Biden’s new administration bodes well for U.S. agriculture

 

Key takeaways


  • The improved outlook for the U.S. farm sector is spurred by recovering global demand and falling inventories.
  • Biden’s administration may sustain a positive market environment by lowering trade tensions, providing accommodative monetary and fiscal policies, and easing immigration policy.
  • Longer term, the increased focus on climate and regenerative agriculture could translate into increased regulatory burdens for the sector. 

 

 

As the Biden administration takes the reins in Washington, the U.S. agricultural sector is showing renewed positive momentum. By mid-January, futures prices for key agricultural commodities that comprised 48% of U.S. crop revenue in 2019, corn, wheat, and soybeans,1 had risen to their highest levels since 2014, and cash prices received by farmers have surged. The Wall Street Journal on January 23, 2021, noted that the outlook for the U.S. farm sector has improved significantly on recovering global demand combined with falling inventories.2

Contributing to the recent revival in agricultural commodity prices has been strong Chinese demand for U.S. agricultural products, supported by an easing in the U.S. dollar. The Biden administration’s emerging policy agenda could help sustain the recent positive market environment for the U.S. farm sector in 2021 on several fronts, including lowering of trade tensions, accommodative fiscal and monetary policy that could put further downward pressure on the U.S. dollar, and an easing of immigration policy that should improve the availability of farm labor.


U.S. row crop prices regained forward momentum in Q4 2020

On-farm corn, soybean, and wheat monthly prices received (US$ per bushel)

Source: USDA National Agricultural Statistics Service, data as of November 30, 2020, accessed January 25, 2021. 

Trade developments

U.S. exports to China over the past six months have increased significantly, reflecting the swift economic recovery in China in the second half of 2020. In addition, China’s expanded imports of U.S. agricultural commodities received a boost from efforts to comply with the phase one trade agreement negotiated by the Trump administration at the beginning of 2020, and increased need for imports of feed to rebuild China’s pig herds following the damage caused by African swine flu.

The Biden administration is likely to maintain much of the current trade policy in the short term and will probably take a less combative approach to trade relations than during the Trump administration’s trade wars. A general easing in trade tensions could reduce market volatility and set the stage for U.S. farmers to take advantage of the expected strong growth in China’s economy in 2021. The World Bank is currently projecting China’s GDP to grow at a rate of 7.9% in 2021,3 which will drive increased demand for agricultural products and allow China to rebuild depleted grain stockpiles in 2021.


U.S. agricultural exports to China recover in 2020

U.S. agricultural exports to mainland China, Hong Kong, and Macau (US$ billions)

Source: USDA Global Agricultural Trade System https://apps.fas.usda.gov/GATS/default.aspx accessed, January 25, 2021.

 

Downward pressure on the U.S. dollar

The Biden administration's US$1.9 trillion COVID-19 stimulus package has been approved, and the U.S. Federal Reserve has reaffirmed its commitment to extremely accommodative monetary policy that should keep interest rates low for the foreseeable future.

The Biden COVID-19 relief bill follows the US$900 billion December 2020 COVID-19 relief package, which included US$26 billion for agriculture and nutrition, including US$13 billion for agricultural producers and processors to be distributed in early 2021.4  The stimulus measures are likely to drive U.S. GDP growth to more than 6% for 2021.5  This combination of stimulative fiscal policy, monetary accommodation, and increased economic activity could potentially trigger an uptick in inflationary pressures that could keep the U.S. dollar on a downward trend in 2021. 

The U.S. dollar has already retreated from the highs of the late 2010s and is heading closer to more average historical levels. U.S. agriculture is a net export sector, and a weaker U.S. dollar is generally favorable for U.S. producers. In addition, with global reference prices for numerous crops based on U.S. dollar-denominated futures markets such as corn, soybeans, and wheat, a weaker U.S. dollar will tend to drive commodities prices higher, all else being equal.


2021 begins with a weaker U.S. dollar and higher agricultural commodity prices

Monthly U.S. Dollar Index and S&P GSCI Agriculture Index

Source: Macrobond, data as of December 31, 2020, accessed January 21, 2021.


Outlook for labor availability improves

An easing stance on immigration compared to the Trump years improves the outlook for the availability of farm labor​. ​In recent years, labor availability has been as challenging as labor cost. The Trump administration capped the pay of agriculture guest workers and reduced the flow of legal immigration, and some of these immigration policies have already been targeted for modification by the new administration, which should increase the availability of farm labor.6  


Looking to the future

The broader macroeconomic and trade policy of the new administration could help sustain the current trend in improvements in the U.S. farm sector. The Biden administration is not expected to introduce specifically targeted initiatives for agriculture in the short term. Typically, a change to the executive branch does not result in major impacts on federal farm programs. Federal spending for the farm economy is driven primarily by farm bill legislation on a five-year schedule and was most recently reenacted in December 2018. A possible exception would be some expansion of the SNAP (food stamp) program as part of the next COVID-19 relief package. 

The nominee for Biden’s secretary of agriculture is Tom Vilsack, who is a known quantity, having previously served in the same role in the Obama administration, which should contribute to an increased sense of stability. In his first interview since being nominated, Vilsack offered indications of the Biden administration’s direction, including a focus on climate and regenerative agriculture as well as COVID-19 recovery.7 Looking out beyond 2021, the Biden administration could represent some possible headwinds in the form of increased regulations and that could potentially translate into cost pressures from higher labor and input costs and compliance with more stringent environmental standards.

 

1 Farm income and wealth statistics, USDA Economic Research Service as of January 25, 2021. 2 “Surging food prices fuel surprise farm recovery,” The Wall Street Journal, January 22, 2021. 3 The World Bank press release: “China’s economic recovery has picked up but risks remain,” December 23, 2020. 4 “Overview of agriculture and nutrition provisions in December 2020 Covid relief package,” Agriculture Committee, U.S. House of Representatives. January 2021. 5 “Goldman Sachs nudges U.S. growth forecast higher on Biden stimulus plan,” Reuters, January 16, 2021. 6 “Biden DOL withdraws Trump actions for H-1b visas, farm workers,” Bloomberg, January 21, 2021. 7 “Vilsack sees bid shift in ag induced by climate,” The Storm Lake Times, January 22, 2021. 

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Oliver S. Williams IV, CFA

Oliver S. Williams IV, CFA, 

Global Head of Agriculture Investments

Manulife Investment Management

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Keith A. Balter

Keith A. Balter, 

Managing Director of Economic Research, Hancock Natural Resource Group

Manulife Investment Management

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Daniel Serna

Daniel Serna, 

Senior Agricultural Economist

Manulife Investment Management

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