By CHAD SMITH
The agribusiness in Minneapolis’s 9th Federal Reserve District started the new year in reasonably good shape. Although farmers face obvious challenges, the overall picture is still good, but that could change quickly, especially if commodity prices fall significantly.
The Ninth District serves six states, including Minnesota, Montana, North and South Dakota, and portions of Wisconsin and Michigan.
“The description I would use for 2022 is ‘surprisingly strong,’ given the challenges farmers face,” says Joe Mahon, regional outreach director at the Minneapolis Federal Reserve. “Increasing input costs and supply chain challenges continue to be a nuisance.”
The downside to this is that crop prices have held up pretty well through 2023. He says this has boosted incomes even as input costs have continued to rise and profit margins have fallen.
“The data tells us that despite these challenges, farm incomes in 2022 were higher than last year,” he said. “Remember that 2021 was a strong year in itself, so that paints a good picture.”
Mahon is the first to admit that the strength is surprising, especially given the rapidly rising input costs. Producers typically buy their fertilizers and chemicals a year in advance and are still working with inputs they bought before the price hike really took off. But the concern is what happens next year?
“Especially when you see a reversal in crop prices,” Mahon said. “We saw a big price spike after the Russian invasion of Ukraine and we worked our way through it. They are hovering near where they were before the invasion.”
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While the overall agricultural picture is strong, it doesn’t apply to everyone. The only exception last year in Minneapolis’ Fed District was Montana’s Golden Triangle region. Mahon was out there during the region’s wheat and barley harvest last fall and said the region was hit hard by the 2022 drought.
“They had two bad years of drought in a row,” he recalled. “If you look at the Montana wheat and barley totals, they’re up a bit compared to the previous crop, but well below what you’ll typically see.
“Producers said the wheat crop was of fairly good quality, although yields fell sharply,” Mahon added. “They also had good protein content, while the prices were still good enough that most producers thought they were making a profit.”
Ranchers in these drought-stricken areas have also been hit hard by extremely dry weather and have had a very hard time getting forage in this part of the country. Consequently, herd size in this part of Montana is much smaller than last year.
“It might even be a bigger story than what’s happening with the crop producers,” Mahon suggested. “Even in some of the most drought-affected areas, I heard a lot more about higher diesel prices, higher transport costs and also higher input costs.”
Looking ahead to the remainder of 2023, it’s hard to say whether this strength in agriculture will continue. There are many headwinds, most of which are very difficult to predict.
“Weather plays a big part and we all know how impossible it is to predict that far out,” Mahon said. “What is happening around the world will be another important factor in economic strength in the agricultural sector. It is imperative to monitor geopolitical shocks on the input and output side of commodity markets.”
The other important thing to note about agribusiness is that it runs on a “different clock” than the rest of the economy. Experts are currently trying to find out whether the US is headed for a recession or whether we are in one right now.
“Everyone wants to read the tea leaves,” he said. “If I were a producer, I wouldn’t worry about it so much. People will always need food, whether the economy is good or bad. They can change their consumption habits, but they still have to eat.”