(Photo: Iowa Soybean Association)
High cost, low margin ag economy likely to stick, says FCSA’s Knuth
July 13, 2023 | Aaron Putze, APR
U.S. farmers are operating in a high cost, low margin business environment. Yet Farm Credit Services of America’s (FCSA) Jim Knuth says tight domestic inventories of soybeans, corn and wheat combined with volatile weather will offer profit opportunities for disciplined operators who have (and act) on a marketing plan.
I recently sat down with FCSA’s senior VP of lending for lunch and conversation. The following are Jim’s takes on the economics of U.S. production agriculture as the 2023 growing season hits its stride:
How would you describe the current economics of farming?
The row crop industry is operating in a high cost, low margin economic environment. For most producers, the cost of producing a bushel of corn has a “$5” in front of it; a “$12” for soybeans. It’s the most expensive crop ever planted, and it was sowed during a time of tightening margins. That’s the definition of a high-risk operating scenario.
How does this compare to 3-5 years ago?
In 2018-19, break-evens for corn were in the $3s and $7-8s for soybeans. This illustrates how much our cost structure has increased.
What’s influencing commodity prices?
We’re in a weather market, with traders greatly influenced by where it rains and where it doesn’t. Given many locations throughout the Midwest remain dry, we’re likely to see the market volatility continue through August.
How is 2023 different from past high-cost, low margin economic environments?
Historically, lenders could pull several levers to free up working capital. Options included lengthening loan terms and reducing interest rates. Those levers aren’t as available today given most loans are extended for the maximum number of years and interest rates are much higher.
Are high land and cash rent prices exacerbating the margin squeeze?
Not as much as one might think. It’s estimated that 84% of Iowa farmland is owned free and clear. Therefore, interest rates aren’t as significant of an economic driver as they once were. Having such a high percentage of land owned also helps maintain strong land prices. To put it another way, there’s a correlation-disconnect between land prices and interest rates.
How are row crop inventories impacting the economic fortunes of producers?
Soybean, corn, and wheat supplies are tight and tightening. Therefore, all three commodities are competing for domestic acres. That’s a rare but positive occurrence. Good demand and reasonable supplies mean no one commodity is driving the whole farm economy. Land owned rather than financed or rented combined with tight row crop supplies are the hallmark of a soft landing after several years of record returns for row crop producers. That bodes well for the ag economy and all who depend on it.
What is your biggest concern about the current economic environment?
The cost structure of raising a bushel of corn or soybeans. It’s at an all-time high. If commodity prices decline, the question will become, “How can I reduce my costs?” This will be an especially tough issue with the current inflationary environment where everything costs more including family living, machinery and equipment, seed, labor, fuel, fertilizer. Because of the current cost environment, the high cost of growing a soybean and corn crop is likely to stick, meaning we will remain in a high cost, low margin scenario in the short term.
Your advice to farmers operating in such volatile market conditions?
This is not an environment that we will be able to just bushel through. Develop sound business and marketing strategies and follow them.
Are you bullish or bearish on the next 3-6 months for the soybean market?
I’m glass-half-full. We’re in a weather market with tight supplies so there will likely be opportunities to price soybeans at a profit. Take advantage of them.
Putze serves as ISA chief officer of strategy & brand management. Converse with Aaron at firstname.lastname@example.org or 515-975-4168.