The Economic Connection Between Lockdowns, Energy Constraints and Supply Chain Disruptions
Dr. Roger Cryan joined the American Farm Bureau Federation last fall as Chief Economist.
Before joining Farm Bureau, Dr. Cryan served as the Director of the Economics Division for the Dairy Program in USDA's Agricultural Marketing Service (AMS), where he directed an award-winning team of market reporters, economists, and marketing specialists across the country, and contributed to dairy purchasing and policy across USDA.
He previously served as Vice President for Milk Marketing and Economics at the National Milk Producers Federation (NMPF) and as the Economist for the Federal Milk Market Administrator in Atlanta, Georgia.
Dr. Cryan was raised in rural upstate New York and earned his bachelor’s degree in International Studies at Johns Hopkins University, and his master’s degree and Ph.D. in Food and Resource Economics at the University of Florida.
For a 30,000-foot-view of what’s going on with overall supply chains and the economy, Dr. Cryan brings clarity and understanding. Hopefully, some of his insights help us prepare as we’re planning for the next farm and ranch business cycle.
Arizona Agriculture: What do you see as the major factors causing supply chain disruptions?
Cryan: Our supply chain problems have really been supply problems. COVID created a recession due to supply disruptions, and the Federal Reserve Bank and Congress both took steps – monetary expansion and spending – that are better suited to recessions caused by too little demand.
Stimulating economic demand overwhelmed the already strained supply of all sorts of things, including computer chips, freight capacity, and manufactured goods, including a lot of farm inputs.
Arizona Agriculture: Talk about the disruptions in the supply chain and what caused so many vessels to back up in the Port of Los Angeles and Long Beach?
Cryan: The government was sending out checks and pumping up the money supply to Americans who couldn’t spend it on restaurant meals or ballgames or concerts, so we started shopping online and clearing out the Home Depot, essentially buying lots of ‘stuff,’ much of which comes across the Pacific Ocean and lands in those ports.
The ports could only handle so much, and shortages of truck drivers and containers and trailers (to put the containers on) further clogged things up. It looks better at the ports now, but only because prices have risen and the ports are primarily receiving ships by reservation, and a lot of shipments are going to Gulf and Atlantic ports instead.
Arizona Agriculture: Talk about the freight rate increases and do they eventually level off.
Cryan: A lot of shipping rates are coming down from incredible highs but, for example, ocean shipping rates are still several times what they were before COVID. It will take time and continued investment – in ships, in port expansions and efficiencies, and in containers – before those begin to look low again. Trucking is still challenged with a driver shortage, as part of a general labor shortage in the U.S. and because potential long-haul drivers worry that they will be replaced by computers in a few years or would rather drive delivery vans so they can sleep in their own bed every night, but rates are falling as demand drops off.
Arizona Agriculture: The cost of energy is along every link in the supply chain. Talk about this and what can be done to mitigate some of these higher prices.
Cryan: Fuel prices are down from their peaks, due partly to the President’s release of oil from the U.S. Strategic Petroleum Reserves; but we can only draw so much from those before we create other problems, so they are not a long-term solution. We are exporting petroleum at the highest rate in 75 years, responding to continued high global demand and trying to fill gaps caused by disruptions from the war in Ukraine.
Biofuel use is growing, particularly renewable diesel, which is a so-called ‘drop-in’ substitute for diesel fuel; and about 6% of U.S. petroleum use has been replaced with biofuels. This can help mitigate high petroleum prices, but in the long term, the price of petroleum may be more of a climate policy result than a pure market outcome. This makes it hard to see a long-term outlook for energy prices.
Arizona Agriculture: Discuss the historic average for fertilizer costs and the market for corn prices and corresponding ag commodities.
Cryan: We’ve gotten used to stable and relatively low fertilizer prices over the last decade. Prices were already rising last fall because 2022 was expected to be a good year with strong demand. Then the Ukraine war made a mess of fertilizer markets. A lot of potash comes from Belarus. A lot of European nitrogen fertilizer plants closed because they couldn’t pencil out with the very high price of natural gas, a lot of which they (usually) get from Russia; instead, Europe bought fertilizer that other folks needed and squeezed the world market. As with fuel, it will take time and investment (plus lower natural gas prices) before fertilizer prices will begin to look anything like normal again.
This is why this year’s relatively high harvest time prices for grain aren’t looking so great, depending on when you booked your crop price and your fertilizer prices.
Arizona Agriculture: The money supply is tied into all of this and is impacting inflation. Please explain. And will this prolong inflation since we’ve added so much money to the supply chain?
Cryan: Our current inflation is, without a doubt, the result of the Federal Reserve Bank creating more than $6 trillion in new money in 2020 and 2021, a 40% increase in 20 months. They did this by lowering short-term interest rates close to zero, which is not unusual, and by buying $3 trillion worth of government bonds and other securities in just 3 months in 2020, which is like nothing that has ever happened before. Like anything else, if you make too much money, it becomes cheap; since we measure the price of everything else in dollars, a cheaper dollar means higher prices for everything else, and that means inflation.
And, yes, I think inflation will be prolonged because the Fed doesn’t seem to believe anymore that too much growth in the money supply causes inflation, which is something that everyone used to understand. Instead, the Fed is moving to stymie demand with higher interest rates, and they are moving very slowly to sell off those securities, which would absorb more of that extra money. So, I think we’ll see year-over-year inflation in the Consumer Price Index – which inflation was 8.3% in August, by the way – continue in the 5% to 9% range through the end of 2023, just to work out the massive money supply increase.
Arizona Agriculture: Some say the ag supply chain should be smoothing out now. What are you seeing and if forecasting, what does 2023 look like?
Cryan: I used to rely on market analysis to project what the next year might look like, but that assumes a certain amount of normalcy. Since 2020, we haven’t really seen normal. What 2023 will look like depends on war and disease and whatever other dumpster fire is waiting over the horizon.
But if markets were in charge, I’d say input prices will come down some and most agricultural commodity prices will be high. There has been a lot of reduction in livestock inventories, so supplies will be down, and those prices could allow for a decent margin. And crop inventories have been depleted, so the current prices may be sustainable for another year. But I don’t count on normal anymore.
Arizona Agriculture: How can farmers and ranchers mitigate their costs in these unusual times?
Cryan: This has been a very uneven year, with perfect weather in one place, flooding somewhere else, and drought in too much of the country. The crazy price swings and the extreme weather means it is very hard to say whether this has been a good year or a bad year for farmers generally, and it has demonstrated how critical good risk management tools are. This may not cut your costs, but if you can’t get through this year, cutting costs won’t mean much next year.