Electricity supply constraints put AI boom and U.S. economic growth at risk

Generative artificial intelligence (AI) applications have drawn billions of dollars in investments with the expectation of big productivity gains which will propel U.S. economic growth. 

But the proliferation of hyperscale data centers powering these applications is creating a widening imbalance between U.S. electricity demand and supply which could jeopardize those expectations.

Data centers currently account for approximately four percent of the country’s energy demand, but this number is expected to grow exponentially over coming years. Many market participants believe the U.S. is 12 to 24 months away from not having enough electricity to run these power-hungry generative AI data centers.

According to a new quarterly report from CoBank’s Knowledge Exchange, the growing imbalance between energy supply and demand could threaten U.S. economic growth. The report suggests AI adoption will be increasingly critical to economic growth given structural problems in the labor market.

“Economic growth is anchored in two core pillars – a growing workforce and technology which makes it more productive,” said Jeff Johnston, digital infrastructure economist with CoBank. “Growing the U.S. workforce will be a challenge given structural headwinds including an aging population, falling birth rates and a lack of immigration reform. This makes the adoption of technologies like generative AI applications and the operational efficiencies they deliver critically important to future economic growth.”

U.S. economy and government affairs

After months of anticipation, the Federal Reserve finally begin cutting interest rates in September in response to weakening labor market metrics and a series of tame inflation reports.

But market expectations for higher long-term interest rates and widening yield spreads mean borrowing costs will not drop as much as some consumers and companies hope. 

Federal Open Market Committee members appear to agree the interest rate environment will remain higher than pre-pandemic levels through at least 2025.

While Congress will be in recess until after the November election, momentum is building to add the farm bill to the lame duck calendar. 

High interest rates, low commodity prices and multiple natural disasters are increasing the urgency for legislative progress. The current farm bill has now expired, and a simple extension of the old one is becoming less palatable with reference prices falling further out of date.

Grains, farm supplies and biofuels 

U.S. farmers are harvesting a record-large soybean crop and the third-largest corn crop on top of large carryover stocks from the previous marketing year. 

The ample harvests coincide with a host of export headwinds including a strong U.S. dollar, stalled rail shipments into Mexico and low water levels on the Mississippi River. However, export demand is showing signs of recovery as droughts in Brazil and Russia send global grain and oilseed buyers back to the U.S.

Fertilizer prices have moderated and ag retailers are anticipating strong farmer spending on inputs this fall. 

Final 2024 expenses for fertilizer, pesticide, fuel and oil are expected to decline nearly 10 percent from 2023, mostly due to price reductions. 

While lower, input costs have not dropped in tandem with crop prices and remain above pre-pandemic levels. Many ag retailers are bolstering their input financing programs as a result.

U.S. ethanol production margins will benefit from lower corn and natural gas costs.

Export demand remains strong, but more competition could be on the horizon with Brazil constructing new corn-ethanol plants. 

Soy oil demand for U.S. biofuel production continues to face headwinds from rising imports of used cooking oil and tallow, which are now estimated to account for one of every six gallons of biomass-based diesel produced in the U.S.

Animal protein and dairy

Despite rising prices, beef demand remained robust throughout the grilling season. 

Retail prices continued climbing through August, topping more than $8.60 per pound. Price-sensitive consumers found relief in ample retail hamburger promotions. 

The composition of beef coming to market in 2024 has been more fed cattle, with more steers entering the feedlot than last year. Falling feed prices, a changing mix of cattle and tighter availability is contributing to higher cattle weights.

Hog production margins are improving on lower feed costs. 

Iowa State University estimates farrow-to-finish operators recorded their fifth consecutive month of positive margins in August. However, any expansion in production is unlikely as non-feed operational costs remain elevated. Pork prices should hold steady through the rest of the year as a result. 

Global pork demand remains robust, and the U.S. will likely overtake Europe as the leader in pork exports this year.

Chicken remains a leading growth segment for animal protein, as consumers seek value at the retail meat case. U.S. per capita chicken consumption is on pace to rise 1.5 pounds in 2024. Consumer interest in both dark and white meat items is growing as marketers address inflation concerns. 

Broiler production was moderately higher through summer, with strong revenues for integrators.

Dairy farmers could experience some of the best margins in a decade given the combination of higher milk prices and falling grain costs. 

In July, milk production margins climbed to $12.33 per hundredweight (cwt) – the highest level since May 2022. Forecasts for the remainder of the year expect margins to improve to nearly $16 per cwt. 

Cheese and butter prices have moved higher due to tighter milk supplies.

Cotton, rice and sugar

Hurricane Helene caused widespread cotton crop losses across the Southeastern U.S. The hurricane arrived with more than three-quarters of the crop in the region having open bolls, risking losses to crop quality. 

Other cotton-producing states across the South suffered crop losses from tropical rains in prior weeks. The estimated size of this year’s crop will be revised downward as the losses are tallied.

U.S. rice prices have defied the downward trend in grains amid tight Brazilian supplies. Brazilian rice prices now trade at a rare premium to U.S. prices. 

Export demand for U.S. long-grain rice in the Western Hemisphere remains robust. However, India’s return to the export market with non-basmati white rice after a year-long export ban will boost global rice supplies and pressure world prices.

U.S. sugarbeet farmers are harvesting a record crop following a mild growing season. Domestic sugar cane production has also risen to record levels. 

Combined, the record crops will help replenish tight U.S. supplies following Mexico’s drought-stricken cane sugar harvest.

Globally, drought and widespread fires in Brazil – the top sugar exporter – have underpinned world sugar prices with Brazil’s harvest expected to fall.

Food and beverage

National food and beverage brands continue to struggle with lower volume sales. Value is still top of mind for consumers, who are continuing cost-cutting behaviors set during the height of inflation. 

Grocery price increases have slowed, but a variety of segments are still well ahead of pre-pandemic levels. 

Retailers’ early start to the holiday shopping season is likely to keep budgets top of mind for consumers. 

Value menus have led to an uptick in restaurant traffic, but not enough to surpass grocery traffic growth.

CoBank is a cooperative bank serving vital industries across rural America, providing loans, leases, export financing and other financial services to agribusinesses and rural power, water and communications providers in all 50 states. For more information, visit cobank.com.