MACROECONOMIC FACTORS
1. Gross Domestic Product (GDP)
The 2024 outlook is shaped by a complex interplay of global and domestic factors. While experts suggest that this rate hike cycle has hit its peak, the impact on Gross Domestic Product (GDP) growth will take months to play out in the economy.
However, the USDA's projection for the U.S. economic growth rate in 2024 stands at 1.2 percent, a deceleration from the current year. While global GDP is also expected to slow, it is forecasted to exceed the U.S. growth rate at 2.7 percent. One could argue that a higher global growth rate implies increasing consumption expenditures for food globally, which would be good for U.S. agricultural exports.
ONE THING TO WATCH
Technological advancements loom large on the economic horizon, with Goldman Sachs Research forecasting that artificial intelligence (AI) may start measurably impacting U.S. GDP in about four years, signaling transformative changes in various sectors, including agriculture.
2024 OUTLOOK
Consumer spending, a key driver for the agriculture industry, is poised to face headwinds in 2024. The depletion of personal savings and the rapid rise in household debt are anticipated to contribute to a slowdown in consumer spending, underscoring the need for the agriculture sector to navigate changing consumer behaviors and adapt to evolving economic conditions. The strength of global economic activity, and its implications for ag exports, will be a key factor to monitor in the year ahead alongside pressure from higher interest rates. This is especially important to monitor for commodities that rely heavily on exports, such as cotton.
MACROECONOMIC FACTORS
2. Interest Rates
The Federal Reserve is expected to maintain a higher target rate until the last half of 2024, signaling a commitment to a soft landing and avoiding a serious recession. Chairman Powell's statements underscore the Fed's determination to proceed carefully, with economic uncertainties such as student loan payments, a government shutdown, and global economic challenges influencing future expectations.
Amid higher interest rates, farmers are adjusting their financial strategies, relying more on savings and tightening budgets rather than term loans.
IMPLIED FED FUNDS TARGET RATES
(target rate by projected year end)
Source: CME Group, FedWatch Tool. As of January 16, 2024.
2024 OUTLOOK
The projection for rising mortgage rates, reaching 7.6 percent by the end of 2023, highlights the impact of increasing interest rates. This implies a slower economy, with potential factors like a government shutdown or global economic crises influencing future economic growth and inflation. Despite uncertainties, the Fed aims for a soft landing in 2024.
MACROECONOMIC FACTORS
3. Inflation
In 2023, food inflation experienced a significant cooling, with a year-over-year increase of 3.3 percent (2.1 percent at home, 5.4 percent away from home) through September, a notable decline from the 11.8 percent increase witnessed in 2022. However, despite this moderation, experts suggest that grocery prices are unlikely to see a substantial relief.
Ricky Volpe, an associate professor at California Polytechnic State University, emphasizes that while inflation may cool, actual price drops are rare, as the underlying cost pressures persist. Even so, some experts are hopeful that we may be entering a period of food price deflation after three years of substantial price hikes.
NOT-SO-FUN FACT
In the last 50 years, the only time food price deflation occurred was in 2016.
2024 OUTLOOK
The 2024 food price outlook presents a wide range, projecting a potential 5.5 percent decrease or a 7.8 percent increase. Despite the current trajectory, the Fed aims for a soft landing into 2024, with uncertainties surrounding whether the target rate of two percent will be maintained or if a higher rate of three or four percent, observed in the 1980s, will be accepted in the event of an economic downturn.
MACROECONOMIC FACTORS
4. Farm Income
The USDA estimated a 20 percent drop in net farm income in 2023 in its most recent forecast, due to a combination of lower commodity prices, higher input costs, and less government payments. Even so, the outlook remains strong from a historical standpoint. Many agricultural economists anticipate a moderate dip in net farm income, but still above the five-year average of $129.7 billion.
Even after the projected decline, and considering the impacts of inflation, the projected levels of real net farm income are still above pre-pandemic levels. The projections are a reminder that 2022 was an anomaly. It should not be a surprise that income drops in 2023 and 2024 as some of those temporary factors fade.”
PAT WESTHOFF, FAPRI DIRECTOR
2024 OUTLOOK
Forecasts indicate that net cash farm income in 2024 may be around eight percent below 2023 levels, adjusted for weaker commodity prices and modest increase in input prices. FAPRI's projection anticipates just a two percent decline in U.S. net farm income for 2024, reaching $140.4 billion, albeit remaining notably above the 10-year average of $101.3 billion.