High interest rates and a strong U.S. dollar are beginning to take a disproportionate toll on rural industries such as agriculture, forest products, mining and manufacturing.
Most international transactions are still conducted in dollars, and a strong dollar makes U.S. exports more expensive and imports cheaper. That disproportionally hurts the backbone of the rural economy, according to a new quarterly report from CoBank’s Knowledge Exchange.
While the U.S. economy is outperforming expectations, the rest of the world — Europe and China in particular — has fallen short. As a result of the U.S. economic position relative to other countries, the dollar has gotten much stronger than previously anticipated. The expectation that interest rates will remain high for the foreseeable future also has contributed to the strengthening dollar.
“The challenge for agriculture and other rural industries that rely heavily on global markets is their export partners simply can’t afford to buy U.S. products,” said Rob Fox, director of CoBank’s Knowledge Exchange. “When you combine the loss of exports with a general slowdown in the U.S. economy, it’s a double whammy for many businesses operating in rural America.”
The disruptive geopolitical and economic events in recent years resulted in the historically irregular situation where commodity prices and the dollar were both moving upward in tandem. But those events are now fading as market drivers. The fundamental inverse relationship between the broad array of commodities and the dollar has largely returned.
Farm Bill negotiations took a back seat while the U.S. House of Representatives wrestled with selection of a new Speaker and Congress worked to pass its annual appropriations bills before the Continuing Resolution expires Nov. 17. The most likely outcome is an agreement by year end to extend the current Farm Bill by a few months or up to a year or more.
Grains, biofuels
Historically low water levels on the Mississippi River are limiting grain movement heading into the peak fall harvest season. Higher barge rates on the river are pressuring interior basis values for corn and soybeans.
The combination of a strong U.S. dollar and robust export competition from Brazil and Russia are creating major headwinds for the U.S. grain and oilseed export program. Winter wheat planting is underway in the U.S. with acreage expected to be down slightly as prices languish below expected breakeven costs of production.
Fertilizer prices continued to weaken in the third quarter. Anhydrous ammonia and potash prices fell 30% and 15%, respectively. Prices for natural gas, used as both a feedstock and production input, dropped by about 7%.
The fall fertilizer application season should be reasonably normal for regions that are seeing an orderly harvest. While the outlook for the 2024-25 planting season is cloudy, less fertilizer usage is expected as acres shift from corn to soybeans.
Fuel ethanol production was strong during the third quarter, averaging 16.1 billion gallons compared to 15.4 billion during the second quarter of 2023.
A strong summer travel season and attractive fuel ethanol prices were the key demand drivers. Profitability was also favorable, exceeding 50 cents per gallon versus 20 cents per gallon in the year ago period. Renewable diesel and other biofuel capacity continues to grow, having increased by 26% or 800 million gallons since January 2023.