Rising input costs cloud sunny outlook for farm income

High commodity prices are fueling a strong farm economy in the Midwest and Plains this summer, but farm lenders worry that rising prices for seeds, fertilizers, fuel and other inputs could dampen farm incomes. short term. “Lenders have reported growing concerns about 2023,” said the Federal Reserve Bank of Kansas City, one of four regional federal authorities to poll bankers every three months on farm finances.

“The agricultural sector is strong right now,” said David Oppedahl, senior business economist at the Chicago Federal Reserve Bank. “Farmers in the Midwest continue to see profits in the current growing season.” So far, input costs are not rising as fast as incomes, he said, but they “could strain agricultural balance sheets in the future”.

The Minneapolis Federal Reserve said pressure from rising input prices increased in the spring and early summer, but producers benefited from high commodity prices. More than 60% of lenders participating in a Minneapolis Fed survey said they expected higher farm incomes in the third quarter of the year, leading into the fall harvest.

In the southern plains, drought was straining agricultural production, especially for cotton, and overwhelming the effects of high commodity prices and crop insurance. “The prairies are stressful for livestock and herds will be down,” a lender to the Dallas Federal Reserve said.

The farm economy “remained strong in the second quarter, but survey contacts reported signs of slowing growth that looked likely to continue in the coming months,” the Kansas City Fed said. A greater proportion of lenders reported significant increases in production spending, and several bankers said livestock feed costs had risen because drought had dried out pastures and hay fields. “High inputs will cause real problems when grain prices start to fall,” said a western Oklahoma banker.

Farmland prices rose despite concerns about rising input costs, market volatility due to the war in Ukraine, rising interest rates and drought. They were 22% higher on July 1 than a year earlier in the Federal Reserve District of Chicago; about 20% higher in the Federal Reserve Districts of Kansas City and Federal Reserve of Minneapolis; and at least 10% higher in Texas, the dominant state in the Federal Reserve District of Dallas.

“At least three-quarters of survey respondents in Illinois, Indiana and Iowa believed farmland was overvalued, unlike respondents in Michigan and Wisconsin, where at least half were of the opinion that farmland was properly valued,” said the Chicago Fed’s AgLetter. But seven in 10 bankers in the survey said they expected property values ​​to be stable in the third quarter, while 25% expected increases.