Taking on the challenges and opportunities for 2023
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As 2022 ends, farmers may feel as if they’re living under an old Chinese curse: may you live in interesting times. The supply challenge created by a global pandemic in 2020 rippled through the economy in 2021 and just as key business factors were getting back on track, the war in Ukraine erupted tossing the supply and logistics business on its ear.
Farmers weathered those changes with solid 2022 net farm income numbers despite rising input costs caused by those supply issues. Read on to gain insight into market changes, weather and environmental predictions and some tips on operational changes to plan for.
After a slump in grain and oilseed prices in 2013 which lingered for nearly 8 years, the rising price of commodities was welcome news for the market. Will those higher prices continue into 2023?
“Eventually those prices will come back down, and when that happens, we’re going to have less fun than in ’21 and ’22,” says Gary Schnitkey, extension farm management specialist, University of Illinois. “A lot of farmers didn’t think ’21 and ’22 was that much fun. I think there will be an inevitable fall in commodity prices but not in 2023.”
Market analysts across the country keep watching the two key factors that impact prices – supply and demand. And the lingering drought in the Western Corn Belt weighs heavily on those supplies. Meanwhile, strong demand continues as other global suppliers including Brazil also face weather challenges that have crimped supplies.
When looking at the farm profit picture for 2023, Schnitkey does see tighter margins for farmers than in 2022, but he still sees good news. “Essentially we’re still projecting a profitable year, but margins will be tighter than ’21 and ’22,” he says.
Corn prices hovered in the $6.40 range, on the board, in much of 2022 yet the trend is that prices will slide into the $5.50 range for 2023. Even at that lower range, this still provides profit potential for corn. Soybean prices have also remained strong, though off their highs in 2022. This also shows a potential for a profit, though tighter than 2022.
Crop price volatility could remain in 2023 with the linger war and potential challenges to shipping grain out of that region. Keeping an eye on Brazil and how that crop fares through the winter will be important too. This can impact supply, dragging down prices. However, global grain stocks remain lower than average which keeps a floor under prices for now.
There are parts of the United States that have been under severe drought conditions for more than three years, and we’re not talking about California, which is in an historic drought. But parched fields are stretching across the Western Corn Belt and creeping East. What’s driving this drought and is there relief in sight?
We’re in year three of La Nina,” says Justin Glisan, state climatologist, Iowa. “So La Nina is that sea surface temperature anomaly in the tropical Pacific that forces thunderstorm activity farther west in the basin.”
That shift impacts where the jet stream sets up over the United States. The result is above average precipitation in the Ohio Valley and up into the Great Lakes, but dryer weather or the Pacific Northwest and Southern States. “Iowa is right in the middle of that interface,” Glisan notes. “It depends on where the jet stream sets up, it shifts back and forth.”
Add in the Arctic Oscillation, which can impact the strength of the polar vortex. That vortex can create bulges in the jet stream, which is where you see cold air outbreaks in places like Texas. Yet Glisan says a triple dip La Nina isn’t new; it’s happened three times since 1950.
Moving into 2023, the key message is drought for the Western two-thirds of the United States. “Soil profiles are dry after crop use,” Glisan notes. “We had the 29th driest summer here I Iowa over the last 150 years and a very dry fall as well.”
He warns that dry soils freeze faster and freeze deeper, which can have infrastructure implications like freezing pipes or broken water mains. A good insulating snow cover would help prevent that, but dry weather persists. If some snowpack arrives, the next step would be what Glisan calls the March 40-20 rule – days in the 40s, nights in the 20s, so the soil opens to melting snow then it freezes to slow the process. This helps that snowpack filter into the soil and build that moisture bank.
But breaking this drought will require more than that, Glisan says. “We need several months if not more than a year of above average precipitation to really start to break the drought, especially in those D3 regions across the Midwest,” he says.
Glisan notes that crop breeders are having an impact even in the face of drought. While some parts of Iowa, for example, were chopping corn that was “done” instead of waiting until harvest, in other dry areas crops look good despite dry weather. “Last year we were very pessimistic getting into Harvest, given how dry it was across much of the upper Midwest. Then we had a bin-buster harvest year in some of the driest parts of the state,” he observes.
