By Kenneth Scott Zuckerberg and Nelson Neale
It’s hard to imagine a more volatile time in agriculture than the past six years.
The party started with U.S. trade tariffs against China in early 2018, followed by enactment of the China-U.S. Phase One trade agreement in early 2020. The ink was barely dry on that major trade deal when COVID-19 started to spread worldwide. It became the worst pandemic the world had experienced since the 1918 Spanish flu epidemic.
Then, in February 2022, Russia invaded Ukraine, a leading agricultural producer. Commodity and fertilizer prices surged following the invasion based on expectations that production and exports for Ukrainian wheat, corn and sunflower would fall significantly. That fear helped drive July corn futures prices above $8 per bushel in April 2022, the highest level since September 2012.
Fast-forward to today and commodity prices have cooled. Cash corn prices briefly traded at $3.77 per bushel in early 2024, below the cost of production for most U.S. producers. December futures prices rebounded by the beginning of April to more than $4.70 per bushel — a level that could allow corn growers to break even this year.
Interest rates have increased since the Federal Reserve began raising the federal funds rate in March 2022 to curb inflation. Interest rates on U.S. farm operating loans, which averaged 5% in 2021, increased to an average of nearly 9% in 2023, as tracked by the Federal Reserve Bank of Kansas City.
Despite those headwinds, the U.S. farming sector managed through this period of volatility. Farm profits were above average from 2021 through 2023, according to U.S. Department of Agriculture data.
But the roller coaster ride hasn’t stopped. Farmers and ranchers continue to face high input and energy costs, elevated interest rates and rising labor costs — all against the backdrop of lower grain prices.
The key question now is this: Will the ag economy stabilize over the next 12 to 18 months? While no one has a crystal ball to know how things will shake out, navigating through volatility begins with understanding the nature and magnitude of key threats and then implementing appropriate strategies to manage risk.
1. Inflation and interest rates
The COVID-19 pandemic triggered an unexpected spike in inflation due to a confluence of interrelated factors. Most notable was the ramp-up in online consumer spending in mid- to late 2020 in response to shelter-in-place and work-from-home efforts to contain the virus and the massive amount of government stimulus designed to avoid an economic depression.
Consumers bought goods instead of purchasing services and out-of-home entertainment. Against a backdrop of constrained supply, this caused major backlogs in manufacturing, compounded by factory shutdowns and labor shortages in key manufacturing regions of the world.
As economies began to recover, food, fertilizer and energy costs spiked sharply, partly in response to Russia’s invasion of Ukraine. In response to the inflation spike, the Federal Reserve began raising interest rates in 2022. The current fed funds policy target stands at 5.25% to 5.50%.
While higher rates will result in higher costs of financing on new borrowing and floating rate debt, keep these points in mind:
- Although policy rates are higher now than they were following the 2008 global financial crisis, the current range of 5.25% to 5.50% is still below the long-term average fed funds rate of 5.69% from the 1950s until 2007. (The 2008 financial crisis was excluded from this calculation, since it was a once-in-a-generation shock to global economies and capital markets.) Therefore, the Federal Reserve’s current policy rate range is more normal than it would otherwise appear.
- Despite the recent “hot” March consumer price index report, the Federal Open Market Committee (FOMC) may still cut interest rates this year if economic conditions warrant a change. Nonetheless, the Fed’s interest rate policies have meaningful and direct implications on variable-rate farm operating and crop input loans, so changes in interest rates translate directly to farm bottom lines.
2. Weather
Increased frequency of severe weather events, including volatile temperatures, droughts and torrential rains, along with changing El Niño and La Niña weather patterns, has negatively impacted global agricultural production and trade in recent years. Here are a few examples:
- Hurricanes, derechos and freezes have damaged U.S. grain elevators, power lines and crops. Fertilizer and biofuels production facilities have had temporary shutdowns due to weather events.
- Low water levels on the Mississippi River and Panama Canal, due to droughts and warmer temperatures, have triggered logistical bottlenecks and higher shipping costs.
Read more about the Panama Canal crisis.
The losses have driven a dramatic increase in property and casualty insurance rates for U.S. ag cooperatives, with premiums rising more than 100% in many cases, according to Marsh. Higher deductibles and coverage restrictions have also occurred.
Dozens of severe storms are forecast to hit the U.S. in 2024. Colorado State University Department of Atmospheric Science researchers expect 23 named storms, including 11 hurricanes and five major hurricanes, during the 2024 Atlantic hurricane season. That’s up from 20 named storms in 2023 and 14 on average.
3. Domestic politics
The 2024 U.S. presidential election will be a closely watched event. The outcome could impact a wide variety of issues for farmers, ranchers and rural communities, including timing and eventual passage of a new farm bill. There’s potential for new trade tariffs and changes to policies governing biofuels production, climate change and carbon sequestration.
4. China changes
China is undergoing a series of economic and structural changes that will likely affect long-term demand for U.S. ag products. China’s economic growth rate has failed to recover following the initial post-COVID bump, the country’s population is starting to decline, its youth unemployment rate exceeds 20% and its real estate sector is experiencing credit stress amid slowing demand and falling prices. These factors have the potential to significantly change the outlook for U.S. agricultural exports to China.
5. Geopolitical instability
Geopolitical instability is arguably one of the most pressing concerns facing the future of global ag trade. While America still holds considerable economic and military power, its influence on global security and democratic thinking may have diminished. Three theaters of geopolitical instability are currently disrupting global agriculture trade:
- Black Sea: The Russia-Ukraine war created long-term uncertainty for grain, crop inputs and energy trade flows.
- Indo-Pacific: Escalating tensions between China and the U.S. may lead to reduced U.S. exports of agricultural products (namely soybeans) and other disruptions in U.S.-China trade.
- Middle East: The Israel-Hamas war in Gaza has led to attacks on key shipping lanes and resulting supply chain and trade disruptions.
Check out the full Spring 2024 C magazine with this article and more.
Listen to an Around the Table podcast episode on volatility factors.
