AgLetter Insights: Ag Prices Climb but So Do Costs
David Oppedahl, senior business economist at the Chicago Fed, discusses agriculture conditions in the Seventh District, delving into data from the latest Chicago Fed AgLetter, crop and livestock prices, the current growing season, and the impact of the war in Ukraine on global markets.
Q: What did the second quarter of 2022 tell us about the state of the Midwest agriculture industry?
A: The agricultural sector is strong at the moment. Farmers in the Midwest continue to see profits in the current growing season, as we noted in the latest AgLetter. However, the USDA reported a 13 percent increase in the cost of inputs—the goods that are needed for day-to-day operations, like fertilizer and diesel fuel. So far, that increase hasn’t outpaced profit growth, but it could put a strain on farm balance sheets in the future.
Meanwhile, the ongoing war in Ukraine and changing global weather conditions, including droughts, have created significant volatility in the supply chain. Thus far, most of the Midwest has been spared from the most extreme weather conditions and is well-positioned with good weather in the growing season.
Q: How did farmland values change in recent months?
A: In the second quarter, we saw a continued surge in the value of available farmland, but that surge may have reached its peak: 71 percent of our survey respondents expect the value of farmland to be stable in the fall. Interestingly, some of the recent price surges have been driven by outside interest from investors, a trend that can accompany inflation. The investment community has been known to see farmland as a hedge against inflation.
Q: Did agricultural prices—the prices farmers receive for crops and livestock—continue to be propelled by world events?
A: Yes. We saw agricultural prices continue to move up in response to global food shortages that resulted from the war in Ukraine. We believe those prices may have reached a peak in June, but we won’t see that data in the AgLetter until the next edition, which comes out in November. Milk prices also moved up strongly in the last year, and cattle prices saw some increases from this time a year ago.
Q: In early August, Ukraine exported its first grain shipment since Russia invaded the country. What effect do you expect such shipments to have on the Midwest if they continue?
A: Ukraine’s ability to export grain is something we will keep a close eye on in the third quarter. If Ukraine continues being able to export, the impact may become more significant for our District. The export of corn and sunflower oil is expected to lag pre-war levels for some time, and those are the crops that pose greater competition to farmers in the Seventh District.
Q: What other trends are you keeping an eye on?
A: I’m very interested to see if agricultural loan repayment rates remain strong in the months to come. Just 1.9 percent of borrowers had non-real-estate loans that were seriously troubled in 2022 compared to the same period in 2021. At some point, we might see that trend return to normal parameters, as the federal government’s Covid-19 payment programs taper off and agricultural prices move lower.
I am also watching the effect of currency exchange rates on the price of agricultural exports, as well as any federal tax discussions that may impact the industry. As we know, conditions change daily and it’s important to keep a close eye on the data to stay one step ahead.
For the latest data and insights, read the second quarter AgLetter.
