With longer days, plans are kicking into gear for the 2023 growing season. It is a good time to review some of the current topics affecting agriculture.
Weather
After nearly three years of La Nina conditions, we seem to be looking at a change of weather patterns. Most long-range forecasts project rapid weakening of La Nina and either neutral or even El Nino conditions by the time we reach the heart of our growing season. While this is not a guarantee of good weather, historically the odds of hot, dry conditions are lessened as we move away from the La Nina pattern.
On the ground, we are seeing evidence of a pattern change. Northwest Iowa has had above-normal precipitation throughout the last three months, coming as both rain and snow. While there is a healthy amount of frost in the ground, a decent amount of rain fell and soaked in prior to the hard freeze. We still have a substantial deficit in groundwater supplies from a very dry late summer and fall, so we will hope for some snowmelt and early spring rains to continue correcting our imbalance. For now, it is at least encouraging to see La Nina leaving and regular fronts bringing moisture that we have not seen enough of over the last few years.
High Input Costs
Costs have gone up! It is true no matter what product or service you are talking about. This year’s corn and soybean crop looks to be the most expensive on record to produce. The big-ticket items include fertilizer, seed, chemicals, machinery, and land costs (rent). Each of these categories has gotten more expensive over the past few years. The biggest jump happened early in 2022. This year, prices have stabilized but remain very high. The total cost for corn and soybean inputs is up at least 40% from 2020.
Last year, there was limited opportunity to lock in prices early on some inputs before the largest price spike. This year, no such opportunity existed. Most of the factors causing these high prices have been around for over a year now. The war in Ukraine is a big one because that region of Eastern Europe is a significant producer of fertilizers and components to fertilizer. Russia is the world’s top exporter of natural gas used to make nitrogen fertilizer and a major producer of potash fertilizer. Our input prices generally follow the global energy markets, especially natural gas.
Other issues carried over from last year include low water levels on the Mississippi River affecting barge traffic and a possible rail strike.
Fertilizer costs have leveled out or softened somewhat this winter, and the supply of fertilizer has slowly improved despite all the global turmoil and supply chain issues. We have no concerns about local fertilizer supply this spring. Looking forward, we expect the fertilizer markets to remain expensive and volatile for at least another year, but it seems the products we need will be available. Choosing when to purchase fertilizer has become more like marketing grain in recent years, with significant upside and downside risk. Most retailers now use formal contracts for fertilizer purchases, which is a change compared to how business was done in the past.
Geopolitical Issues
It has been a year since Russia invaded Ukraine. Wheat prices, and to a lesser extent corn, jumped on the supply uncertainty caused by the disruption in this key grain-producing region. What have we learned since? Production has gone down in Ukraine as could be expected, but grain markets have normalized, largely thanks to a U.N.-brokered agreement to allow grain exports to flow out through the Black Sea ports despite the ongoing hostilities. Whether this will continue is as uncertain as what phase the war will take, but at this time, it seems likely to continue, as food availability is a humanitarian issue, and Russia’s allies are some of the biggest importers of this grain.
China is always a topic for the Midwest agriculture industry. They continue to be our largest export market by far for soybeans and are also a very important destination for our corn, pork, and increasingly, beef. Our relations with China during the previous and current U.S. administrations could be described as tense at best, and these tensions seem to be increasing with the Taiwan issue and China’s aligning with Russia in the current Ukraine war.
Their intention is to become a second superpower and, as such, we will increasingly be facing off in various situations. We can hope that agricultural trade does not become a casualty of these tensions, but the possibility is real. In the near term, China’s economy will grow as they come out of COVID lockdown, which will be a positive for food demand.
Agriculture and Energy
Agriculture and energy have been part of the same discussion for 15 years. Fully 40% of our corn crop is used for ethanol, and when oil prices go up as they have over the past year, this industry benefits as well. The ethanol industry is mature, however, and is looking for regulatory help in moving blend rates higher to counteract what will likely be lower liquid fuel usage as electric vehicles increase.
Environmental issues are at the forefront these days, and how “green” your product is perceived is part of the discussion. Towards that end, the ethanol industry is going down the road of carbon capture to improve their green score and hopefully protect long-term ethanol demand. There are currently two projects on the board affecting our trade area. Most area ethanol plants are moving towards capturing carbon and converting it into a form that can be transported by pipeline to permanent underground sequestration sites in either North Dakota or Illinois. The companies building these pipelines are currently in the process of securing easements under private land across the state. While getting easements signed by hundreds of individual landowners is a monumental process, it does seem that there are enough financial incentives (including government infrastructure funds) that the projects will move ahead. A number of our clients are in the path of these proposed pipelines.
The environmental issue is also looking to affect our other major crop – soybeans. The renewable diesel market, while just getting started in some states, looks to have huge potential from the trucking, maritime shipping, and airline industries as the push comes to replace diesel made from fossil fuels. While diesel can be made out of numerous natural fats and oils, soybean oil is the largest source. This is a big enough story that it deserves its own article in a later newsletter, but it is certainly an exciting time for this new industry and should provide a solid demand base for soybean producers.
