GREENWOOD VILLAGE, Colo. – Labor challenges during COVID-19 and continuing today will provide incentives for businesses throughout the food supply chain to rapidly increase automation within their operations, which is one of the big changes on the horizon for U.S. agriculture.

That’s according to a new quarterly report by the Knowledge Exchange division of CoBank in Greenwood Village.

“And it will affect the entire supply chain from field to grocery and restaurants,” said Dan Kowalski, CoBank’s Knowledge Exchange vice president. “It won’t be an overnight transformation, but much larger investments in technology now will lead to a much more automated supply chain over the next few years.”

He said restaurants didn’t have the leverage to push prices higher then, but they do now.

“And food manufacturers have also gained pricing leverage as a result of large federal support programs, and an improved economy,” he said. “Consumers have benefited from very low food inflation for much of the past decade, but higher prices are a near certainty for the next year.”

As a result, grocers and restaurants are anxious to learn what and how consumers will want to eat in the new equilibrium, he said.

“The coming adjustments will look quite different for each segment of the food supply chain,” he said. “But the acceleration in change will be meaningful, and strategic steps to build more resilient businesses are coming sooner than we thought before.”

Kenneth Scott Zuckerberg, CoBank grain and farm supply lead economist, said he and his CoBank colleagues expect an elevated level of grain prices “in this new phase as mixed weather forecasts, dryness, and moisture deficits threaten yields during critical stages of the current growing season.

“Grain elevators and merchandisers will need to maintain excess liquidity (availability of liquid assets to a market or company) during this period,” he said.

He said July weather was critically important to the U.S. corn crop during pollination, while August weather is important for soybean and spring wheat development.

“Buckle up your seat belts,” he said. “The next phase of the grain run will not be one for the faint of heart. The grain run has entered a new phase of higher volatility that has been exacerbated by increasing non-commercial speculation activity.”

He said the weather will now be the main catalyst driving grain prices over the next two months.

“Drought and excessive heat have diminished the yield prospects for corn, soybeans and wheat, although the USDA (June) production estimates do not yet reflect this view,” he said. “The outlook for exports remains constructive, though we see China buying U.S. grain on price dips rather than at recent nine-year high record levels.”

He said U.S. farm supply cooperatives enjoyed a strong spring agronomy season, as rising grain prices gave U.S. crop farmers confidence to increase input spending, he said.

“Crop progress is well underway, and the next three months should be slow ahead of fall fertilizer applications,” he said. “While it’s too early to make predictions for the fall agronomy season, we see both opportunities and challenges.”

He added, however, “Fertilizer supplies remain plentiful in North America, and retailers that bought extra inventory early in 2020 (at much lower than current price levels) should be able to re-sell at attractive margins.

“On the other hand, prices are approaching decade-high levels, exposing re-sellers who buy fertilizer now to the risk that nutrient prices will correct by the fall should 2021 prove to be a bumper crop,” he said. “One way for cooperatives to protect themselves from declining prices is to accelerate farmer prepayments for the 2022 growing season, thereby locking in current price levels.”

The report said the U.S. fuel ethanol sector outperformed expectations during the past quarter, and appears well positioned for the second half of 2021.

“Several key demand drivers underpin this outlook: general economic growth, seasonal summer driving and more people driving as they return to offices and classrooms,” Zuckerberg said. “The regulatory and policy environment remains dynamic with some recent positive developments, while electric vehicle adoption – a long-term threat to ethanol – is powering ahead.”

Currently, 48 states have enacted legislation allowing for the sale of gasoline used as motor vehicle fuel to contain up to 15 percent ethanol (E15), up from 10 percent (E10), which should be a positive demand driver for domestic ethanol consumption, he said.

“Interestingly, while some retailers are concerned that existing storage tanks and pumps must be upgraded to accommodate E15, guidance from the Petroleum Equipment Institute suggests this is not necessarily the case,” he said.

Rob Fox, CoBank Knowledge Exchange director, said despite feed prices roughly 60 percent higher than last year, industry margins have markedly improved from the worst of 2020.

“Given the price and feed outlook, profitability should remain strong through the end of 2021,” he said.

He added meat and poultry prices began the year fairly low, but by mid-May, wholesale prices hit record highs as food service and retail grocery pipelines were primed for post-COVID-19 summer celebrations.

Moreover, he said, “Despite beef prices at or near record highs, cattle ranchers and feeders are currently caught in a vise between maxed-out national slaughter capacity, and the liquidation pressures of exceptional drought hitting the western U.S., combined with high feed costs.”

He said the national beef herd is already in contraction due to weak cow-calf profitability going back as far as 2015.

“Beef cow slaughter is currently up 10 percent year-over-year, with the big jump occurring since April,” he said. “The U.S. beef cow herd will likely be down another 1-2 percent by year end.

“There is a sliver of silver lining for producers: As cattle-on-feed numbers work themselves down and feed prices have backed off recent highs, August feeder futures are trading near $160, a level the market has not settled at since 2017,” he added.

On the other hand, he said pork has been one of the highest-rising commodities in 2021, with nearby lean hog futures topping out at $122 in mid-June (73 percent above Jan. 1).

“Although the market has cooled a bit in recent weeks, the fundamentals still tell a bullish story: incredible consumer meat demand, tight supplies of competing meats, freezer stocks at 10-year seasonal lows, and declining pork production in the second half of 2021 (forecast down 2.3 percent year-over-year by the USDA),” he said.

Tanner Ehmke, CoBank dairy and specialty crops lead economist, said U.S. milk production continues to chart new record highs, despite the surge in feed costs and hot temperatures, as the report indicated.

“U.S. milk production in May topped 19.85 million pounds for the first time, with daily output up 4.6 percent year-over-year as milk cow numbers climbed to the highest since 1994,” he said. “Production has been especially strong in the Midwest, Southwest and California.”

He added the ever-growing milk supply has pushed Class III futures (milk used in the manufacture of cream cheese and other spreadable cheeses, and hard cheese of types that may be shredded, grated or crumbled) sharply off their highs to the lowest level in seven months.

“The addition of 145,000 new cows year-over-year to the U.S. dairy herd as of May will continue to bring more milk availability in the months ahead,” he said.