The past two years have seen a big spike in farm incomes. But that may change in 2023, as farmers should plan for much tighter margins, due mostly to rising interest rates and a consequent higher cost of loans, and higher input costs.
That was the conclusion of a special webinar of the Purdue University Center for Commercial Agriculture on “Long-Term Farm Management.” Michael Langemeier, associate director of the center and professor at the Department of Agricultural Economics, began by noting that the steadily rising Fed rate equals a high prime rate, and higher interest costs for farm loans. Jim Mintert, the center’s executive director, said the effective interest rate could go as high as 9.5% or even 10%, which could be a “shocker” for many people. Both agreed this would have implications for the purchase of land, equipment and storage.
A change in the interest rate from 4.5% to 9% would be “a big change in the cost of storage” Mintert said. Langemeier said he hasn’t seen interest rates this high since 2007.
Coming on top of the high interest rates are increases in input costs. The costs of anhydrous ammonia and potash fertilizer have doubled. Corn and soybean prices have increased as well, but not enough to make up for the rise in input costs. Langemeier believes that in 2023, both corn and soybean prices could go lower—but input costs will not. In central Indiana, he showed on one chart, inputs costs have increased by 15%, while inflation was at 6%. The breakeven price point for farmers is increasing, with corn breakevens rising to $6 a bushel in that region, and soybean breakevens at $13 a bushel.
Mintert pointed out that worldwide planted acres for corn and soybeans have increased to 833 million acres, from 580 million in 2005. The ongoing Ukraine conflict, he said, is a “true wild card,” tightening stocks, but not by as much as initially predicted. Major agricultural competitors of the United States, like Brazil, Argentina, Russia and South Africa, as well as Ukraine, are increasing output. “We are not the reserve suppliers we used to be” on the world market, according to Mintert.
So how should growers manage in this environment? According to Nathan Thompson, associate professor in the Department of Agricultural Economics, growers should manage futures and basis separately. He noted that during the low water on the Mississippi River, when barge cargoes were temporarily halted, basis prices collapsed in Mississippi River basin terminals, although they have since recovered as water levels rose and some export cargoes got through. Basis at river terminals and soy processing plants usually move in tandem, he said, but not always.
Thompson’s charts showed relatively stronger export demand for corn than soybeans. He reminded viewers that basis is not constant and doesn’t always move in the same direction. The biggest factor in basis variability, he said, will be the tighter carryovers in both corn and soybeans. Forecasting basis from harvest to March is easier than in the more volatile summer months.
Mintert noted that carryovers differ in different parts of the country, which is “markedly different” from what we saw in 2020-21.
David Murray can be reached at [email protected].
