The speed of the economic recovery will largely hinge on the availability, dissemination and reach of COVID-19 vaccines, pushing the expected burst of pent-up consumer demand into the latter half of 2021, according to a comprehensive year-ahead outlook report from CoBank’s Knowledge Exchange division.
“The coming year will be a recovery year for most Americans and the businesses that make up the U.S. economy,” said Dan Kowalski, vice president of CoBank’s Knowledge Exchange division. “The early part of the year should look very different than the latter, but in total, economic growth is estimated to be about 4%, following a retreat of roughly 4% in 2020.”
The CoBank 2021 outlook report examines 10 key factors that will shape agriculture and market sectors that serve rural communities throughout the U.S.
Against all hope that COVID would fade in 2020, it will continue to steer the global economy in 2021. Global economic recovery was very uneven in 2020, and given the current surge in virus cases, we expect that to remain the case in 2021.
Our confidence in gross domestic product forecasts has increased since mid-2020, but uncertainties related to the dissemination and uptake of vaccines mean timing the recovery is still exceedingly difficult. Of all major economies, China recovered the fastest from the pandemic and will finish 2020 in remarkably good economic shape while Europe has suffered the most.
Perhaps one of the longest lingering impacts from COVID will be the mountains of debt absorbed by most governments around the world.
A post-COVID bounce is coming to the United States in 2021, but it’s unlikely to happen soon. Much of the year’s economic trajectory will depend on fiscal policy decisions made over the next couple of months. Roughly 10 million Americans who lost their jobs early in the pandemic have yet to find work, and many of them are receiving some form of public support. If and how Congress chooses to fund further relief will impact the speed of the recovery.
Throughout the first half of the coming year, many businesses will be just trying to keep the doors open. Optimism, however, should spur investment decisions in the first half of the year.
Opportunistic firms will attempt to time the comeback with new investments into the leisure and broader services sectors. Not all things will return to the way they were, though. Some industries may never fully recover.
If there is an economic hero amidst the pandemic, it is most certainly the central banks. The Federal Reserve in particular stabilized the global financial system within weeks of the pandemic taking hold, and it continues to provide massive amounts of economic support.
The role of central bank policy in 2021 should be less dramatic but no less important. With short term interest rates firmly at zero, the Federal Reserve will manage a few levers in the coming year, advocating for fiscal policy and keeping a close watch on longer-term rates and inflation, among other things.
As the 117th Congress begins, the political landscape is still somewhat uncertain. The Biden administration transition is proceeding apace. The House will remain Democratic with a smaller majority of no more than nine seats. In the Senate, control will be decided by a Jan. 5 runoff election for both Georgia Senate seats.
The narrow margin of power within Congress will moderate legislation. The Biden administration cabinet will be more diverse than President Donald Trump’s but is unlikely to shift to its leftward extreme, as indicated by the selection of former U.S. Department of Agriculture Secretary Tom Vilsack for that role.
The COVID response will be job one, followed closely by responding to the economic impact of the pandemic. The other priorities of the president-elect — reengaging with the rest of the world, investing in infrastructure, addressing social justice, climate change and trade, will all depend on getting the virus under control and getting the economy firing on all cylinders.
U.S. farm economy
Higher commodity prices and low interest rates will be an important financial buffer to net farm income in 2021 with the federal government’s role in farm payments expected to greatly diminish. Federal government was the source of more than one-third of U.S. net farm income in 2020 with USDA providing extraordinary payments through a variety of programs.
Crop prices have been bolstered by robust Chinese purchases and dry growing conditions in key growing regions of the world. Historically low interest rates will lower borrowing costs for farmers and ranchers. The value of farmland, which is an important source of equity for farmers and ranchers, is also expected to remain stable in 2021.
The specialty crops sector will continue to adapt to historic shifts in logistics and supply chains in 2021 as the COVID-19 pandemic causes consumers to purchase more food at retail and less through foodservice. With thousands more restaurants expected to permanently close through the winter months as COVID-19 cases surge, specialty crop growers and the supply chains that deliver fruits, nuts and vegetables will have to continue adapting to a consumer eating more at home.
Some growers, packers, and processors have successfully managed to increase or reroute products into retail channels like grocery stores and home delivery of food boxes. However, steep financial losses from the loss of foodservice contracts will ultimately result in the rationalization of some processing assets and production acreage.
Grain, farm supply and biofuels
The grain and farm supply sectors enter 2021 on reasonably firm footing supported by rising commodity prices, farmer stability and favorable domestic fuel, feed and food usage, as well as firm export demand, especially from China. The outlook for grain is more favorable than a year ago, although carry has evaporated with the inversion of futures prices.
The outlook for farm supply cooperatives is positive for 2021 following a very orderly harvest, rising grain prices and decent farm liquidity.
The ethanol outlook is stable but guarded, with considerable growth and margin opportunities favoring ethanol co-products versus fuel. After experiencing a near 50% reduction in demand during mid-March 2020 to mid-April 2020, fuel ethanol in the United States has recovered to about 90% of pre-COVID levels.
Dairy and animal protein
A rising cost environment stemming from higher feed prices will challenge the dairy and animal protein sector’s ability to return to pre-COVID margin levels in 2021. Corn and soybean meal prices have reached multi-year highs with the futures curves indicating still higher costs in the months ahead.
China’s rebuilding of the nation’s hog herd brings into question its appetite for foreign protein in 2021 as supplies climb. The U.S. dairy sector stands to benefit from the rebound in Chinese hog production with dry whey used as a protein supplement in China’s hog feeding rations.
Domestically, the animal protein and dairy sectors will be entering 2021 with still greater uncertainty in foodservice demand as COVID-19 cases surge to new highs and restaurant closures are expected to soar.
The common need to turn a corner, pivoting from being pandemic-reactive to market adaptive, opens the door to a more decisive response from U.S. power suppliers to changed market conditions. Amplifying the call for action are shifts in policy, costs of new technology, and consumer requirements — all of which conspire against a business-as-usual restrained pace to energy transition in 2021.
Lazard’s annual Levelized Cost of Energy Analysis report marked an important milestone for the industry, with solar now proclaimed the cheapest form of energy in history. So cheap, in fact, that it is now less expensive to build new solar than it is to operate coal plants.
Business Roundtable chief executive officers recently issued their strongest message yet on energy transition, arguing that addressing climate change is now a business imperative for American companies.
With a new president and a likely split Congress, we expect a good bit of gridlock in Washington in 2021. It’s likely that any COVID-related stimulus will focus on near-term economic needs versus investing in projects that take years to produce results.
That leaves the Federal Communications Commission as the remaining institution in Washington to enact policies that will help rural communication providers. In 2020 the FCC held its citizens broadband radio service spectrum auction that was much more rural friendly than any of its past auctions.
And as a result, rural operators are now able to build carrier-grade fixed wireless networks at significantly reduced costs.
CoBank contributed this article.