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CoBank Quarterly: Inflation is Beginning to Loosen its Grip

The Federal Reserve rate hike cycle will soon end, but commodity market supplies remain vulnerable

DENVER (January 20, 2023)—The U.S. economy will progressively slow through the first half of 2023 and fears of a recession are still high, and still warranted. Inflation and interest rate increases intended to combat swiftly rising prices are behind the broad economic slowdown. But with the unemployment rate at a 53-year low and inflation trending lower, forecasts are turning at least a little less gloomy.

U.S. consumers are still spending but doing so by increasing dependence on credit. They are also finally pushing back on price increases on goods, a response to continuous declines in real wages and dwindling reserves of pandemic savings. Like consumers, businesses economy-wide are also spending more cautiously, according to a new quarterly report from CoBank’s Knowledge Exchange.



“The economic cracks that emerged in late 2022 in housing and tech are beginning to spread to manufacturing, finance and retail,” said Dan Kowalski, vice president of CoBank’s Knowledge Exchange division. “These sectors are showing signs of weakness but not to the degree of pointing to an imminent recession. Manufacturing and retail are both undergoing a normalization phase as pandemic consumption of goods has shifted to post-pandemic consumption of services.”

The Federal Reserve raised its benchmark overnight rate by more than 400 basis points in 2022 and it is not finished hiking. The Fed has made it clear it is focused less on headline inflation and more squarely on the labor market and core services inflation excluding housing. With job growth far outpacing the availability of workers, the scarcity of labor is cause for concern, especially for the services sector.



China’s abrupt reversal of its zero-COVID policy is unleashing the full brunt of the virus. The humanitarian toll has been severe. Little data is coming out of China, but reports have estimated that in some regions up to 75% of the labor force has been infected — forcing shutdowns at manufacturing plants and causing major delays in trucking and at ports. U.S. exporters are feeling the impacts now, as supply chain problems have been preventing the movement of many goods into and around China.

Grains, Farm Supply & Biofuels

Grain markets balanced several challenges in the fourth quarter, from the war in Ukraine and economic slowdowns in China and Europe to interest rate hikes in the U.S. and other developed economies. The continuation of these factors and La Nina weather conditions into 2023 will likely put pressure on grain storage and merchandising margins. Stocks-to-use ratios for corn, soybeans and wheat finished 2022 at multi-year lows driven by strong domestic demand.

For the second year in a row, ag retailers posted exceptionally strong revenue and profit growth, driven by sturdy grain market fundamentals. Interestingly, despite high spring demand and tight global supplies, fertilizer prices declined during the fourth quarter amid falling prices for natural gas. While the farm supply sector begins 2023 on strong financial footing, rising wages, higher interest rates and continued high transportation costs are likely to tighten margins. 

Ethanol production in the fourth quarter nearly caught up to pre-COVID levels, averaging 15.5 billion gallons for the quarter. Profit margins averaged $0.27/gallon compared to $0.25 for the first nine months of 2022 and long-run historical average levels of $0.25 to $0.30. Profitability was well above average during October and November, but increasing corn prices, coupled with a 12% decline in ethanol fuel prices, pushed down margins in December. Year-round sales of E15 gained momentum with the Biden administration’s announcement of its intention to review states’ proposals. 

Animal Protein & Dairy

Animal protein production surged in the fourth quarter, with the weekly average increasing 6% compared to the third quarter. While cold storage inventories edged higher through the second half of the year, they remain below the five-year average due to the ongoing strength of demand.

In a major shift from the prevailing conditions earlier in the year, chicken markets were well-supplied during the fourth quarter thanks to increased placements and higher live weights. Retail chicken prices remained elevated, averaging $1.85/lb. for the quarter. However, wholesale chicken prices crumbled amid the pressure of mounting supplies. Export markets have been less affected. Overall, U.S. chicken remains supported by global markets despite the weakening fundamentals at home.

Shrinking market-ready fed cattle supplies are bullish for cattle prices, but beef prices have drifted down from their summer highs. While retailers provided modest relief at the meat case during the fourth quarter, and a discount to year ago levels, consumer demand remained resilient despite comparatively high prices. At the wholesale level, however, beef prices have dropped from their elevated levels. From January highs to December lows, the boxed beef cutout lost 15% of its value. Processor margins suffered through the fourth quarter due to moderating beef prices and higher operating costs. 

