Covid knock-on impacts

Dr. Roberts highlighted how Covid:

• Further amplified would-be temporary imbalances in supply of raw materials and manufactured components — from computer chips to construction steel and vitamins to trace minerals

• Increased shortage of U.S. skilled labor — truck drivers, welders, mechanics — as training slowed and boomers retired sooner than expected

• “Whipsawed” inventory management and drove up manufacturing costs across the board — including for feed and pet food products

Then the February 2021 freeze in Texas disrupted petroleum supplies. Covid’s knock-on impacts meant refineries required even longer to recover than from a hurricane like Katrina.

Cost of resilience

Building these supply chains took time, Dr. Roberts notes, and they’ve continued to function, but less efficiently.

“Just-in-time supply chains were designed and built for efficiency and return on equity,” he says. “Making them more resilient to Covid-like disasters requires more investment — more storage, more equipment, more technology.

“How much resilience is enough? How much can a business afford?”

For example, China is the current global low-cost supplier of key vitamins and trace minerals, so feed manufacturers are suffering delays and shortages. Yet “re-onshoring” processing of such micro ingredients is not a near-term solution and requires major investment. By one estimate, re-onshoring key ingredients may add 10% or more to their cost.

Inflation concern, not worry

“Meanwhile,” Dr. Roberts says, “higher prices and time are reducing Covid-related logistical problems.”

Inflation will be with us for a bit, he says, but it’s important to keep it in perspective. Market expectations point to a 2.7% inflation average over the next five years and 2.0% over the next 10 years. Federal Reserve short rates are projected to be up 0.75% this year and another 0.75% next year, while the 10-year U.S. Treasury rate remains under 2%.

Within 12 months, Dr. Roberts says, we’re likely to see annual inflation rates trending normal in the 3.0-3.5% range. And, within 24 months, we can look forward to 2.0-2.5%.

He adds that the long-term ag outlook remains very positive and the short-term outlook is on-balance positive, although high inputs are going to crimp profitability. While the macro economic outlook is largely benign, labor markets are favoring sellers.

What about the big unpredictable?

Ukraine and Taiwan

The possibility of a Russian invasion of Ukraine dominates the news today and adds to energy market volatility.

“However,” Dr. Roberts says, “there is a much bigger threat to the U.S. and global economies. If China attempts to reunify Taiwan by military action, it puts the world’s two top economic powers in conflict, which would be an unprecedented economic disaster.”