Glisan says he’s fascinated by the work being done by crop breeders to beat stresses that hinder yields, and he’s seeing it in crop reports in the face of year-three of the drought. Yet dry conditions will linger into 2023, which should be a guide for hybrid and variety selection for the next crop year.
While Schnitkey at the University of Illinois sees grain prices staying solid into 2023, the challenge of input prices remains as well. Fertilizer is a cost that’s top of mind for many, as is fuel costs with diesel prices remaining high. He notes that fertilizer costs go up faster than they come down. “Fertilizer will come back down, not this spring, but someday,” he observes.
But there’s upward pricing pressure on all inputs going into 2023, says Sam Taylor, analyst, farm inputs, RaboResearch. “We anticipate a pretty decent increase in seed pricing, and when we play with our models we see a comfortable double-digit increase in pricing,” he says.
He notes that a factor in seed pricing includes cost challenges for seed producers as the cost of fertilizer and other inputs impact production there as well. This will likely be the biggest difference farmers see in their balance sheets in 2023. Fertilizer and fuel prices won’t fall much, but there is some indication that fertilizer prices could settle some.
RaboResearch recently released a report looking at the fertilizer market and showed there is a three-year trend in pricing. Based on that, the 2023 season is nearing the end of that mini-cycle, which indicates prices for fertilizer have peaked, barring any unforeseen consequences.
Taylor sees 2023 as a high-cost year, but one that has pulled back from the peaks seen at the onset of the Russia/Ukraine conflict. “As it stands, most in-market fertilizer prices are leveling off with last year’s,” he notes. “Growers will continue to face a tighter cost/return structure.”
He anticipates farmers will review fertilizer plans and perhaps cut back on P and K. “They will flex the agronomic tools,” he says. “You can cut back on P and K, and it will not likely impact your yield quite so aggressively. Nitrogen tends to be more inelastic. Growers don’t like skipping nitrogen. Productive land will still yield them a decent margin in 2023.”
On the P and K front, Taylor observes that RaboResearch sees downward pricing pressure on P and K through the next six months, based on supply and demand loosening up. It’s nitrogen pricing that remains tricky to predict with the natural gas complex in Europe volatile, while industrial demand for nitrogen is weak.
Taylor notes RaboResearch’s current baseline forecast for prices is $5.60 for corn and $13 for soybeans. “So, farmers can turn a profit on that,” he adds.
Even with continued profit projections despite inflationary pressures, experts talking with farmers get a sense of general unease even in these better times. And Taylor observes that one factor is continued supply chain concerns.
“It feels like [farmers] are more conditioned and they understand what’s happening and it’s going to be an inflationary environment on seeds, and they hear about fertilizers all the time,” he says. “The other thing is there are still supply chain concerns for machinery.”
He notes that farmers continue to have trouble getting parts and there isn’t “perfect availability” of machinery. This has created pent-up demand for growers to be able to invest in machinery.
A drive by any equipment maker’s factory these days is greeted with rows of machines ready to ship, but waiting for parts. The increasing investment in technology in equipment is part of the problem. The global supply chain, hammered by the pandemic, saw a collapse in availability of computer chips needed for cars, pickups and farm equipment.
But it’s more than chips. Manufacturers have been challenged for access for everything from hydraulic fittings to tires to bolts that slow production. One manufacturer admits the purchasing chips that once were priced at $20 each for more than $1,400 just to get machines into farmers’ hands.
While that is easing, supplies remain tight going into 2023. For farmers that need to replace equipment planning farther ahead is one key tactic. The other is to work with the local dealer when it comes to a trade-in.
In 2020, when the supply chain trouble started, farmers who traded equipment in anticipation of timely arrival of the new replacement found themselves in trouble when the new machine didn’t arrive. If you’re looking to trade, hang on to your machine until delivery time arrives for the replacement. The key here is working with the dealer more closely on any transaction for the foreseeable future.
Stocking up on repair parts is key. And while every brand has its share of “captive parts” that are designed and made only for that machine, seeking substitutes for other parts becomes more important. Wear parts, filters, and other items that don’t bear the brand’s name can be found by shopping alternative sources.
