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.

 

2023 and the year ahead for the ag economy

2023 and the ag economy
David Widmar, an agricultural economist with Agricultural Economic Insights. (Photo from www.aei.ag)

2023 and the ag economy combine to produce some trepidation as we look to next year. While the ag economy is doing okay despite several challenges like supply chain delays and high input costs, the question is how long this will last into next year. I talked with David Widmar, an agricultural economist with Agricultural Economic Insights in West Lafayette, Indiana.

There are no doubts that commodity prices are showing a lot of volatility at the end of this year, and Widmar says that’s causing a lot of angst. However, it’s generally still a positive story in the farm economy. But what’s ahead next year?

“We do expect that positive story to continue into 2023,” he said during the 2022 National Association of Farm Broadcasting’ annual convention in Kansas City. “One of the biggest reasons why is tight commodity inventories across all commodities in the U.S. and globally.”

The problem is when things get tight for corn, soybeans, and wheat, we really can’t substitute one crop for another. All of those crops will want to maintain their acreage shares. The idea of “robbing Peter to pay Paul” won’t work.

“We can’t plant fewer corn acres to make up for soybeans or vice versa,” he said. “So, everything is tight, and that will continue to be part of the narrative going into 2023.

“We know one thing about2023,” Widmar added. “There will come a point when we oversupply. We’ll bring in new production acres around the world, including South America, Southeast Asia, India, and hopefully Russia and Ukraine in the long term.”

The other thing that will eventually affect the markets is the possibility of big yields. There’s been a recent run of average to slightly below-average U.S. corn yields. “Eventually, more acres and yields will push us over again.”

Here’s the entire conversation during the NAFB’s Trade Talk event in Kansas City.

Harvest 2021 deep dive shows variability

Harvest 2021 is proceeding along at a good pace. Mike Zuzolo is the Founder and President of Global Commodity Analytics in Atchison, Kansas. He took a deep dive last week into the crop progress numbers and found a lot of variability in the results.

“Comparing the pace of the corn harvest 2021 versus the pace of the soybean harvest suggests that the corn yields are indeed a little more variable than beans,” Zuzolo said. “I hate to say lowered because of the issues that we’re seeing with the yields coming in. We’re seeing very good, very top-end yields coming in down in Kansas and Nebraska.

Harvest 2021
Mike Zuzolo is President and Founder of Global Commodity Analytics in Atchison, Kansas.

“My business clients and subscribers say strong yields are coming in through certain parts of Illinois,” he added. “However, my question is whether they’re top-end yields. Probably 90 percent of the producers I work with throughout Nebraska and Kansas would say ‘yes,’ we have top-end corn yields, and we’re close to wrapping up. However, central Illinois and central Indiana are probably around 50 percent complete, by comparison.”

Illinois and Indiana farmers are probably close to 75 percent done with soybean harvest 2021, but recent rainfall has slowed them down a bit. His clients in both states are saying they have top0-end yields in just 25 percent of their corn, but everything else is above average.

He thinks the numbers are showing the corn yields are more variable, especially because our corn and soybeans both have low moisture content. Six of the top 18 corn-producing states are at 50 percent or greater on corn harvest. About 29 percent of the national harvest 2021 is done compared to 24 percent at the same time last year.

“Those kinds of numbers are completely upside down when it comes to the soybean harvest,” Zuzolo said. “Just two of the 18 major soybean-producing states are at 50 percent or greater on harvest pace. The national soybean harvest is at 35 percent compared to 34 percent at the same time in 2020.”

Here’s the rest of the conversation.

Canadian agriculture hit hard by drought

Canadian agriculture has something big in common with U.S. producers this year.

In fact, Canada and the U.S. have more in common than just a border. The two countries are also sharing a lot of hot, dry weather. Shaun Haney of RealAg is an agricultural journalist and broadcaster in Canada who says the longtime trading partners are in the same boat.

Shaun Haney of RealAg is an agricultural journalist and writer covering Canadian agriculture, which has been hit hard by drought. (Photo from YouTube.com)

“Absolutely yes,” he said on the phone from his office. “The drought of 2021 in Northern Ontario and the Western Canadian Prairies has been compared to the drought in 1988. This summer has been extremely hot and dry.

“It’s obviously hurt the crop conditions,” Haney added. “In some ways, it’s even more urgently impacted the grasslands and pastures, which is forcing producer discussions on the future of the Canadian cow herd after this fall, depending on what the level of cow cull will be.”

The drought isn’t just confined to 2021. As with many dry areas in the States, the drought stretches back to last fall. Haney noted that many Canadians were saying that “you don’t lose the crop in March.” However, they could have used moisture at that time, which they didn’t get.

“It was so dry that we’d used up a lot of our subsoil moisture last year,” he recalled. “We needed to replenish that moisture through the winter, and it didn’t happen. As we made our way into the growing season and the weeks passed, the rain just didn’t come.”

Canadian agriculture
Severe drought is making things tough on Canadian agriculture. (Photo from globalnews.ca)

As the rain continued to hold off, the area listed on the Drought Monitor began to expand. Early in the year, the drought ran in a tight band along the U.S.-Canada border, especially in the Southern Prairies of Alberta, Saskatchewan, and Manitoba. At the same time, that drought also affected North Dakota and Montana early on in the U.S.

“As the weeks went by, the drought-impacted area continued to make its way further and further north,” Haney recalled. “It created a situation where the yields became more questionable on an increasing number of acres. The frustrating thing is some of those same fields started 2021 in great condition.”

The crops didn’t get the rain they needed for any consistent grain fill. Haney is located in Lethbridge, Alberta, and said a lot of the dryland in Canadian agriculture never had a chance. He described the 2021 Canadian growing season in one word: heartbreaking.

Crops hit by this year’s drought run the entire spectrum in Canada. Some crops handle adversity better than others, including chickpeas and lentils. However, Canadian farmers are especially concerned about the wheat and canola crops.

“I would say it’s even more so with canola,” Haney said. “From what I’ve heard, there are a lot of people harvesting some pretty light barley. But canola is the one where people are concerned they won’t have the yield. Canola is a fairly small seed, but it shouldn’t look like pepper.”

Canadian farmers do grow some soybean in Manitoba, where farmers may harvest bushels worth as little as $15. Producers also grow a little grain corn in Manitoba, as well as some in southern Alberta, that’s fed to livestock. Almost all of that corn is irrigated.

“There are some irrigated sugar beets in Alberta that are looking good as well,” he adds. “However, the list of struggling dryland crops is a long one.”

Haney says the one possible saving grace is good commodity prices. If prices were low during a drought like this, that would be the mother of all discouraging situations. He notes that if canola is around 20 dollars and you have ten bushels in the field, that’s 200 dollars an acre.  

“It’s not a moneymaker on dry land, but it’s a lot better than a market with nine dollars,” he added. “This boils down to Mother Nature not cooperating with us, and it’s one of the variables that are out of our control.

“I can’t even imagine what it would have been like going through a drought like this in the 1930s and ‘40s when we weren’t in a minimum-till situation,” Haney said. “Thankfully, most of our fields are minimum or zero-tillage, which helps to conserve as much moisture as possible. It’s a good reminder of why we change our practices in Canadian agriculture out here on the prairies.”

Find out more about Shaun Haney and everything going on in Canadian agriculture at https://www.realagriculture.com.