by Brent Gloy and David Widmar
Although the 70 degree temperatures in Western Nebraska haven’t made him think of Christmas, David has been reminding Brent that December is here and that means it’s time for us to take a moment and reflect on the past year. As far as the ag economy goes, this has been one of the best in many years, but it has still been accompanied by lots of ups and downs as well as the emergence of new and different challenges and opportunities.
Corn and Soybean (and Most other Commodity) Profits Soar
There is little doubt that corn and soybean farmers will remember 2021 for many years. The combination of lower production costs and high commodity prices set the stage for strong profits in the farm economy, especially for corn and soybean production. When reviewing contribution margins, corn and soybean returns exceeded the highs observed between 2011- 2013. That’s a pretty nice outcome for many, but it has also set the stage for much higher prices for everything from farm inputs, to equipment, to land rents and values. By the end of the year, we started to see some signs of a pretty exuberant farm economy, particularly in equipment and real estate markets.
Fertilizer Prices Increase Dramatically
Nearly every ag input – from fuel to equipment to labor-started heading higher in 2021. But fertilizer went from 0 to 60 about as fast as an electric car, and really stands out as the input whose prices have changed the most. By the end of the year, most coffee shops were buzzing with news of sky-high fertilizer prices. Remember those decade-low prices in 2021? Well, they are now only a fond memory as most fertilizer products shot higher, reaching dizzying highs as we head into 2022. For those of us making 2022 budgets, it seems like we have to adjust our assumptions every few weeks. The causes of all this are up for debate, but among the contributing factors are supply chain constraints, inflationary concerns in the broad economy, higher energy prices, and the prospect of very strong farmer demand. While it’s always risky to speculate on the year ahead, we’re betting that how this story ends will probably be a major theme of our 2022 annual review.
Soybean Oil Price Surge
Move over “food versus fuel,” the 2021 version of this seems to be “diesel versus doughnuts.” After years of soybean oil prices around 30 cents per pound, prices exceeded 70 cents per pound throughout most of 2021. Bakers are voicing their concerns and asking the EPA to help by rolling back the biodiesel mandates. Digging into the data, we realized the trend of more soybean oil going to biodiesel has been underway for several years. This presents a pretty unique story on the ag demand front and one that will also bear watching in 2022.
Carbon
It’s almost like there was a giant “carbon market interest” switch that got flipped when the new administration entered the White House. Carbon and carbon markets didn’t even make our list in 2020, but the interest in that topic has increased dramatically in the last year. We even launched Season 2 – “Corn Saves America – of the AEI.ag Presents podcast considering the opportunities and challenges through the historical lens of the last time agriculture had a front-row seat in helping solve a national crisis – the rise of ethanol. If you haven’t checked it out, it’s absolutely worth a listen. We promise you won’t find anything else like it and that you will probably hear some new perspectives that will challenge your thinking.
Wheat and Cotton Prices Surge
It seems to us that everyone is focused on the corn/soybean acreage story in 2022, but keep in mind that 2021 was a good price year for most crops. This was especially true for wheat and cotton, whose fortunes improved throughout 2021. It’s been a while (almost 10 years) since wheat prices were this attractive. We’ve often said that those low wheat prices changed the dynamic in acreage decisions, and this year we will get to see how higher prices affect it. All in all, 2021 has set the stage for an interesting acreage debate in 2022.
Farmland Values Surge
Last January, we posed the question, “What is the probability of top-quality Indiana farmland values increasing by more than 10% in 2021?” Survey said: Indiana farmland values were up 14.1%. It seems that we hear about another record sale every week. Later, the USDA reported farmland values were higher throughout the Corn Belt, and especially so in the Great Plains. There’s no doubt land markets are on a tear. In the previous 4-5 years they had been supported by very low interest rates, despite pretty weak farm incomes. In 2021, farm income came to the party and it was off to the races. It’s worth noting that cash rental rates were slow to adjust in 2021, but we shouldn’t expect that to last long.
Valuations and Price Go Crazy Everywhere
It wasn’t just farmland values that have people scratching their heads; we’ve gotten countless questions about Bitcoin and other cryptocurrencies. Often overlooked is the role low interest rates play on asset valuations, especially as interest rates approach zero. It seems that everywhere we looked asset markets reached new highs in 2021, as speculative spirits were unleashed. Perhaps the most revealing sign of the time was the GameStop short squeeze (heck it even got its own Wikipedia page already, really!?). Nobody seems to know how this all will end, but it is important to keep perspective and realize that there really aren’t any new secrets for getting rich.
Inflation
2021 will go down as one of the first years in recent memory that U.S. inflation grabbed headlines. Earlier this year, we posted an AFN question about the probability of inflation in the U.S., averaging 3.5% or more in 2021. This is a topic that the data – and in turn perceptions – have greatly shifted. In January, the monthly data was reported at 1.4% – arguably too low and certainly below the Fed’s long-run target of 2%. Most recently, the October data came in at 5.0%. This is quite a bit more inflation than many of us are used to and people are starting to take notice.
All this talk of inflation created the great debate of 2021. Is this inflation a short-term issue or something that might be longer in nature? People quickly lined up into either the transitory or not camps with the Fed on the transitory side. As things moved along the Fed recently suggested dropping “transitory” from the discussion noting that it’s adding confusion to the debate. (Perhaps “transitory” is a candidate for word of the year?).
