Special Report

May 06, 2025 | 15:25

Eight Key Trends Affecting U.S. Agriculture

Economist

Senior Economist and Director
Economics

Aaron analyzes performance and risk across a diverse selection of industries and countries. His research is regu... (Read more)

Aaron Goertzen , CFA

Senior Economist and Director
Economics

Aaron analyzes performance and risk across a diverse selection of industries and countries. His research is regu... (Read more)

It’s been a bumpy ride for the economy, markets, and the agriculture industry over the past few years. Swings in commodity prices, inflation, interest rates, world events, and now trade policy have roiled the farm sector and created significant uncertainty for producers. In the spirit of trying to simplify a complex situation, this article highlights eight key economic and market trends that are having an outsized impact on U.S. farmers, both for better and for worse.

Trend #1: Trade Turmoil

The agriculture sector is perhaps uniquely exposed to the on-again-off-again trade war, as the United States exports far more farm products than it imports. In the crop space, exports account for an outsized 30% of sales and some products are grown almost exclusively for foreign markets (Figure 1). In addition to being economically vulnerable, crop producers have also become geopolitical targets, with U.S. trading partners aiming retaliatory tariffs at the President’s rural constituents. It doesn't help that many crops are produced widely around the world and have amply available substitutes, which makes them a low-cost and politically expedient target for foreign tariffs. Given these sensitivities, benchmark crop prices have fluctuated widely over the past few months.

For much of the economy, it has been an enormous relief that U.S. trade action has become more narrowly focused on China. Less so in the crop space, where China is the number one destination for U.S. exports, accounting for 8% of total sales. China is a particularly voracious buyer of soybeans. Despite continued efforts toward diversification, more than a quarter of the U.S. crop is fed to its enormous hog herd each year, and the country specifically targeted soybeans during earlier trade hostilities in 2018-19. But even if soybeans bear the brunt of China’s 125% tariff on most U.S. goods, there will be significant spillover effects on other crop products. Already, the uncertain environment has pushed farmers to plant domestically oriented crops like corn more intensively, which risks undermining those prices in coming months.

Livestock producers are less exposed to current trade frictions. For one thing, trade is limited by the cost and complexity of transporting live animals, leaving exports at less than 1% of U.S. sales. Of course, livestock farmers have indirect trade exposure via downstream meatpacking, where products can be frozen and shipped abroad more easily—but even there, exports amount to a moderate 8% of sales. Livestock and meat trade is also more localized within North America, which will limit the impact of China's tariffs. And, from a broader financial perspective, lower feed prices represent a welcome silver lining for livestock producers.

The eventual outcome of the trade war is anyone’s guess. If the administration is able to secure concessions from trading partners and deescalate the situation, damage to the agriculture sector could end up being relatively limited. However, if the objective is to permanently rewire global trade, then there could be a large price to pay for U.S. farmers, especially in the crop space. In such a scenario, a key unknown is whether producers could expect the type of government support that was forthcoming during the President’s first administration.

Trend #2: Slower Economic Growth

Over the past few years, the global economy has managed to churn out decent growth despite large shocks to inflation, interest rates, and asset prices, not to mention geopolitical upheaval in Ukraine and the Middle East. However, trade-related uncertainty is now casting a dark shadow over the macroeconomic outlook. At this point, most of the world’s largest economies are expected to grow more slowly than envisioned at the turn of the year, and global growth is likely to run at the slowest pace outside of epochal crises like the pandemic and the Great Recession (Figure 2). With the U.S. at the center of it all, its economic forecast has been among the hardest hit, with growth expected to slow from an enviable 2.8% in 2024 to less than half that pace this year. If tariff coverage were to widen, the number could turn out worse still.

Slower economic growth represents another headwind for agri-food product demand and pricing. Intuitively, food demand doesn’t vary all that widely with growth—after all, people need to eat. However, crop and livestock supply are also rigid over short periods (for example, once planting decisions have been made), so even small fluctuations in demand can have a large impact on farm prices. Historically, crop and livestock prices have come under heavy pressure during economic downturns, and they will be vulnerable in the slower growth environment expected ahead.

Trend #3: Abundant Crop Supplies; Livestock Leaner

Unfortunately, trade tensions have soared at a time when crop prices were already near multi-year lows, as producers are coming off a string of good harvests and a corresponding run-up in inventories (Figure 3). Recent developments also suggest little let-up in production. In the Southern Hemisphere, farmers turned out another solid harvest in recent months; it was not quite as big as originally feared, but too large to allow a meaningful inventory drawdown. Growing conditions are also shaping up decently in North America. In the Midwest, the U.S. Drought Monitor estimates that only 6% of acreage is experiencing drought rated “moderate” or worse, down from almost 30% at the start of the year. Conditions on the U.S. plains are somewhat drier, which could affect the approaching winter wheat harvest, but the weather has improved significantly on the Canadian prairies, another major wheat-producing region. At this point, the last thing that crop markets need is a bumper crop, but they just might get it.

Supply has remained leaner in the livestock space, and prices correspondingly higher. In the cattle segment, the headcount of the U.S. herd has declined each year since 2018, first driven by drought and challenging industry economics (i.e. previously high feed prices and low cattle prices), and more recently a desire to take profits at today’s record prices rather than hold back animals for expansion. Indeed, the U.S. Department of Agriculture (USDA) projects yet another decline in the domestic cattle herd this year, albeit a modest one. Supply is not as tight in the hog space, though producers have still been cautious on capacity and prices remain firm, if middling. The USDA also expects a slight contraction of the hog herd this year, in part because the downstream pork industry is among the more trade-exposed meat segments. For both cattle and hogs, supply constraints should help keep a floor under prices.