Perhaps the big surprise for 2022 which will bleed into 2023 is the rise in interest rates. With inflation topping 8%, the Federal Reserve turned to the only tool it has to cool an economy – interest rates.
Quick moves to raise those rates led to an increase in bank lending rates, which bleeds into the cost of other purchases on the farm. Farmers financing inputs for 2023 won’t see a lack of available credit, but may be turning to alternative sources offering lower interest rates to incentivize sales.
Taylor from RaboResearch, a division of Rabobank, is seeing that revolving credit facilities for customers are at about 50% of what they normally are ahead of a new crop year. “That’s pretty indicative of farmers having a lot of cash that they’re not really worry about financing,” he notes.
However, there are some tactics to engage in this higher-rate environment going forward. “A lot of my focus is on cash rents and where land values intersect,” says Ann Johanns, extension program specialist, Iowa State University. “And I think every producer really needs to focus on knowing their cost of crop production or the cost of livestock production.”
She notes that in a high-crop-price environment over the last two years, farmers have tended to “slack off” and haven’t had to scrutinize every line. But as margins tighten it’s likely time to go back and “use those fundamentals of knowing your cost of production.”
While Taylor notes that fewer farmers are seeking credit facilities for 2022, Johanns adds that some farmers may be returning to banks for loans for the first time in a couple years. That’s the dichotomy of agriculture, different financial situations play out in different ways.
The high prices farmers have seen for commodities in 2022 are weighing on cash rents for 2023 too, Johanns says. “I think a lot of cash rents were negotiated early and then we saw prices increased dramatically,” she says. “And you have these landowners who didn’t get to capture [that gain]. This is feeding into the conversations now and we’re seeing increased cash rents for 2023.”
For tenants talking with landowners, it’s likely the conversations you have must change. Johanns notes that the more removed a landowner is from farming the less likely they’re aware of the true costs of production. “If you even retired just five years ago, that was a different cost structure than it is today,” Johanns says. “The tenant kind of has to wear that hat of explaining where all the money is going and even though you’re seeing those high commodity prices with everything else those margins are tight.”
Rising interest rates are also known to be negative to land values, though later 2022 sales may be counterintuitive on that score. “We’ve seen those record land sales, but usually there’s some other reasons behind what we see in some of those,” Johanns adds.
A recent report from the Kansas City Federal Reserve branch notes that interest rates on farm loans had increased sharply in the third quarter of 2022, but real estate values continued to increase. However, the acceleration of the increases eased.
Farmers are stewards of the land, working to maintain their land for future generations. Yet more attention is being paid to the ways that land is farmed, and how the tools used on the farm impact the environment.
With fertilizer prices so high – especially for nitrogen – farmers are paying more attention to this key nutrient. But so are environmentalist, who note the challenges nitrogen can case when it runs off fields into watersheds, or is volatilized into the atmosphere.
“I’d say nitrogen use efficiency and what growers can get away with both economically but then production wise and then how those benefits could translate into environmental benefits of corn production are top of mind,” says Nathan Fields, vice president of production and sustainability, National Corn Growers Association.
He notes that rising prices have growers looking more closely at nitrogen use efficiency. The idea of adding a few pounds of N as a cheap form of insurance doesn’t work for 2023 because it’s no longer cheap. “Let’s take a look at how we can do secondary applications or split applications and not try to store it all in the soil in the fall,” Fields says. “I think those little details are going to help in the long run and the economics are really driving that.”
Keeping nitrogen out of the rivers is a key environmental benefit. “We are always concerned about those nitrogen loads in the Gulf of Mexico, and it takes a lot of energy to produce nitrogen. So that can help our greenhouse footprint as well. There are a lot of benefits to nitrogen use efficiency,” Fields says.
When talking about nitrogen use, there are also new tools that can help maximize performance of nitrogen applied. Growing attention to biologicals is a key part of that. In 2022, Corteva launched Utrisha-N, a foliar-applied biological product that can help a plant get more out of the nitrogen applied to a crop. But it’s not a tool for reducing nitrogen applied.
“What we encourage is that farmers use the right amount of nitrogen for their soil and their environment,” says Ron Geis, crop production market development specialist, Corteva. “Then our product would add supplement nitrogen that’s not subject to leaching and not subject to moving off the field no matter the weather.”
