11 Questions Facing Agriculture in 2022

by Brent Gloy and David Widmar of Ag Economic Insights

The New Year is a great time for reflection and planning. Although it’s impossible to anticipate the biggest unknowns for even a year, based on what is known today, here are 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, and strong profits and commodity prices have 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 impact.

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 at 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 - 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 prices, 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 of 2021 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 over the 2016 to early 2020 conditions.

At present, we believe “cautiously optimistic” best summarizes 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 will 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.

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. 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, we think there are three considerations: Will the Fed raise the target on the Funds Rate? If so, how significantly 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 made to the Fed’s decision in 2022, but agriculture – especially farmland – will likely be more impacted 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.

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, and 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.

EDITOR’S TAKE:

Informative summary of the major issues facing agriculture in 2022. Gloy and Widmar put them in no particular order, but there are a few that stand out as more significant and immediate. For instance, let’s lump inflation, the overall economy and rising input costs into one category and put it at the top of the list. Whether we’re talking to consumers, farmers or other businesses, inflation is now impacting almost every spending decision. The highest inflation rate in over 40 years is being discussed far and wide.

Other topics that top the list in our opinion, are trade/commodity prices/farm income. While inflation may eat away at some of the farmer net income, the fact that they had such a strong 2021 and assuming the U.S. continues to push for additional trade deals, 2022 looks like another very good year for farmers.

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