by Brent Gloy and David Widmar
The new year is a great time for reflection and planning. Each year we challenge ourselves by reviewing the previous year’s top stories and pondering the biggest uncertainties, unknowns, and questions that the new year might have in store. There are many benefits of doing this, but we find it helps us think more clearly about the unknowns (see the 2021 list), but it’s also a humbling reminder that it’s impossible to anticipate the biggest unknowns for even a year (see the 2020 list). With that, we present what we think are currently the biggest issues and questions facing agriculture in 2022, in no particular order.
1) Production Expenses
While fertilizer has captured the majority of attention – more than doubling from the decade lows of fall 2020 – the price of nearly every agricultural input has turned higher. The combination of supply chain challenges, general inflation in the economy, along with strong profits and commodity prices has created bidding-up behavior across the board.
The same is likely true for fixed expenses, such as machinery expenses, family living, and labor. These costs will also be higher for producers in 2022; it will just take time to fully capture the effect.
Finally, higher production costs are problematic, but conditions are also rapidly changing. We observed fertilizer expenses jump nearly $100 per acre in a matter of months this fall. Our observation is that decision-makers are really challenged in rapidly changing environments. Will the upward charge in prices- and volatility- abate in 2022?
2) Farmland Markets
Last January, we opened an Ag Forecast Network (AFN) question about the probability of farmland values increasing by more than 10% per Purdue’s summer survey. At the time, we admitted that this seemed like a very large annual increase, but it turned out to be on the low end of the spectrum. Purdue’s June results were 14% higher, and more recent data from Iowa (+29% per December data) suggest the enthusiasm has continued.
Farmland is a topic we closely monitor and frequently write about. While higher farmland values are something most producers can get excited about, a significant fundamental improvement in the farmland market – farm profitability – suggests cash rental rates will likely be pushed higher in 2022.
3) Another Year of Strong Farm Incomes?
The combination of a relatively low cost structure and high commodity price set the stage for a very profitable 2021. In fact, 2021 will be remembered as one of the most profitable years for corn and soybean producers.
Like going to bat immediately following a grand slam in a baseball game, it’s going to be very difficult to repeat the financial performance in 2022 given the soaring cost structure. However, even with higher costs, early looks at 2022 show the prospects of positive economic returns and conditions much improved from the 2016-early 2020 conditions.
At present, we believe “cautiously optimistic” best summarized the 2022 outlook. With most of the costs already written in pen (or nearly so), the biggest determinant of whether 2022 is a good year will likely be whether commodity prices hold or exceed current levels.
4) Grain Stocks
Grain stocks turned higher in 2021 but remain well below the ample or burdensome levels seen in 2019 and 2020. This creates a situation where concerns about short crops could push prices even higher, but where a big crop and even larger stocks at the end of 2022 could quickly leave the market focused on “not enough demand.”
5) China, China, China
While China frequently makes our annual lists, the specifics are unique in 2022. The first issue is the Phase One trade agreement. Without much fanfare or attention, the Phase One trade agreement expired at the end of 2021. It was never clear what would happen at the end of Phase One (regardless of the outcomes), but here we are, and China didn’t meet all of the stretch goals. It’s unclear what happens next, but neither country has returned to Trade War tariff conditions. How long with the informal economic cease-fire continue?
Beyond Phase One, China has been on pace to purchase a record amount of U.S. ag exports in 2021. The biggest surprise has been corn. Can we anticipate China’s 2021 activity to be the new norm?
Finally, China has faced several headwinds in recent years: the Trade War, African Swine Fever, COVID, and now a looming financial crisis. In short, there is not a shortage of things to monitor and watch with China in 2022.
Bonus: Check out how China impacts twelve global commodities, especially corn, beef, and swine.
6) Supply Chains
We were first concerned about supply chains in early 2020, as China shuttered entire cities. We clearly missed the timing, but supply chain disruptions were everywhere in 2021. Will there be relief in 2022?
It’s worth noting the availability bias is often in full force with supply chain problems. Everywhere we look we can find them, but they often get resolved with little attention.
7) The Economy, Obviously
All eyes are on inflation. On the one hand, it’s at the highest levels in decades. On the other, the duration has been short, and conditions are nowhere near the levels observed in the 1970s. Furthermore, it’s unclear how much of the inflation challenges are related to short-term supply chain issues.
With inflation comes the question of what’s next for interest rates, and we’ve been asked versions of these questions at nearly every presentation this winter. In our minds – and we’ve written about this a lot on the Premium side of the site – we think there are three considerations: Will the Fed raise the target on the Funds Rate? If so, how significant of an increase is possible in 2022? Finally, what happens with longer-term rates, such as the 10-year treasury rate?
A lot of attention will be given to the Fed’s decision in 2022, but agriculture – especially farmland – will likely be more affected by longer-term rates, which can move higher or lower without changes in Fed policies.
Finally, don’t lose sight of the long-run implications of economic performance and monetary policies in 2022. If we were writing a long-term list of questions, we’d place this issue towards the top of the list.
8) Policy Priorities
For the last two years, policymakers have been mostly focused on policies surrounding COVID and the economy. With a new year comes the question of what will the White House and Congress be focused on in 2022? Of course, the midterm elections are in play, but it’s worth noting the pandemic and economic recovery efforts might begin to lift.
We plan to unpack this in a future post, but keep in mind that Farm Bill discussions will likely begin. Will ARC and PLC remain? Will there be meaningful efforts toward carbon and carbon markets? Do policies regarding cattle pricing discussion make it across the finish line?
9) Global Drama
Last January, we noted global tension could swell as the pandemic subsided. A year later, all eyes are on China/Taiwan, Russia/Ukraine, and Russian helping the government of Kazakhstan deal with protests. Suffice it to say conditions have gotten tense around the world.
10) Energy
From gasoline to electricity, energy prices caught everyone’s attention in 2021. There was the Texas cold snap, natural gas issues in Europe, and higher prices for crude oil (and all energy) around the world. With the WTI hitting the highest prices since 2014, higher energy prices will be worth monitoring in 2022.
What makes this issue so interesting and the challenge is, perhaps, how there appears to be a tension between decarbonizing efforts but also the challenges of higher energy prices (see Kazakhstan: oil-rich county and higher energy prices).
11) COVID
Will 2022 be the year where we get ahead of COVID? While a surge of cases is underway with a new variant (Omicron) on everyone’s mind, it is worth noting conditions are very different than January 2021 and March 2020. There is the vaccination, but we also know more after nearly two years. Perhaps underappreciated in March 2020 is the role of time, and perhaps the progress we’ve made thus far will accumulate.
Wrapping it Up
We could go on with issues, but you get the point. There is A LOT of uncertainty heading into 2022. As we move forward, it will be important to stay up to date, update your forecasts and assessment of the conditions, and be proactive in managing risks. The good news is that the ag economy enters this period in great shape.
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.
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