Geis notes that when it comes to nitrogen, there are two customers. “We have the farmer customers, but there’s also everybody else who buys food,” he explains. “And we want them to continue to allow us to produce the food in a manner we find best for us to do that.” The key is improving nitrogen use efficiency.
Biological products are gaining greater attention for agriculture as companies turn to nature to find more effective ways to control insects, diseases and other pests impacting crops. But these microbes can also be put to work to boost nutrient efficiency. And each takes a unique approach to get the job done.
Geis notes that Utrisha-N is foliar-absorbed and applied when the crop is near canopy closure so V4 to V8 for corn (V8 for 30-inch rows). The product will propagate and colonize in the plant and as the plant grows new foliage the product lives off exudates from the crop – mainly methanol. From that the bacteria secrets ammonium nitrogen as waste material which is a form those leaves can take up and use.
And while corn is a big nitrogen candidate, Geis notes Utrisha-N is providing surprising results in soybeans. That’s due to the biology of soybeans, a crop traditionally considered its own N producer. However, Geis notes that past a certain point those nitrogen nodules no longer provide enough for the plant during its reproductive phase. This can starve the plants for nitrogen when it’s needed most. Those nodules, Geis says, can keep up with plant up to about 65 bushels per acre. After that the plants need more than they can fix themselves. Adding Utrisha-N at R1 to R3 gives plants that added N boost.
The idea is to use the biological for soybeans in a high-yield environment and apply it at the same time a fungicide goes down. “In high-yield environments that N is hitting at the right time,” he says. “It’s like a NASCAR with enough fuel to get 80 out of 100 laps, but for that last 20 they need that fuel. Utrisha N is like stomping on the accelerator.”
But gaining that higher yield while not adding to a farm’s greenhouse gas footprint may not be top of mind. NCGA’s Fields notes that while farmers may not be paying attention it’s a concern. “What we’re paying attention to is the fact that our downstream customers are paying attention to it,” he says. “There’s always talk and opportunities surrounding low carbon fuels which gets any corn grower’s attention.”
However, that downstream customers, which in many cases is the livestock industry, is looking at its environmental footprint. “And when they come to us and say ‘hey, 50% of our environmental footprint is our feed, corn and soybeans, what are you going to do about it?’ Well, nitrogen efficiency is a big step in that direction to kind of meet their marketing needs,” Fields says.
Beyond better use of nitrogen, NCGA has its eye on a couple of hot environmental topics going into 2023. First is Waters of the United States, which involves defining which waters are ‘navigable’ and defining that term. “Waters of the U.S. and how that all is going to continue to shake out and be negotiated is a big concern,” Fields says. “The aim is the appropriate level of regulation and not too much overreach when it comes to defining Wates of the U.S.”
A second concern is the U.S. Fish and Wildlife Service and EPA regarding the Endangered Species Act. “There is a lot of concern on what possible impact that could have on some of the crop protection products we utilize,” Field says. “It’s a really big job that EPA is well suited to handle, but it’s getting bigger and how the two agencies can continue to work together and figure this out in a way that allows agriculture access to those products is going to be critical.”
EPA must reregister all crop protection products over time, but the Endangered Species Act is playing a bigger role in that process. Fields says the ESA requirements are becoming more robust. “We’ve talked about it on the horizon, but the horizon is getting closer and closer, so we’re seeing greater attention paid to this issue,” he notes.
One other area on the environmental radar is the recent allocation of nearly $3 billion from USDA for climate-smart farming projects. “When it comes to environmental challenges, I think another one that’s going to be facing growers is how this distribution of resources in the environmental space is going to be managed and how will it be implemented,” Fields says.
That focus on climate-smart farming will evolve in 2023 and an issue to watch.
A challenge that many farms may be facing in 2023 is planning for the future of the operation. Who will farm that land? Who in the next generation will take the lead? And like everything else these days, the pandemic had an impact.
Megan Roberts has a strong interest in succession planning as part of her work with the Minnesota State Colleges and Universities. She’s the executive director for the Southern Agricultural Center of Excellence working to support ag educators across the state, and works with succession issues.
