By: Brent Gloy and David Widmar
With only a handful of days remaining, we are stepping back to review the stories that had the biggest impact on the U.S. farm economy in 2022. In no particular order, here is the list:
Russia Invades Ukraine
Perhaps the biggest story of the year, the late February invasion was almost as surprising as the Ukrainian’s resilience. The biggest implication for most of us has been supply shocks. From grain to energy and fertilizer, global markets have been navigating port access, sanctions, and price caps. For example, wheat prices soared on news of the invasion but have now fallen to near pre-invasion levels. To add further turmoil and intrigue, but most likely related to the conflict, the large Nord Stream underwater natural gas pipelines mysteriously blew up in late September. While many challenges will linger into 2023, here’s to hoping the situation improves.
Farmland Values Soar
There may be anecdotal evidence of farmland values increasing at a slower rate over the last few weeks or months – particularly where yields were affected by drought conditions – but 2022 gains will likely be a high-water mark for farmland value gains. In Indiana, values were 30% higher between June 2021 and June 2022.
So-Long Fiscal Easing
It became difficult to keep track of how many 75-basis point hikes the Federal Reserve announced this year (four), but the message has been clear, “so-long cheap money.” The Fed funds rate started the year near 0% and is now pushing 4%. Not only did we part with low interest rates, but also stability and reasonable expectations about the future. In other words, 2022 has been marked by higher rates, but volatility and uncertainty also entered the game.
The Fed’s other – and less mentioned – tool was also activated in 2022. At $95 billion per month, the Fed is working to shrink its balance sheet as well. The pace might seem big given the billion-dollar magnitude, but it will take until early 2027 to get the balance sheet to pre-pandemic levels.
U.S. Economy Avoids Calamity
It always takes a while to reconcile the data – and the Fed’s tools have long and variable lags – but in 2022, the U.S. economy avoided a major collapse despite the Fed’s actions. For instance, unemployment remains historically low, and the U.S. dollar remains strong. This is one of those cases where if you had known the Fed’s 2022 actions a year ago (375 basis points of increase through November), few of us would have expected that other economic conditions would have held up so well. All that said, no bets for 2023.
Farm Income Stays High
The final tally for 2022 farm income won’t be known until late 2023, but the early estimates reveal that 2022 is poised to be another historically strong year in the farm sector. This, of course, follows strong incomes in 2021. The rising financial tides didn’t affect every sector or region the same, but this is overall certainly a positive story in a year dominated by rising production costs and uncertainty.
Government Payments Plummet, Ad Hoc Still Dominates
It was just two years ago that we wrote about record-high direct payments. In 2022, direct payments returned to the low end of the range observed in recent history, but ad-hoc continues to account for a majority of funding. We’d anticipate this being a major issue and consideration for the ongoing 2023 Farm Bill negotiations, but, hey, it’s politics.
Speaking of Politics
The mid-term elections were held, and the Republican party picked up enough seats to claim the majority in the House of Representatives. In perhaps a mild surprise, the Democrats retained control in the Senate. This setup will be interesting to watch as a new Farm Bill will be developed in 2023.
Record Wheat Prices
Spurred by concerns about “feeding the world” after the Russian invasion of Ukraine, wheat prices reached all-time highs by several metrics. First, farm-level prices hit $10.50 per bushel in May, the highest ever observed. Second, crop insurance guarantees for winter wheat hit an all-time high of $8.79 this fall.
Futures Markets Go Haywire
It wouldn’t be fair to say futures markets “broke” in the spring of 2022, but they certainly didn’t function normally. Especially nickel. Closer to the farm, grain producers wanting to forward contract or sell into the cash markets found it difficult to get a quote as commodity prices soared.
Cash Basis Goes Wild
For some producers, especially in the Great Plains, their marketing plans got a boost (or a bust) as the cash basis went wild this fall. The drought and transportation issues no doubt played a role. It will be interesting to see how long it takes to return things to a more normal pattern.
Drought Expands into Great Plains
There is always a drought somewhere, but in 2022, conditions worsened for the Great Plains. Take a look at how the drought monitor changed over the last year (below). This contributed to the cash basis issue, as well as low yields and hay/forage production. While the farm economy overall has been positive, the weather has created another challenge and uncertainty for many.
Ending Stocks Remain Tight
The U.S. supply and demand story for corn and soybeans has resulted in tighter grain stocks at the end of 2022. Notably, the corn crop was below-trend for the fourth consecutive year. That’s right, it’s been 4 years since we went above trend.
China On Pace For Another Record
The “Phase One” deal is long behind us, but China continues to make large purchases of U.S. ag goods. Some of the surge is driven by high commodity prices, but also China continues to buy corn and larger quantities of beef.
Production Expenses Continue Higher
Fertilizer has been the poster child for higher ag production costs, but nearly every cost category increased this year. In some cases, the situation was driven by strong commodity prices and the prospect of profitability (cash rents, farmland values), and in other cases, it was geopolitical or macroeconomic factors that pushed costs higher. Still, there is no doubt that 2022 was among the most expensive ever planted in the U.S.
Crushing Plants and Slaughterhouses
We lost count, but it might be a tie between the number of soybean crushing and meat processing facilities announcing plans to expand or build in 2022. It’s unclear how many of these projects will break ground and eventually open, but it’s certainly a “sign of the times.”
It took Congressional intervention the second time around, but the threat of a railroad strike loomed large twice in 2022.
Mexico Gets Serious About GMO Ban
It started in 2020 when the President of Mexico issued a decree to phase out GM corn and glyphosate by 2024. This fall, the situation turned serious as it seems that U.S. corn exports to Mexico – even those for livestock feed – might be subject to the ban. If 2024 feels like a long way away, remember it’s just one corn planting season, as next year’s harvest will be exported in the 2024 calendar year.
Cell-Cultured Meat Approval
In November, the USDA approved the first cell-cultured food for human consumption. It will likely take years – if not decades – to unpack the potential effects of this trend.
A Rocky Relationship
Chinese demand is key to many agricultural products. To say the relationship between the U.S. and China is strained is perhaps an understatement, particularly regarding Taiwan. Things got tense when House Speaker Nancy Pelosi visited Taiwan. Now China has its own protests over COVID policies. Things will most likely continue to be “fluid” in 2023.
Technological Change Hits Home
Maybe it’s just us, but it seems we’ve seen lots of technological innovations implemented in society. From a new vaccine based on a technology (mRNA) that most of us hadn’t even heard of to the new AI ChatGPT that writes like a human.
It’s always a bit humbling to step back and wonder if technology and AI will eventually replace you. We ponder it at AEI and think we’ll be busy for at least another year…
Wrapping It Up
While these year-in-review articles are fun to read, we challenge you to use this as a jumping-off point. What are the big stories for you in 2022? What lessons can be learned?
It’s also interesting to compare this list with our past “year in review” posts – which date all the way back to 2014!- to see what has changed, and what has not.
As we move forward, we think it’s important for all of us to continue to remain curious to improve our decision-making skills. If you agree, you should try AEI Premium in 2023.