-year, while the consumer price index increased just 5.2%. So, it’s clear that many businesses are passing only a small portion of those cost increases on to the final consumer. We expect that will change in the months ahead.”

Rapidly rising input costs and product shortages are hitting agriculture particularly hard, Kowalski said, as ag commodity prices flatten and inflation compresses margins. However, robust exports have kept much of agriculture in the black. The USDA currently projects that China will import $39 billion of U.S. ag products in 2022, up from an estimated $37 billion in 2021.

Ag retailers are benefitting from strong demand for crop inputs resulting from above-average U.S. grain prices and net farm in­come, CoBank reported. U.S. cotton prices have also risen nearly 20% since the beginning of the year. While harvest is not yet finished, farm supply cooperatives should experience a favor­able fall agronomy season, barring any extreme weather events. Skyrocketing fertilizer prices and crop chemical shortages are two key short-term factors affecting the ag retail sector.

On the livestock side of the industry, returning demand from the food-service sector has led to extraordinary strength in the U.S. meat and poultry industries. However, the report predicted, the full effect of inflation is expected to test consumers’ appetite for meat during the fourth quarter of 2021.

Foreign demand for U.S. animal protein has also remained robust. Combined U.S. exports of beef, pork and chicken are forecasted to reach record highs in 2021, increasing 3% over last year. But inadequate labor availability continues to dampen pro­ductivity throughout the meat industry and is expected to remain a concern into 2022.

Rising feed and construction costs halted the 11-month-long expansion of the U.S. dairy herd last quarter while record hot temperatures dented milk cow productivity. The U.S. cow herd dropped by 29,000 head over three consecutive months into August.

Much more information is available in the full report at cobank.com. Each quarterly update covers key industries represented by CoBank, a $158 billion cooperative bank serving agribusinesses such as MFA Incorporated across rural America.

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