Nearby lean hog futures accelerated quickly to begin 2022 and had gained 68% in value by late July, peaking at $122/cwt. Hogs retained much of that support through the third quarter. But despite tight hog supplies, valuation succumbed to the pressure of seasonal tendencies and processing limitations during the fourth quarter. The lean hog index dropped into the upper $70s to end the year, and the hog market appears poised for a significant bounce in 2023.

U.S. milk prices continued softening in the fourth quarter with Class III milk futures falling 5%. Butter prices have also fallen in a faster-than-expected retreat. Spot butter prices are down nearly 10% from the record highs scored in October. Record large total U.S. dairy exports for 2022 carried through the fourth quarter, underpinned by recent weakening of the U.S. dollar. However, the outlook for U.S. exports in the first half of 2023 is deteriorating. Dairy product prices are expected to grind lower as post-holiday season demand wanes amid uncertain global demand.

Cotton, Rice & Specialty Crops

China’s worsening COVID situation adds even more uncertainty to cotton markets, which were already under pressure from the deteriorating global economic outlook. China represents about one-third of global mill use and textile exports, so widespread or long-lasting mill shut-downs would send cotton prices lower yet again. Cotton futures have fallen sharply since May. The steep decline in prices will impact 2023 cotton planting decisions and ultimately, global supply. 

Rough rice prices climbed in the fourth quarter as USDA continued shrinking its estimate of the U.S. rice crop amid tightening global supplies. The 2022 U.S. long grain crop is down 8.9% year-over-year while the medium/short grain crop is down 30.7%. The small U.S. crop and strong U.S. dollar have stimulated imports of rice to a record fast pace, mostly of the jasmine and basmati varieties. Exports, meanwhile, have fallen as U.S. rice is priced out of the world market. 

Sugar has been one of the best-performing U.S. farm commodities in 2022. Wholesale refined sugar prices averaged the year near $0.60/lb., nearly double the long-term average. And the 2023 outlook is for continued price strength and resilient consumer demand for groceries, particularly in the sweet snack and confectionery categories.

Frozen orange juice concentrate prices ended 2022 at the highest level since 2016 and near an all-time record high. USDA estimated Florida’s crop in December at a sparse 18 million boxes, down 56% year-over-year and the lowest since 1937. Processors are filling their needs with increased purchases of imported concentrates from Mexico and Brazil.

Power, Water & Communications

Higher energy costs will continue to squeeze the majority of U.S. consumers this year. Nearly half of all U.S. households heat primarily with natural gas and they will spend 28% more to do so this winter, according to the U.S. Energy Information Administration. The cost of electricity this season is also set to increase, with consumers likely to notice a 10% seasonal adjustment in their bill. Unfortunately, high energy costs have a cascading effect, feeding inflation and hampering economic growth.

Charter Communications signaled its commitment to stick with its hybrid fiber-coaxial infrastructure as it announced a three-year plan to deploy DOCSIS 4.0 across its cable footprint. This will bring top speeds of 10Gbps by 2025 at a cost significantly less than fiber. Comcast has also voiced its support for DOCSIS 4.0 and recently completed a trial in Philadelphia. These announcements are important to the broadband industry because they represent a meaningful competitive threat to companies deploying fiber to the home as cable companies build on their existing (and cost-effective) infrastructure. Meanwhile, a tight labor market and access to critical equipment continue to negatively impact operators’ ability to meet their network build schedules. 

About CoBank

CoBank is a cooperative bank serving vital industries across rural America. The bank provides loans, leases, export financing and other financial services to agribusinesses and rural power, water and communications providers in all 50 states. The bank also provides wholesale loans and other financial services to affiliated Farm Credit associations serving more than 76,000 farmers, ranchers and other rural borrowers in 23 states around the country.

CoBank is a member of the Farm Credit System, a nationwide network of banks and retail lending associations chartered to support the borrowing needs of U.S. agriculture, rural infrastructure and rural communities. Headquartered outside Denver, Colorado, CoBank serves customers from regional banking centers across the U.S. and also maintains an international representative office in Singapore.

–CoBank