by: Professors Ani Katchova, Farm Income Enhancement Chair, Seungki Lee, Ian Sheldon, Andersons Chair of Agricultural Marketing, Trade, and Policy, Department of Agricultural, Environmental, and Development Economics (AEDE), and Chris Zoller, Agriculture & Natural Resources Ohio State University Extension (OSUE) – Tuscarawas County
At this year’s Farm Science Review a panel of AEDE economists chaired by OSUE’s Chris Zoller answered questions about global uncertainty and its impact on agriculture. Their outlook for farm income, production, and global markets is summarized here.
Farm Income Outlook
Net farm income is expected to increase in 2022, up 5.2 percent from last year, mostly due to higher cash receipts which are offset by lower government payments and higher production expenses (ERS-USDA). High commodity prices are expected to more than buffer the largest-ever year-to-year increase in production expenses. However, farm income is projected to decline in 2023 and 2024 as commodity prices are expected to soften, and then hold steady through 2027 (USDA, Baselines).
The demand for farmland has surged this year due to higher farm income and high farm liquidity. With the return to normal supply of cropland for sale, farmers who have experienced several years of high grain prices have continued to strongly bid for land. Individual investors have also entered the land market as farmland is considered a safe, long-term inflation-hedging investment. This combined heightened demand propelled land prices higher in 2022. This year’s high inflation rate at 8.5 percent is another leading contributor to buoyant land values, yet high interest rates have counteracted it.
In line with high farm income, agricultural credit conditions have also remained strong in 2022, but the pace of improvement has slowed, with higher repayment rates and lower demand for agricultural loans (Federal Reserve Bank of Kansas City). In the past couple of years, the total agricultural loan volume has declined, mostly because of higher farm incomes resulting in fewer production loans. The trends for Ohio farms have followed those for US farms, although the reduction in production loans has not been as large for Ohio. The rise in interest rates (currently about 3 percent and expected to increase more) to the levels seen in 2018 and 2019 are a major factor contributing to lower loan demand. Overall, an economy with an inflation rate at about 8.5 percent, which boosts land values but also increases farm production expenses, and a higher interest rate, will dampen the farmer’s ability to service debt.
Farm financial performance has improved in 2022 as the agricultural economy has been recovering from the pandemic. Agricultural loan delinquency rates have remained low this year, at 1.9 percent as of the end of the second quarter of 2022, compared to as much as 4 percent in 2012 (FDIC). For Ohio, the delinquency rate was even lower at 1.5 percent, with a total of two Chapter 12 bankruptcies in 2022 so far (FDIC and US Courts). Farm balance sheets are stronger this year than 2021 with an inflation-adjusted increase in assets and equity of about 4% each and a decrease in inflation-adjusted debt by 1.2 percent (ERS-USDA). The increase in farm income is associated with the first decline in total debt since 2012 and the bankruptcy rate being at its lowest level since 2004.
Negative Shifts in Supply and Demand Added to Grain Market Uncertainty
In the September WASDE report, USDA adjusted down its forecasts of both production and usage for major grains. So far, the drop in production has been somewhat overwhelming, resulting in persistently high commodity prices: corn and soybeans were anticipated to have average season prices of $6.75 and $14.35 per bushel respectively. However, prices are equilibrium outcomes, so they are limitedly instructive in a current market featured by contemporaneous shifts in both supply and demand. Consequently, it is important to explore both sides of the market.
In comparison to August, corn and soybean planted acreage and yield expectations have decreased, resulting in total corn and soybean production expected to be down by 5 and 1.5 percent respectively from 2021. Forecast corn and soybean use were reduced by 250 million and 93 million bushels from August. Exports drove the drop. Good weather in its northeast regions is boosting China’s harvest, which will reduce demand for US grain. Brazil is also expected to produce record volumes of corn and soybeans according to the latest observation of planting. Compared to last year, 21 percent more soybeans and 9 percent more corn are expected. As La Niña is expected to be less influential in 2023, the optimistic forecasts for Brazilian production should be taken seriously as it could be the coming season’s most bearish influence.
Lastly, several wildcards exist outside the market. First, the Federal Reserve has raised interest rates to 3 percent this year. Despite interest rates not being highly correlated with commodity prices, such a rate hike can have critical implications. The drastic increase in rates will certainly increase farm capital costs and reduce price competitiveness due to a strong dollar in export markets. Thus, a higher interest rate may burden farmers in terms of both supply and demand. Second, the ongoing war in Ukraine could be another game changer as it could induce further tightening of the energy market if the war continues through winter.
Volatility Will Characterize the Global Market
The global market outlook will be one characterized by continuing price volatility, due to the ongoing effects of the Russian invasion of Ukraine, the impact of drought on global grain production, slow rebuilding of stocks, along with various policy choices. After two months of the export deal brokered by Turkey and the United Nations (UN) to get Ukrainian grain out through the Black Sea, 218 vessels have already left carrying a total of 4.85 million tonnes, only marginally denting the 20-25 million tonnes trapped in storage (Reuters, September 18). With Ukrainian exports down 46 percent this year (Reuters, September 25), Russia finding it difficult to export its grain (Bloomberg, September 22), and persistent drought conditions in the United States, South America, and Europe affecting yields, not surprisingly futures prices for wheat, corn and soybeans have risen 17, 28, and 14 percent respectively over the past 12 months (Wall Street Journal, September 21, 2022).
At the same time, commodity prices are proving sensitive to policy pronouncements. Threats by President Putin to stop Ukrainian grain exports in early-September pushed up wheat futures by 7 percent (Bloomberg, September 7, 2022), while his recent mobilization of Russian reservists and his suggested use of nuclear weapons in Ukraine immediately pushed up both wheat and corn futures (Wall Street Journal, September 21, 2022). On top of this, India recently announced a 20 percent duty on two thirds of its rice exports, placing more pressure on already high levels of global food insecurity (Bloomberg, August 29, 2022). With global grain supplies currently remaining tight, analysts are predicting two years of good harvests will be needed to rebuild global grain stocks and relieve market pressure (Wall Street Journal, September 20, 2022).
Planning for 2023
As we review the topics presented by our AEDE experts, phrases like declining farm income, inflation, the war in Ukraine, supply and demand, and global policy movements are evident. It is becoming increasingly more important to analyze your current situation, critically analyze where and how each dollar is spent, develop a plan (along with back-up plans), execute your plan, and monitor performance.
As you wrap-up harvest, assemble a team of advisors (examples include accountant, lender, agronomist, nutritionist, and Extension Educator) to discuss your production and financial performance in 2022, plan strategies for the coming year, and schedule regular check-in times to monitor progress.