September 10, 2021

Ask Dennis - September 2021

Q: I have read in multiple places via Food Export content (blogs, eBulletin, newsletter articles, webinars, etc.) that 2021 will be another record year for food and agricultural exports, better than 2020 which was an all-time high. My concern is that we have peaked now and wonder what to expect next year when economies start to normalize. What do you think?

 

A:   A good, very timely question, I think there are a few things to unpack here. The first is that on August 26th, 2021, USDA’s Economic Research Service and Foreign Agricultural Service published their “Situation and Outlook Report”. In it they said that U.S. agricultural exports in fiscal year (FY) 2022 are forecast to reach $177.5 billion, which is an increase of $4 billion more than in the revised forecast for the preceding year. A fiscal year runs from October 1st through September 30th of the following year. By the time you read this we may be in or nearly in FY ’22 already.

The FY 2021 export forecast of $173.5 billion represents an increase of $9.5 billion from May’s projection, mainly due to higher livestock, poultry, and dairy exports, as well as the adoption of a new definition of “Agricultural Products.” Because of that new definition, which really means products that were not considered “agricultural” now are there has been a re-calculation all the way back statistically.  FY 2021 will indeed be a record high, and the forecast is for FY ’22 to surpass that total, which remains to be seen.

But as it turns out, 2020 was not the all-time record we thought it was. The highest amount based on the new tabulation was in 2014 when the dollar was quite a bit weaker and U.S. products more affordable, totaling $154.5 billion. The 2020 total has been adjusted to $149.7 billion. And to keep you up to date the July 2021 year to days (YTD) data was just released and it is now nearly $100 billion already at $99.8 billion, growth of 28% over the same period in 2020. The top 11 markets are all in high double-digit growth, such as China at a staggering 119%, except for the Netherlands which has growth normally seen as very strong at 6%. As recently as 2009 the annual total was only $100.7 billion so it shows you how far we have come, now reaching that in July with five months still to count.

Big Changes in 2021

The ERS reports that beginning with this August 2021 release, the report is adopting the World Trade Organization’s (WTO) definition of “Agricultural Products,” which adds ethanol, distilled spirits, and manufactured tobacco products, among others, while removing rubber and allied products from the previous USDA definition. They said that the net effect of the definitional change on historical values is that U.S. agricultural exports under the new definition averaged $4.7 billion higher per year during FY 2018–2020 from the previous definition, and U.S. agricultural imports averaged $9.9 billion higher annually during the same period.

This is following an earlier move by USDA to change the way it defines "Agricultural Products" when reporting on international trade. Beginning with the release of the January 2021 monthly agricultural trade data product on March 5, 2021, USDA—in coordination with the U.S. Department of Commerce—adopted WTO’s definition, which were formerly three product groups not included in the previous USDA definition. They were counted as “Agricultural & Related Products” or in the case of distilled spirits they were classified as “processed food products”. The change harmonizes USDA’s trade reporting practices with those of the international community and ensures USDA numbers are aligned with those of the Office of the U.S. Trade Representative, which already uses the WTO definition when negotiating WTO binding trade agreements.

The values of new 2021 agricultural products in 2020 were as follows: ethanol, non-beverage $2.2 billion, distilled spirits $1.4 billion, industrial alcohols and fatty acids $459 million, mineral and aerated waters $397 million, dextrins, peptones, and proteins $217 million, manufactured tobacco $212 million, misc. animal products $90 million, live animals $87 million, cotton waste $55 million and misc. plant material $23 million, for a total of $5.2 billion.

Another important change to point out for those using GATS for food export data at www.fas.usda.gov is that effective January 1, 2021; the separation of the United Kingdom (U.K.) from the European Union-27 (EU27) was complete, including trade between both entities. Starting with this August 2021 release, the Outlook for U.S. Agricultural Trade is reporting on EU27 and the U.K. separately, rather than a joint EU27+UK in previous quarters. So, you will not find any U.K. data in the EU 27 aggregate, but you would if you used “Europe”, or “EU-28” which still is available. Or you could isolate the country individually and just select United Kingdom.

Export Growth in FY ’22

The ERS report states that the FY 2022 forecast increase is primarily driven by higher export values for soybeans, cotton, and horticultural products. Soybean exports are projected to increase by $3.3 billion from FY 2021 to a record $32.3 billion on higher prices, which more than offset lower projected volumes. So again, increased bulk commodity revenue is not always reflected in an increase in weight. Cotton exports are forecast up $500 million to $6.8 billion on higher unit values. Horticultural product exports are forecast up $600 million to a record $37.7 billion, led by higher exports of tree nuts.

They added that exports of livestock, poultry, and dairy are forecast up $400 million to $36.8 billion in FY 2022, primarily due to growth in dairy and poultry products. Grain and feed exports are forecast down $1.1 billion from prior forecast levels, primarily due to lower corn export prospects. Agricultural exports to China are forecast at a staggering $39 billion, an increase of $2 billion from FY 2021—largely due to higher expected soybean prices and strong cotton and sorghum demand. China then will remain the largest U.S. market followed by agricultural exports to Canada and Mexico which are forecast at $23.8 billion and $22.3 billion, respectively.