The pandemic has limited who the university systems can reach out to and have conversations about succession planning, and that’s true across the Midwest. The in-person meeting remains a valuable tool for farmers to get that added education whether discussing succession, management, labor issues and more.
“I haven’t talked with the hundreds and hundreds of people I typically do in a year, it’s more like we had 75 participants last year,” she says. “Which still gives you a collective feeling, but it’s not the same as doing a presentation once a week.”
But she has observed how the ag economy is changing the succession conversation. For example, a farm may see its assets have grown tremendously in the past two or three years with higher commodity prices and net farm income. “That nest egg has gotten a lot bigger in the last three years and it’s less about holding on and more about the fact that fairness and equal really is a big question with a larger estate than we had before,” Roberts says.
And while one family may be faced with a bigger estate than planned, the flip side is a livestock producer who may be seeing lower returns and a drain on assets. “For some farms, it’s been a more challenging time depending on the type of livestock,” she observes. “Maybe their conversation is more about scraping by right now if they can’t find labor or pay higher input prices.”
Roberts says agriculture brings this dichotomy of issues for succession planning, and it makes the process very complicated. In fact, it is not a ‘go it alone’ concept. and she offers some tips as farm family do start those conversations, or perhaps revisit them as economic conditions change:
* Consider having a consultant guide the process
* Everyone needs an attorney and a tax professional versed in estate and transfer planning
* If involved in a farm business management program consider discussing succession with that instructor
That last point brings a different level of expertise to the conversation. “[The instructor] isn’t a legal expert and they’re going to send you to an attorney, but they might be able to help walk through what the attorney will need and prepare you for that conversation,” she advises.
The key is to consider the idea that succession is a holistic concept. “It’s not just the finances, it’s not just the legal, it’s not just the family dynamics. It’s all of it. And it gets really messy because it’s a family business,” Roberts concludes.
Lack of farm labor is not a new lament for agriculture, since the 1950s the rural population decline has let to a shrinking pool of workers. Add in a pandemic, a population shift and changing immigration laws and the availability of workers keeps falling.
David Kohl, ag economist and professor emeritus at Virginia Tech University, observes that the stimulus checks, and extended unemployment benefits created labor shortages for a range of industries. Agriculture wasn’t immune from the impact. As he notes at the same time small businesses, including farms and ranchers, were constrained in their ability to raise wages.
There’s also another shift happening, beyond that urban resident deciding to move his or her remote job to a small town. Big warehouses, processors and manufacturers are moving into rural areas where land values are cheaper, and even labor costs can be lower. But a lower labor cost for a warehouse company may still price that employee out of farm work. And the changing labor force may prefer the 8 to 5 nature of that “city” job over the demands of working on the farm.
There are few resources agriculture can bring to bear on the issue. Innovation in agriculture has long been driven by decline labor access. The move to big round bales is a key example. Less help to put up hay in a timely manner drove innovation for this sector. Combines filled a labor gap when first invented and as their size increases that continues today.
With the average age of farmers rising steadily over the last 30 years, the focus turns to bringing in the next generation. But there are issues there too. A report by AgAmerica Lending looked at labor showing that issues like heavy physical demand and unequal work-life balance come into play when looking for employees.
More farmers are turning to the H2-A program to bring in laborers from outside the country. This program brings along a range of federal pay and housing requirements and has long been used in the South and in California. And it’s a growing option for larger farms in the Midwest. If a farmer has a greater need for H2-A labor, most successful operations with this program work with a contractor to help manage the intricate details of the program.
The labor shortage isn’t going to get better, as farmers look to 2023 evaluating equipment efficiency to get the most out of every farm hand may be important. And perhaps relying on contractors and custom operators can help fill the gaps. The challenge of farm labor didn’t appear overnight, it just accelerated faster than usual. It won’t be solved overnight.
Engaging the nascent carbon market may either be the biggest boon to agriculture, or a bane to your farm management approach. As these markets evolve producers appear to be choosing up sides, with some walking away from the opportunities provided while others embrace it. Yet for 2023, engaging potential carbon markets raise opportunities.
