Digging Deeper...

The U.S. economy is on a strong growth path and cash-rich consumers are spending robustly on both services and goods, reports Colorado-based CoBank, a national cooperative bank that provides loans, leases, export financing and other financial services to agribusinesses and rural power, water, and communications companies in all 50 states. In the latest edition of its publication The Quarterly, CoBank says “while the U.S. economy is running hot, it is still very much in the grips of the pandemic [and] its negative influence has steadily shifted from curtailing demand to derailing supply chains.” 

Dennis McLaughlin, McLaughlin Writers LLC – Sources: Nabaneeta Biswas, professor of economics at Marshall University’s Department of Finance, Economics and International Business; Michael Ellis, publisher of Rural Lifestyle Dealer; Neil Dutta, head of U.S. economics at Renaissance Macro Research; PNC Financial Services Group senior economic adviser Stuart Hoffman; Jean Boivin,PhD,  managing director of the Blackrock Investment Institute; Wall Street Journal, November 22, 2021; The Quarterly, CoBank.

Are Supply Disruptions Becoming Slightly Less Painful?

Businesses of all sizes in all sectors of the economy have been wrestling with the worst supply chain bottlenecks anyone has seen or can remember. In the final quarter of 2021, the U.S. economy and rural industries are still dealing with ongoing phases of the COVID pandemic. Nevertheless, the economy seems on the route to recovery, even as supply chain disruptions and labor shortages have added significant costs to business operations and consumer budgets. American shoppers will be looking at higher prices for months to come.

Rapidly rising input costs and product shortages are hitting agriculture particularly hard, as ag commodity prices have flattened and inflation compresses margins. However, robust agricultural exports have kept much of agriculture in the black, says Dan Kowalski, vice president of CoBank’s Knowledge Exchange Division. Credit conditions were strong going into this Fall’s harvest season, with consumers still flush with cash and, he notes, spending robustly on both services and goods.

Supply chains, however, remain in desperate straits. As of October, according to CoBank, lead times for manufacturing inputs had reached record highs, and retailers were spending millions to charter container vessels to ensure shipments reached stores in time for holiday shopping. The scramble to keep supply chains intact has driven up costs. The latest producer price index data for August was up 20% over August 2020. The consumer price index was 5.2% higher than August 2020.

Earlier this fall, businesses were paying much higher costs, but passing only a small portion of those costs on to the end user/purchaser. While many businesses held off on raising prices, that is expected to end in Q4 or Q1 2022. Supply chain snarls could persist well into 2022, and so will elevated inflation. The Federal Reserve has adjusted its tone on inflation, with Fed Chairman Jerome Powell recently admitting that inflation is now more broad and structural than earlier in the year.

For seasoned ag industry veterans, the supply chain is like nothing they’ve ever seen. “In my 30-year career this is the first time we have faced a situation of this magnitude,” says Michael Kuhlmann, head of Crop Protection at HELM Agro. There were different factors coming together at the same time, he explains – such as a reduction of production capacity when China experienced its own pandemic-related shutdowns, along with a shortage of container availability and space on container vessels. The Olympic Games in Beijing in the first quarter of 2022, plus the Chinese New Year in February – that shuts down factories for a week – and other trade and COVID-19 disturbances converged to form the perfect logjam. “I do not expect a significant improvement throughout the first quarter,” Kuhlmann states. “Hopefully in the second quarter, things start to stabilize a little. Other shipping, manufacturing, and retail executives are on the same page: They don’t expect a return to more-normal operations until next year and that cargo will continue to be delayed if Covid-19 outbreaks disrupt key distribution hubs.

Things Are Looking Up

But better times could be happening sooner than later. On November 22, the Wall Street Journal said global supply-chain woes are beginning to recede. “In Asia, Covid-related factory closures, energy shortages and port-capacity limits have eased in recent weeks,” the paper reported.  In the U.S., meanwhile, major retailers said they have imported most of what they need for the holidays.” Walmart, Home Depot and Target, said they are well stocked for the holidays because they imported goods earlier than usual this year. 

Although the situation may be looking up, most company executives concede their problems are not over. Several retailers reported thinner profit margins, blaming elevated freight costs. In desperate fashion, some have chartered their own ships to get around bottlenecks.  But “globally speaking the worst is behind us in terms of the supply-chain problems,” said Louis Kuijs, head of Asia economics at U.K.- based Oxford Economics. Its recent survey of 45 economies found that “almost all believe supply-chain disruptions have peaked or will peak in the last quarter of 2021.”

An easing of supply-chain choke points would allow production to move toward meeting strong demand and would lower logistics costs. If sustained, that, in turn, would help alleviate the upward pressure on inflation. Nabaneeta Biswas, professor of economics at Marshall University’s Department of Finance, Economics and International Business, recently observed the best way to contain inflation and ward off a paralyzing recession is “to increase production capacity, specifically, in the sectors where we are experiencing inflation. Increasing production capacity is the key. There's no magic wand that would increase production capacity overnight. It's something that's going to happen over time.”

Aubrey Daniels, Ph.D., architect of the concept of organizational behavior management (OBM) that applies behavioral principles to individuals and groups in business, government and human service settings, offers a unique understanding of the economic conundrum of supply-chain, demand, production, inflation and recession. In a recent article, Daniels wrote, “Economics will never improve its ability to predict without first understanding and studying behavior as the central source of economic activity. People buy things and spend money. That is behavior. Without behavior there is no economy.”

If it is true that behavior is what drives the economy, then things really could be looking up. Michael Ellis, publisher of Rural Lifestyle Dealer, observed in a recent issue that farmers and rural equipment buyers appear reconciled to supply chain delays. But they haven’t stopped buying because of delivery delays. So dealers shouldn’t be cutting back their marketing/merchandising programs.

PNC Financial Services Group senior economic adviser Stuart Hoffman is optimistic about economic growth in the U.S. He thinks the country can avoid recession in 2022, 2023 and 2024 if Congress raises the debt ceiling. The $1 trillion infrastructure package to address the country’s roads, bridges and broadband initiatives should help. “That’s a pretty big stimulus for the U.S. economy,” he adds, “and it’s hard to believe the U.S. economy is going to fall into recession.” 

Other economists have made similar points. “To be in stagflation, the economy needs by definition to be stagnating, and the evidence for this is quite thin,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research, in October. “By all accounts, the economy remains firmly in boom mode.”  For the economy to be in stagflation, new orders must be below their long-run average while higher prices continue above their long-run average, Dutta explained. He described the economy as being in an “inflationary boom.”  New orders and prices are both strong.

That, however, doesn’t mean inflation isn’t a concern. Reacting prematurely to expectations about rising inflation could become a problem. Jean Boivin, head of the Blackrock Investment Institute worries that some policy makers will be too quick and/or aggressive in responding to inflation increases with ineffective monetary policies. Or actions that only exacerbate the situation – needlessly destroying demand. Tightening monetary policy would do little to unclog ports or fix shortages that have snarled supply chains.

Amidst all of this, energy prices have surged, with few indications of a near-term reversal. The dollar has also been steadily rising for months, and the yield curve is steepening again. All three of these factors could be interpreted as signs of a healthy economic recovery. They could also be simply reflections of the supply and inflation challenges being experienced throughout the economy. In this case, the explanations are not mutually exclusive. “The economy is on a strong growth path, but inflation is hastening expectations on the Fed’s timeframe to tighten monetary policy,” CoBank explains. “For those in agriculture, this confluence of factors poses a headwind and creates even higher operating costs to close out the calendar year.”