Economic Growth Holds Positive Outlook in 2022

According to the ERS report the primary factor affecting economic activity across the globe is the global pandemic from the Coronavirus. The prevalence of the Delta variant has renewed concerns over pandemic-induced pressure on public health infrastructures, softening consumer spending and global supply chain recovery. For example, as you have likely heard or perhaps experienced, microchip manufacturing and the shipping of physical goods are two aspects of the global economy that continue to observe elevated prices from supply chain disruptions.

Despite these economic challenges, employment statistics and consumer confidence have remained strong, pointing to a continued economic recovery through the end of 2021. World real gross domestic product (GDP) is projected to increase by 5.7% in the remainder of 2021, and subsequently increase by 4.6% in 2022. So, your point about normalizing the economy is well regarded, but it looks as if 2022 will still have higher than average world, and U.S. economic growth.

In fact, growth projections for U.S. real GDP in 2021 were raised to 6.2% from previous estimates of 5.8%. Many economists state that any growth over 2% is considered decent.  The U.S. economy has already grown at an annualized rate of 6.4% during the first half of 2021. ERS reported that Q2 output was, however, diminished by drawdowns in private inventories as firms struggled to source goods in the presence of strong consumption demand. Strong demand and low inventories pressured the prices of many goods higher, drawing concerns about inflation.

The report states that the latest July Consumer Price Index (CPI) showed prices increased by a sizable 5.4% over the past 12 months, which was largely due to price increases in used cars and categories aligned with the reopening of the economy. You have probably read about that as well. Those categories showed signs of slowing price growth in July. However, after factoring out some of the more disrupted categories of prices, the report indicates that inflation remains notable.

Prices of shelter, which is the largest component of consumer prices, observed the two highest monthly price increases in June and July since the Bureau of Labor Statistics (BLS) revised how they measured shelter following the 2008 “Great Recession”. Inflation is expected to remain an important consideration going forward, particularly in relation to economic growth. The U.S. economy is forecast to grow in real terms by 4.2% in 2022.

Regional Economic Growth Forecast

Real GDP in North America is expected to grow by a projected 6% in 2021 and 3.9% in 2022. Real GDP forecasts for both Canada and Mexico in 2021 are revised upwards to 6.5% and 5.6%, respectively.  The Eurozone economic growth projection is raised from 4.2% to 4.6% for 2021, as vaccination rollout continues to make progress in addition to the further recovery of tourism and the service-sector economy.

Collectively, South American real GDP is projected to grow by 6% in 2021, revised upward from 4.6% in the previous quarter. Argentina is expected to grow by 5.9% in 2021. 2022 cumulative growth expectations in South America are tempered at 3.7%. Across the globe in 2022, GDP growth expectations return to more historically average levels after the large, atypical swing of record decreases in 2020, followed by the rebalancing upswing in growth in 2021.

Despite targeted lockdowns in response to the Delta variant in several cities, China’s 2021 real GDP is expected to grow by 8.1%. Continued domestic and international attention has focused on China’s manufacturing industry, which has seen growth rates slow in recent months due to high input prices. Continued bottlenecks in shipping containers and their ensuing record prices also reduce the growth potential of further goods demand. China’s real GDP growth for 2022 is forecast to grow by 5.7%. Japan’s real GDP growth for 2021 is revised downwards to 2.6% from 3% previously, mainly due to continued economic disruption from COVID-19. Japan’s economy shrank by 4.8% during the first quarter of this year due to the pandemic. South Korea’s real GDP growth is revised upwards from 3.6% to 3.9% in 2021 and is forecast to expand by a further 2.9% in 2022.

Oil and Money

The Forecast reports that many economic sectors are still in the process of establishing a new footing after the substantial shocks and changes from the pandemic. Commodity price increases have subsided, but many remain at elevated levels. Crude oil prices continue to exceed pre-pandemic levels, though the near-term outlook remains uncertain. The Organization of the Petroleum Exporting Countries’ (OPEC) and Russia’s supply management—along with the slow recovery of U.S. oil and gas production—has created uncertainty around supply levels. Demand is still returning strong, but with increased uncertainty due to variants creating new possible drawbacks for consumer behavior and travel demand.

Higher commodity prices such as bulk foods, as well as low interest rates across central banks, are expected to continue to support inflationary pressures. Monetary policy will continue to be closely monitored around the world, as multiple central banks have already begun to adjust rates higher. Interest rates for U.S. government debt are expected to remain low, but above those observed in other advanced economies. The relatively higher rates are expected to help support the U.S. dollar during the rest of 2021, though the U.S. agricultural exports weighted dollar is anticipated to depreciate on average by 2.4% in 2021. The annual average depreciation is due in large part to weakness of the dollar at the start of 2021. This should aid food exports even more since like back in 2014 they are much more competitively priced when they don’t cost as much.

So, it appears the answer to your question is that indeed a “peak” may have happened but the descent back into normalcy, if we can call it that, will be slowed by the strength of the recovery and the durability of the virus in all its strains as well. This is a good time to enter into the food export business to be sure, and a very poor choice to back away from it. This is especially true with global economic recovery, which is clear, but also a depreciating dollar. This tends to raise oil prices a bit but many oil producing nations are among our best customers in food, and also makes us much more competitive globally.