2023, the Ag Economy, and a New Year Ahead

What’s the first thing that comes to mind when I say, “Describe the year 2023 farm economy in one word?” Actually, I’m not sure one word would be adequate, especially if you live and work in rural America. The best way to describe 2023 in the agricultural community for many may be “Is it 2024 yet?”

Ag Economy, 2023
In today’s ag economy, 2023 saw many of us pinching pennies to grow crops.

Dave Widmar is an agricultural economist with Agricultural Economic Insights in West Lafayette, Indiana, and keeps a close eye on the ag economy. We had a conversation during the last National Association of Farm Broadcasting Annual Convention in Kansas City in November, a week before Thanksgiving.

“One of the biggest stories of 2023 is declining net farm income,” Widmar says as the crowd in the Trade Talk event walked by in the background. “That’s not a big shocker to most people in rural America, but we have to put it in perspective. It’s still historically high, so we need to bring it into balance.”

Unfortunately, that income balance doesn’t apply equally to all parts of farm country. He said the Midwest and the Corn Belt did especially well during the last three years combined. In fact, he called the last three years (2021-2023) the “best three-year run” since the 1940s.

“On the other side of the narrative, commodity prices have trended lower,” he said, “especially on corn. We also had another year of below trendline yields combined with higher interest rates.”

AEI isn’t necessarily watching the interest rates the general public hears about during the evening news. Those are the short-term rates the Fed adjusts at their meetings, and, since June, the Fed has raised short-term rates 25 basis points. “On the other hand, long-term rates have increased 150 basis points,” he said.

“That may continue into 2024 as that yield curve un-inverts as we move into a different economy next year,” Widmar said. “As the Fed spent time raising rates, the curve got inverted, meaning short-term interest rates got more expensive than long-term rates. This is often thought of as an indicator that recession may be coming.”

2023 ag economy
The 2023 farm economy showed producers it’s time to keep a tight reign on how they use debt.

Now the Fed has paused interest rate hikes, the long-term interest rates have continued higher. That means the yield curve is starting to un-invert, something he’ll continue watching.

There is some good news for the economy. The unemployment rate remains low, which is a positive trend, and inflation has come down “significantly.” In his words, “the genie isn’t back in the bottle yet.” The country isn’t back to two percent inflation, and the last 150 basis points on inflation are going to be the hardest to reduce. “A lot of moving pieces in 2023,” he added.

So, what do those moving pieces possibly mean for 2024? For those looking for the economy to settle down, they may be disappointed. Widmar said “hold on.”

“The volatility is probably going to continue,” he said ruefully. “That isn’t all bad. Despite record fertilizer prices, the uncertainty around usage, demand, and inflation, the farm economy had a good run between 2011 and 2023.

“We could see some reversion to the mean,” Widmar added. “Farm incomes might be lower next year but not necessarily historically bad. What we need to realize is the last three years are not normal.”

The last three years weren’t typical in terms of government payments, commodity prices, or profitability. Widmar says it’s time to start recalibrating our expectations as to what’s normal and what we should plan on being normal in the future. Speaking of the future, what should producers be thinking about heading into next year?

“One of the big things we’re keeping an eye on is acreage distribution,” Widmar said. “There’s always at least some reallocation. One of the things that we observed in 2023 was that we had a lot of corn acres and not as many soybean acres. That’s resulted in an imbalance in ending stocks.”

That’s put corn ending stocks are above the long-run average, closer to 15 percent than the average of 13 percent. Soybeans are closer to five or six percent instead of the long-run average of eight.

“That means we may see some acreage reallocation,” Widmar said. “Producers should keep an eye on the relative price ratio and how that’s going to impact their budgets.

“They also need to keep an eye on fertilizer expenses,” he added. “Fertilizer has come down a lot recently, and that’s going to benefit corn budgets quite a bit.”

Another thing to watch for is farm debt. One of the things the economists at AEI have observed is new farm loans with different terms than in the past. Take a machinery loan, for example. The payment terms have been stretched out. How does that affect the bottom line?

“For every $1,000 of farm debt one takes on, the payments are going to be about the same as they were the last few years,” he said. “The payment hasn’t changed. What’s changed is the ‘stretching out,’ which means more payments get added to the backside. The extra interest expense is backloaded into the form of additional payments.”

Interest expenses are increasing as we go forward, and it will take more payments to maintain the same level of debt that farmers have had in the past. He said a lot of the economic challenges we face today may be getting “kicked down the road.” But there is one good sign amid some uncertainty looking to the new year and 2024 spring planting.

“Lenders are still confident and comfortable making long-term loans on things like machinery,” he said. “One of the big differences between the 1980s and today is back then, we had very high interest rates and short repayment periods. Some repayment periods lasted less than a single year.”

That created a large problem of no access to capital in the ‘80s. Today, Widmar said there’s a lot of available access to debt markets, which are very accommodating right now. But, he says, just because someone will lend to you at those terms doesn’t mean you as a farmer need to accept them. “Always be thinking about the implications of any loan terms you accept,” he added.