There are different carbon market approaches. Today, the greatest opportunities involve “additionality” where you engage in a new practice that measurable sequesters more carbon on your farm. The two key areas are cover crops and no-till, both of which are not overnight-successes.
Yet there’s growing interesting in paying farmers to sequester carbon, and growing work that shows a link between soil health and food security. The Soil Health Institute conducted an depth-survey with more than 100 growers around the country to explore use of these new practices and their potential on the farm. What the group found that most every respondent using soil health-focused practices found that the work made their farms more resilient.
For example, the ability to get into a field faster after a big rain because of improved soil conditions. Or cover crops protecting soil from losses over the winter.
As 2023 unfolds, the potential for these programs to offer benefits may be become clearer. Upfront payments to incentivize a new practice is one tactic growing in popularity, others include programs that look back a few years to give some up-front credit for work already done. And others are looking beyond cover crops and no-till to better nitrogen management. Nitrogen volatility is gaining more attention.
Mahdi Al-Kaisi, professor emeritus in agronomy, Iowa State University, writes a regular column for Wallaces Farmer, and in one installment he notes the need for outreach and education to make these carbon programs work. He notes that most carbon credit markets are focused on structure and technical protocols as business entities. While this is a necessary first step the next move is to couple that program with education and technical expertise to increase awareness. That outreach platform will be necessary for success, he asserts.
That education will help firm up the opportunities presented by this potential new income source for agriculture.
Looking ahead to 2023 and beyond, there may be growing new crop opportunities for the future as big data in agriculture links up with consumer needs. But there are already specialty markets bringing added income potential for the farm. In most cases, these opportunities are regional, which may require some digging.
For example, white corn or waxy corn for specialty markets are often near processors, as are non-GMO options. One that’s gaining traction, and been under development for some time, but shows how these opportunities build, is high-oleic soybeans.
Roger Theisen, marketing manager, specialty crops, Corteva, is shepherding Plenish soybeans into the market working not only with farmers and processors but end-users to explore market opportunities. And in 2022 processors stepped up to pay a bigger premium as market opportunities expanded, a practice that continues into 2023.
“In 2022, we hit more than 600,000 acres Plenish,” Theisen says. “Contracting will continue through spring of 2023 and we expect to be over 900,000 contracted acres. We’ve seen good growth in the program this year.”
Theisen adds that people are getting more comfortable with the genetics. “Plenish soybeans yield as well as commercial soybeans,” he says. “Growers are seeing that now.”
He notes that there is one workaround for the current list of Plenish varieties, none contain the latest weed control tech such as Enlist. “But growers who can manage that part of their business are seeing a phenomenal benefit,” he adds.
Not every elevator in the country is open to taking in high-oleic soybeans, this is a regional market heavily focused more in the Eastern Corn Belt. But as downstream demand increases, Theisen is seeing the market area expand. This is of course the classic chicken and egg marketing problem – the processor won’t buy the beans unless there is end-user demand, and the end user won’t contract the beans unless there is enough supply. Both are being worked through in a big way going into 2023.
But for those snack chip makers or restaurants looking to reduce their food waste numbers, high-oleic soybeans are gaining traction. Even baked goods companies are seeing a benefit because high-oleic soybean oil can boost shelf life. “That helps those companies reduce the number of ingredients they use to preserve shelf life, they want simpler, cleaner food labels,” Theisen says.
And while the consumer food market is a big buyer of the soybean oil, building demand because of those benefits, there are industrial opportunities too where the high heat point of high-oleic oils has a benefit. There’s even growing opportunity for use of the soybeans in dairy rations.
“Dairies are looking to reduce expensive fat supplements in dairy diets, and they can increase their milk fat content with Plenish,” Theisen says. “Feeding whole roasted Plenish beans can decrease their ration cost.”
It’s a growing opportunity and even with soybean prices predicted to hold at near $14, that extra premium remains popular. “We have to build the upstream pile to meet downstream demand and the downstream demand is growing,” he says.
Meeting the challenges of 2023 will require farmers to be more nimble than ever, seeking new income opportunities, and working to manage spending in the face of predicted tighter margins. The good news is that net farm income is still predicted to be positive for the 2023 crop year. How you manage for that can help maintain a healthy farm operation into to 2024 and beyond.
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