At the Idaho Hay and Forage Association conference held in February, Doug Robison – Idaho president at AgWest Farm Credit – addressed higher-level topics impacting the ag horizon. He reviewed the effects inflation, oil prices and Federal Reserve policy are having as a three-pronged trident impacting agriculture.
Robison started on a positive note with this: “Keep in mind, agriculture does best during periods of inflation. When inflation is above 5 percent, that is when, historically, agriculture has always generated its strongest returns and increases to the bottom line.” However, he was quick to note that this creates management challenges because input costs will also increase during periods of inflation. From a macro standpoint, two of the biggest factors influencing agriculture are Federal Reserve policy and oil prices.
Federal Reserve policy
The Federal Reserve has a dual mandate: 1) maximum employment and 2) price stability. Tackling labor first, Robison said that if you look at labor force participation and go back to the 1960s, the country showed a steady increase in labor participation. You had the largest generation at the time, baby boomers, joining the workforce, while a cultural and economic shift was occurring and women began joining the workforce en masse. This created economic pressure and led to the high inflation experienced during the 1970s and early 1980s. Eventually, those baby boomers had families, and those children (millennials) have now entered the workforce and are creating some of the same economic pressures the U.S. experienced then – with demands on housing and increased consumption – though not at the scale experienced during the 1970s.
Labor force participation has decreased from an all-time high of 67.1% in 2000 to the current level of 62.3%. Robison noted that the recent major decline in labor force participation, however, is not related to women leaving the workforce, but has been driven by males, aged 25-54, dropping out of the labor force. Prior to the '70s, 96.7% of this age group was active in the workforce, but it has been declining ever since. Today, the figure is 88.4% – which represents more than 5 million missing male workers. What factors are influencing the decline? Robison noted three factors: 1) baby boomer wealth and delayed responsibility, 2) video gaming and 3) opioid addiction. It’s estimated that the males choosing part-time work over full-time work dedicate more than 75% of the remaining hours to video gaming. There is a loss of about a million males specifically to video gaming. And then there’s the opioid epidemic, resulting in the loss of several million potential workers from the economy, among both men and women.
Labor force participation has not returned to pre-pandemic highs. The COVID-19 pandemic had the greatest impact on the age-55-and-older category, some of whom took early retirement and have not come back to the workforce, resulting in the loss of approximately 1.5 million workers. Of those younger than 55, there are still 900,000 workers missing. Add in migrant labor, which resulted in the loss of 500,000 to 600,000 potential workers during the COVID-19 lockdowns of 2020 and 2021. Post-pandemic, the U.S. has lost nearly 3 million workers.
Immigration trends also have a significant impact on labor availability. Robison said that migration between Mexico and the U.S. was balanced prior to the pandemic. However, due to decades of declining birth rates in Mexico, there are not as many young workers seeking opportunities in the U.S. In the 1970s, Mexico’s fertility rate was at 6.5 births per woman. At that time, the U.S. was averaging 2.5 births. Mexico’s fertility rate has fallen to two births per woman today, and the U.S. rate is now 1.78 births. It takes 2.1 births per woman to maintain a population (not to grow, but to maintain). During the 1990s, there was a large immigration influx from Mexico, but that trend has now reversed.
“If you look at the next decade, we're probably going to lose people to Mexico,” Robison said. A lot of manufacturing is moving to North America from Asia and heading to Mexico. “We may actually start to lose people on a net basis to Mexico from a migration standpoint … Mexico is not going to be a source of cheap labor in the future, the way that it has been over the past few decades,” Robison said. This, coupled with baby boomer retirements, will reduce the available workforce even further and put more upward pressure on wages.
Oil prices
Over the past 30 years, farm product prices have maintained an 81% correlation with oil prices. Robison said the U.S. is producing oil in the 12-million-plus barrels per day range, which is just under the pre-pandemic level and is basically producing enough for its own needs. However, the production increases have started to level off, and productivity gains in shale oil are moderating. While we are technically energy independent, it’s still a world market, and international challenges will influence the prices we pay in the U.S.
Robison said to remember that history can be a painful teacher. In 2020, the futures price for oil went negative for a day. With that in recent memory, investment money has not returned to the oil production sector at its previous rate, and investors are demanding greater returns. Robison also noted that China is slowly coming back online, following their COVID-19 lockdowns, and will increase consumption by approximately 1 million barrels a day during 2023. Oil prices will probably rise over the intermediate term and be supportive of commodity prices. Goldman Sachs is projecting $110 per barrel of oil by the third quarter of 2023.
Inflation
The Federal Reserve’s target is 2% inflation. The consumer price index (CPI) is a primary measure of inflation, though the Fed uses multiple gauges and prefers the personal consumption expenditures (PCE) price index. January’s CPI increased 0.5% month over month and annualizes to 6%, almost double what analysts and economists expected. Combined with the stronger-than-expected January jobs report, it is likely the Federal Reserve will move interest rates an additional quarter percent higher than originally forecast.
As for inflation causes, Robison said, “From a high-level perspective, we've had supply chain issues. There's no doubt about that – coming through the pandemic.” He continued, “But I would argue that the majority of our inflation challenges have been due to the fiscal and monetary stimulus that took place. There was an estimated [gross domestic product] GDP output gap of $2.3 trillion from the pandemic and the combined stimulus measures were more than $7 trillion. The excessive stimulus has resulted in most of the inflation we have experienced over the past two years.”
Government stimulus impacted all parts of the U.S. economy. “For example, during the 2020 and 2021 time frame, more than a billion dollars came into Idaho agriculture from various government programs, and that is just one small sector of the economy. I can assure you, that is showing up in equipment prices, land values, etc. Those dollars are still having an impact,” Robison said.
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