“Stretching the terms out has kept the payments low, but now that we’re in a high-interest environment, how are producers going to adjust,” he asked. If costs like fertilizer, electricity, or gasoline go up, Economics 101 teaches that we should be using less of each input.

2023 Ag Economy
After a volatile 2023, keep an eye on farm debt and how you structure it.

“What do we do then with the higher cost of money,” he said. “Using less of an input is one particular approach. We can also shift the way we’re using money, including using more long-term debt last year and then shift it to short-term debt going forward. We always have to be evaluating how we’re using debt.”

In closing, he pointed out that agriculture hasn’t been in many rising interest rate environments in the past. The 1980s was one, and farmers and now in another. Producers need to revisit the strategies they’ve been deploying around farm finances, the use of farm debt, and their cash flow.

 

Drought has Utah farmer in “survival mode”

Drought to an average person likely means “it’s dry.” And that’s fair. However, what you may not realize is drought, to a farmer, might mean “we’re struggling to stay in business because of something we literally have no control over.” It’s understandably a situation that non-farm folks have a hard time relating to.

drought
In a more typical year, here’s a picture of the Roberts family selling their fresh produce at a farmers market. (Photo from Facebook.com)

The National Association of Farm Broadcasting’s News Service and the American Farm Bureau Federation undertook a project this month to put a human face on the challenges of drought, especially in the Western United States. That area of the country has been clobbered by a long and intense spell of dry weather.

Tyson Roberts is a farmer from Layton, Utah, who’s seen the challenge firsthand because he’s living it right now. I jumped on the phone with him on Tuesday of this week for an interview about what it’s like to face a drought of this magnitude. While drought is a big topic of conversation in 2021, he said the dry spell stretches back to 2021.

“We got started with this last year,” he recalled while on the phone from his Utah farm. “A lot of people may not realize that.”

It wasn’t quite as bad last year as it is in 2021. The water available for Roberts’ crops was below normal levels in 2020, but they still grew “pretty much” all of the crops that they would in a normal year. This year has been markedly different.

“We are a vegetable operation here,” he said, “and we grow fresh market vegetables for farmer’s markets.

“When you think about a tradition row crop farm, the producer plants in the spring and harvests in the fall,” Roberts says. “We work a little differently: we’ll start planting different vegetables in the spring and continue through most of the summer and into August.”

Their typical planting schedule came to a sudden stop. Roberts, the sixth generation of the Roberts family to work the farm in Davis County, Utah, got to the middle of June and figured out they wouldn’t have enough water to sustain the crops they have growing and grow the additional crops they’d be planting through the month of July.

“We ended up putting all of our planters away around the first of July,” he recalled. “About 20 percent of our property remained unplanted. We fallowed it because there just isn’t enough water to grow the amount of produce we normally plant in a given year.”

Drought is making the lives of farmers miserable in 2021, especially in the Western United States. (Photo from foxnews.com)

As someone who doesn’t live on a farm, imagine having to give up 20 percent of your income due to circumstances you had no control over. I don’t know about you, but a 20 percent drop in income would likely throw me out of my house and into the street.

The drought hasn’t forced Roberts to destroy any crops, but it has forced him to leave some crops in the field because they’re not harvestable quality, which amounts to the same thing. He offered up his sweet corn crop as an example.

“About 2/3 of the top part of our fields are pretty good quality and should get us good yields,” he said. “However, on the bottom end, we haven’t had enough water for all of the other plants. I guess you’d say we couldn’t get the water all the way to the end of the row.

“We’ve lost a lot of yield and in quality,” Roberts added. “In addition to the unplanted ground, there’s also a portion of the planted crops that are unmarketable.”

Crop farmers get paid when they harvest crops. Can you imagine knowing ahead of time that the one check you get for harvesting your crops won’t pay your bills? That’s what farmers face every year. These are the people that grow our food. It’s a rough way to earn a living.

He sums up the situation on his farm rather succinctly: “We’re in survival mode right now,” he said grimly. “With the unplanted acres and the loss of yield, we’re just trying to stay afloat. And I think that’s fair to say for a lot of farmers around us and across the state, as well as throughout the Western U.S.”

So how do farmers like him find a way to keep moving forward and get through this?

“I serve on the Utah Farm Bureau Board of Directors, and we met last week to discuss how we can help keep our farmers in business,” he said. “Every state has received a fair amount of COVID assistance, which is some help. We’re looking at the best ways to help the livestock farmers, the crop farmers, and get them the help they need.

“We’re looking into government programs to help them stay in business,” Roberts added. “I hate to say it, but sometimes a company or a farm may need a little help staying afloat when they face the challenges that we have for nearly two years.”

 Roberts and his wife, Danna, have six children who each help on the farm, and Tyson’s parents, Dix and Ruth, also operate the farm with him.