Because of persistent strength in labor markets and consumer spending, economic growth during the first half of 2023 was stronger than anticipated. Inflation and some recessionary indicators in the second half make prospects for growth less promising as we head into next year.
Inflation has continued to fall, but recent declines have been driven by volatile factors such as food and energy costs. Core inflation measures have fallen more slowly as shelter costs have grown. The Federal Reserve has indicated that it will continue with restrictive monetary policy until it observes sustained moderation in core inflation.
Farm income is expected to remain above historic averages for 2023, but margin compression is hampering profitability. Cash receipts have fallen while many farm expenses have remained high or even increased. Meanwhile, grain prices have moderated following a rebound in global production and a decline in U.S. agricultural exports. Returns for dairy and hog producers are negative but strong for cattle producers who have adequate forage.
Harsh weather — particularly drought and excessive moisture — has taken a toll on U.S. agriculture thus far in 2023. However, most measures indicate that crop loss in the first half of 2023 was lower than it was last year. Growth in farmland values has begun to slow, driven by declining revenue potential and higher borrowing costs.
The System reported solid financial results for the period ended June 30. System growth slowed in the first 6 months of 2023, compared with the past several years, with higher interest rates and tighter margins affecting loan demand.
Portfolio quality remained strong despite a slight increase in credit risk indicators.
Year-to-date earnings through June were $3.5 billion, marginally lower than they were a year ago. The System also maintained its strong capital position and robust liquidity.
Overall, System institutions are well positioned to meet the credit and liquidity needs of agricultural producers and rural America.