Grain

As we look back on 2022 many factors led to a successful year in crop farming for most farmers in the Horizon Farm Credit footprint. Strong corn, soybean and wheat prices helped offset some of the rising cost of inputs. Coming into 2022, the question was whether the prices were going to hold to offset the increased expenses. For the most part, prices held strong through year-end. Some areas of the region were hit with a drought; however, the majority of the territory saw favorable weather, which led most producers to have average to slightly above average yields.

The biggest asset on most farmers’ balance sheets is the land that they own. In the last few years, land has significantly grown in value, which can be attributed to:

• Increased liquidity from government payments

• Historical profitability for farmers in the last few years

• Increased competition from multiple sources for available land

Whether or not this will continue is unknown, but we have seen that rising interest rates and the price of corn tend to have an impact on land values.

Much discussion has arisen recently regarding the weather in Brazil. There has been a lot of chatter about major frost that occurred, however that frost did not hit the major corn producing region and will not affect yields. The U.S. has historically been the world’s largest corn exporter, however Brazil is expected to surpass the U.S. in total corn exported in the coming years.

Additionally, the ongoing war in Europe has changed the wheat market globally as both Russia and Ukraine are major world producers of wheat. The U.S. still lags significantly behind the rest of the world in terms of wheat output and continued dry conditions in the western wheat belt are not likely to boost production in 2023.

Ending stocks on the U.S. grain balance sheet may see an increase in the coming years as supply catches up with demand. Domestic consumption combined with some post African Swine flu exports to China has kept the corn stock-to-use ratio in check. Increased world supply could place pressure on corn as rising production meets steady demand. We continue to see the export market trend back to “normal” with production to rise and domestic consumption to maintain, which will build the carryout back up to a more typical level.

Exhibit 15 shows the U.S. has declined in dominance of world corn exports since the 1980s. What the chart does not show is that domestic use for feed and ethanol has increased over time and largely absorbed any reduction in exports. Given a fixed land base for corn production, and the fact that our domestic producers are already using the best management practices and technology, increasing production to meet future world demand is unlikely. That said, ending stocks have not exploded, and simply put we do not have enough corn to meet 70% of world export demand.

Source: AgFax, Corn Exports Over the Last 6 Decades, https://www.agfax.com/2021/03/22/corn-exports-over-the-last-6-decades-promise-vs-performance-commentary/

Input costs are a factor on the “watch list” for most grain farmers in 2023. Fertilizer costs started higher than normal at the end of 2022 and into the very beginning of 2023, before starting to come down at the close of the first quarter of 2023. Fuel costs are following a similar trend as fertilizer, with costs also starting to come down towards the end of the first quarter of 2023. These two major factors affect the operating cost of a crop operation.

Technology is vital to a cash grain farms, from yield data to soil temperatures to GPS on equipment, the delay in getting this technology to the farmer is having a major impact on operations. Equipment purchases have been impacted as parts shortages have delayed the arrival of new equipment. In turn, this impacts the used equipment market which peaked in 2022 and prices remain strong. New equipment has risen in cost, but there is lag time due to the arrival of computer chips which delays the equipment being put into production right away. The industry continues to monitor the value of technology and the cost of equipment as it affects farmers’ operational expenses.

The agriculture industry is coming off multiple years of strong farm income driven by high commodity prices, average input costs and strong government payments. As we move into 2023, we expect grain prices to continue to trend down, mostly on the corn side, resulting in slimmer margins for crop operations than in recent years. There are certainly variables in the profitability mix that are uncontrollable, weather being the biggest one that may cause regional yield differences. However, we generally expect to see lower net income for crop operations this year.

Interest cost has not been a concern in recent years as rates were at all-time lows and allowed for cheap operating capital. With the Federal Reserve raising interest rates over 400 basis points since 2022, this has a direct impact on a farm’s operating line of credit rate. At the time this information is being compiled, the Prime Rate is sitting at 8.25% compared to

4.0% a year ago. This increase in interest expense is felt on operations that have historically relied on cheap operating capital for farm operations. Some operations have been able to pay down or pay off operating lines over the last few years, but those that have not taken advantage of those prices are beginning to feel the impact of the increased cost.

Crop prices are extremely hard to project due to many different factors including local basis, forward contracting, hedging and many other risk management tools. Looking ahead to 2023, we continue to see downward pressure in the corn market. As Exhibit 16 shows, USDA’s projection of corn acreage planted is expected to increase by 3% to 91 million acres and the important ending stocks estimate increases 49% after the 2023 crop year hits the bin. The increase in production against rather stable domestic and export demand is likely to reduce the corn price below recent years.

Source: USDA Grains and Oilseeds Outlook, February 23, 2023, https://www.usda.gov/sites/default/files/documents/2023AOF-grains-oilseeds-outlook.pdf

Considering other commodity markets, soybeans have also been challenged. With the world oilseed market stress, U.S. soybean and soy product futures saw decreases at the beginning of 2023. Overall soybean ending stocks post 2023 harvest are projected be lower which should provide support to price. As this publication goes to print the corn planting season has started and we are only weeks away from barley and wheat harvest, so the markets will begin watching the weather and trading accordingly.

21 Acreage, yield, production, and beginning stocks are estimates from the National Agricultural Statistics Service. Imports, use, ending stocks, and season-average farm price are projections from the World Agricultural Supply and Demand Estimates, February 8, 2023.

22 Average farm price are projections from the World Agricultural Supply and Demand Estimates, February 8, 2023.

23 Corn used to produce ethanol and by-products including, distillers’ grains, corn gluten feed, corn gluten meal, and corn oil.