Trend #4: Dollar Past Its Peak

For farmers, as well as exporters more broadly, a silver lining of the current environment has been the reversal of the U.S. dollar. Until recently, the greenback had been trading near all-time highs, reflecting the strong state of the U.S. economy and relatively hawkish Fed (at least, compared to other central banks). Now, with the U.S. economic outlook in question, additional Fed cuts coming into view, and investors eying U.S. assets with less enthusiasm, the currency is no longer unassailable. From its recent high in January, the trade-weighted U.S. dollar exchange rate has dropped roughly 8% (Figure 4).

Make no mistake, the weaker U.S. dollar mainly reflects negative economic developments at home, but it will still act as a partial shock absorber for farm exports. The depreciation will not move the needle on China-U.S. trade, given the triple-digit tariffs in place between the two countries, but it should help incrementally with pricing and competitiveness in other foreign markets. And with the dollar still historically elevated, the currency is likely lose additional ground ahead.

Trend #5: (Some) Costs Are Cooling

Agricultural producers, like households and other businesses, have grappled with a major increase in costs over the past five years. The USDA estimates that aggregate farm operating expenses (i.e., excluding interest costs) increased by an average of almost 6% per year between 2019 and 2024, after rising closer to 3% per year over the previous two decades. To be fair, some of the most acute pain points have lessened, with diesel, fertilizer, and chemical costs down significantly from recent highs, but input prices are still far above pre-pandemic levels (Figure 5).

Unfortunately, widespread relief on costs is unlikely—at least, not without a significant deterioration of the broader economy, which would also undermine farm prices. If anything, current trade frictions risk putting supply chains into disarray and lifting farm costs even further. And, it doesn’t help that the weaker U.S. dollar is raising the cost of imported inputs. Perhaps one bright spot on the cost front is that weakening economic prospects and OPEC+ policy (i.e., its phasing out earlier supply cuts) have brought down oil prices significantly. Over the past few months, the outlook for WTI crude oil has been lowered from an average of US$75/barrel this year to $65, which will provide some relief on fuel costs.

Trend #6: Interest Rates Climbing Down the Mountain

To the relief of almost everyone, financing costs are down from recent highs (Figure 6). Last year, the Fed cumulatively cut its policy rate by one percentage point, lowering the prime rate by the same amount. Longer term market rates are also off their cycle highs, though they have remained volatile due to uncertainty about inflation, growth, and federal deficits. Interest rates are still restrictive, but they are now less restrictive—and for the capital-intensive agriculture sector, any reduction is warmly welcome.

Unfortunately, progress has stalled this year, as a series of high-side inflation reports has kept the Fed on hold. It is also wary of rising tariffs, which could put upward pressure on prices and inflation expectations. In this environment, the Fed is likely to hold its fire until it sees a meaningful improvement in inflation (unlikely, given the circumstances) or a material weakening of the economy. On the latter front, it may not need to wait long, as the fog of uncertainty surrounding U.S. trade policy will likely begin to weigh noticeably on the economic data over the next few months. As it stands, the Fed appears likely to resume cutting in July and is expected to gradually lower its policy rate by another 1.5 percentage points by the end of 2026, leaving it a bit below the estimated neutral rate. Of course, there are a multitude of wildcards at play, relating not only to trade, but also the President’s desire to install a more pliable Fed Chair, which could send inflation expectations and long-term interest rates skyward. Already, long-term rates are tending to increase when markets receive concerning policy news, in contrast to their usual safe-haven behavior.

Trend #7: Labor Availability Still a Challenge

Over the past two years, the U.S. labor market has gone from generationally tight to much more balanced. However, labor availability remains a key challenge across the agriculture space. The Bureau of Labor Statistics reports that the unemployment rate for workers in farming, fishing, and forestry increased from a cycle low of 6.3% in early 2023—a time of severe labor shortages—to 9.3% in April, so conditions have become a bit less challenging overall (Figure 7; both numbers on a 12-month moving average basis). But even today, industry unemployment remains below longer-run norms and producers in many segments and regions continue to experience difficulty finding workers.

Naturally, the trajectory of the labor market is as uncertain as that of the rest of the economy—and in the farm sector, perhaps even more-so. On one hand, tariffs and related uncertainty can be expected to slow consumer and investment spending, which will weigh on job openings and inject some additional slack into the labor market. Across the U.S. economy as a whole, the unemployment rate is expected to increase by almost one percentage point by the end of the year, which on its own, would help to allay any lingering labor shortages. However, the possibility of widespread migrant deportations and reduced legal immigration could also throttle the labor supply for some types of farming.

Trend #8: Prodigious Productivity Growth

In times like the present, it’s worth taking a step back and considering the bigger picture—and for agriculture, this means recognizing the industry’s outstanding record of long-term productivity growth. In the crop space, trend yields (i.e. adjusting for year-to-year volatility in the weather) have increased enormously in recent decades, thanks to improved plant genetics, treatments, precision technology, and advancements in management practices. Farmers now extract almost 80% more wheat, 115% more soybeans, and 145% more corn from each acre of land than in the mid-1960s (Figure 8). Livestock farmers are also doing more with less. In the cattle space, for example, the average animal now yields around 30% more meat than it did fifty years ago. Few sectors of the economy can hold a candle to that performance.

Even today, producers continue to invest heavily in their operations. A short walk through a farm trade show illustrates the incredible amount of technology being deployed by both crop and livestock farmers, which hints at continued outperformance ahead.