Just remember a key issue with inflation is that the amount of trouble it causes is a combination of magnitude and duration. Thus far, the duration has been short. While the debate about how long inflation might stick around will last well into 2022, we pointed out that the arguments – on both sides- are numerous and complicated. We expect that the discussion will continue for some time.
The Ever Given Gets Stuck
In an ominous sign for the supply chain issues that were to come in 2021, a large ship somehow got stuck in the Suez Canal. In late March, the world live-streamed as crews attempted to get the 1,300 foot long (yeah that is really big — think a 1/4 mile) “unstuck.” After six days, the ship was freed, but it was only the tip of the iceberg for supply chain concerns, and it seems it’s been pretty much downhill from there.
Infrastructure
There have been lots of big-spending bills coming from Washington since the start of the pandemic. In November, President Biden signed a $1 trillion infrastructure bill into law. It will be interesting to see how the infrastructure money is spent and the projects that will be undertaken, but many ag groups have been asking for improvements to ag infrastructure for years.
Big Spending, Big Concerns about Taxes
When there is uncertainty met with lots of conversations, chatter, and speculation, it’s a recipe for decision-making chaos. The big government spending in 2020 and 2021 has raised concerns about the deficit and the prospects for higher taxes. It looks like 2021 will end without a big change in estate or capital gains taxes, but the chaos and confusion around these issues have been significant. We saw a series of trial balloons for new taxes floated and usually popped pretty quickly. There is little doubt that these discussions will continue into the future. To help keep things in perspective we wrote an article to unpack the issues around estate taxes, capital gains, and stepped-up basis. We also opened an Ag Forecast Network questions about the issue.
COVID-19
While buried on our list, historians will probably rank the COVID-19 vaccination roll-out as one of the biggest stories of 2021. The scale, scope, and technological development are really pretty mind-blowing. Just consider that while the number of infections, vaccinations, etc. is now tracked on a nearly daily basis, 10 or 15 years ago, we’d have never had access to this data so quickly. One has to wonder how this real-time information has affected our perceptions of the entire issue. Historians will no doubt try to unpack its successes and failures for years to come. It’s kind of funny how sometimes the biggest stories of a decade or generation can be an afterthought at the moment. (Last year, we noted the Pentagon’s 2020 UFO videos also seemed to be a bigger story than it felt in the moment.)
Cattle Pricing
It seems that turmoil is constant in cattle markets. First, it was the 2019 packing plant fire. Then it was pandemic-related issues of 2020/21. While there wasn’t a new crisis in cattle pricing, the debate continued as everyone has been looking for a fix. It’s unclear if Congress stepping in with a “fix” is a desirable or undesirable outcome.
Soybean Stocks Rebound
Perhaps no commodity has been on a wilder ride than soybeans. At the height of the trade war, the U.S. was looking at all-time highs for soybean stocks, then by the spring of 2021, we were approaching all-time lows. In the spring of 2021, the ratio of soybean to corn crop insurance prices was at a historic high of 2.59. In the past, such price ratios produced nearly equal splits of corn and soybean acres. While that wasn’t the case in 2021, concerns and projections of tight stocks subsided throughout the summer, and now the soybean/corn price ratio is nearing the low end of its range.
China Continues to Buy Corn
China is always a big part of the demand for agricultural products, especially soybeans. However, this year we were frequently asked, “What’s going on with China buying corn?” We wrote a bit on the topic (here and here) to shed some light on the issue. While it’s unclear if the purchases are supply or demand-driven issues, an important piece of evidence is to consider how long China continues to purchase corn. For the 2021/22 marketing year, China has, again, been making large corn purchases.
Ag Exports to China on Pace for Record
U.S. ag exports to China are on pace to potentially set a record in 2021. While the current record of $29 billion was set in 2012 and nearly surpassed in 2020, data through October suggested China’s pace for the calendar year was close to $33 billion. Good news, right?
On the surface, yes, China has returned as a major buyer of U.S. commodities. However, many are watching progress toward the Phase 1 targets, which China is likely to miss. This is especially relevant as Phase 1 is set the expire at the end of 2021, with no clear path for what happens next. Remember when Phase 1 was the only thing in the ag news? Now it’s hardly mentioned.
Wrapping it Up
As is the case in most years, a lot has happened and changed over the course of the year, but it sure feels like the last couple have been crazy. From lows to highs, shortages to surplus to shortages, acrimonious debates, and everything in between. We certainly have, as the old saying goes, been living in interesting times. Or perhaps more appropriate is Lenin’s famous line,
“There are decades where nothing happens; and there are weeks where decades happen.”
In pulling together this year’s review, it felt like events that should unfold in five or ten years of time happened within a month. Yet despite the volatility and uncertainty, 2021 will go down as one of the better financial years in the U.S. ag sector. Perhaps this is a sign of things aligning for a longer-term upturn, or perhaps things happened to align just right for a short-term hit. We will have to wait to find out. Regardless, we know that we have enjoyed the ride in 2021 and that agriculture heads into 2022 in the best economic shape in years.
We hope our list can serve as a starting point for your own personal review of 2021. What were the big stories that affected your life? Take a few minutes and make a list, and share it with your family and colleagues, then put it aside for reflection in future years.
Moving forward, we think it’s important to continue to remain curious, improve our decision-making, and cultivate our thinking. If you agree, you should try AEI premium in 2022.