The volatile economic situation requires intense financial management

High production costs, rising interest rates and volatile commodity markets create a conundrum for farmers as they prepare to harvest the 2022 crop and start making plans for 2023.

Much of the challenge stems from issues beyond farmers’ control, said Aaron Smith, associate professor and extension economist at the University of Tennessee.

“Input prices continue to be influenced by supply chain disruptions, labor shortages, inflation and high energy prices,” Smith said. “Fertilizer and diesel prices have been boosted by Russia’s invasion of Ukraine.”

He said that some costs, like urea, have gone down a bit. “But substantial volatility and uncertainty remains in the market, and input prices are expected to remain high through 2023.”

The weather could make things worse. “The potential for an active hurricane season in the Gulf could quickly add to the problems in fuel and fertilizer markets,” Smith said.

He suggests that producers look for ways to minimize risk, without sacrificing profit potential.

“At county meetings, we talked about taking a little risk out of buying inputs,” Smith said. “Try to avoid cutting your margins.”

He said fertilizer prices, although costs have come down, remain significantly higher than in recent years. “Think about how many bushels of sales you want to price to mitigate the risk of buying inputs. It will also depend on commodity prices, but try to mitigate risk. The key is to avoid paying high prices for inputs and then having to sell products at lower prices. It’s an input hedge to avoid huge margin squeezes. He adds that when producers buy inputs can make a difference in their approach to managing price risk.

Rising interest rates

Added to these rising costs will be the end of low interest rates, at least in the short term.

“The cost of capital is a growing concern for producers as the Federal Reserve raises interest rates to combat 40-year highs in inflation,” Smith said. “Accessing and pricing capital for 2023 could be a major challenge for producers with the combination of high interest rates and expensive inputs. Producers should contact lenders early to discuss financing options for 2023. See what makes sense.

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Commodity prices, including soybeans, have been falling since May and June, which has squeezed producer margins or turned them negative, negatively affecting producers who did not take advantage of price protection.

He said medium- and long-term credits with fixed interest rates are likely to be in place for most producers. Operating loans with variable interest rates, however, could be worrying.

“Consider strategies to secure substantial operating capital savings for 2023,” Smith said. “Variable interest rates present risks of rising rates. Obtaining a fixed rate loan for operating costs could mitigate rising interest rates for some producers. »

All funding alternatives should be considered. Input suppliers, for example, could be sources of operating loans. Producers need to crunch the numbers to find the lowest cost alternative to securing financing in 2023.

Volatile markets

Cost and market uncertainty make 2023 budgeting a complex issue. Smith said producers should consider the potential for weaker commodity markets. “Crop prices have fallen dramatically since early June,” Smith said. “For example, wheat futures are now below pre-Russian-Ukrainian war levels.

“Production estimates in the United States and globally have increased over the past two months due to improved weather forecasts; however, much of the decline in commodity prices is due to forces outside of agricultural production – economic uncertainty/recession concerns, a strong USD (dollar index) is at its highest level since 2002, which create headwinds for exports.

He said cotton, corn and soybean prices weakened. “The price collapse has squeezed producer margins or made them negative, negatively affecting producers who did not take advantage of price protection in May and June.”

Smith said crop insurance prices provide some basic protection. “Going forward, projected crop insurance prices for corn at $5.90, cotton at $1.03, and soybeans at $14.33 provide a baseline level of protection that exceeds offers. current futures market.”

Aggressive Marketing Strategies

He said growers might want to be a bit more aggressive with marketing, looking ahead to 2023 and 2024. Uncertainty remains for 2022 crop production, Smith adds, so markets will remain in flux.

“Producers need to weigh the price they have set against projected production, storage availability, and potential marketing strategies that provide price protection (up or down). Volatility is expected to remain a feature of commodity markets during these uncertain times.

“It will be interesting for growers to consider what 2023 and 2024 marketing opportunities they are comfortable with. We get massive swings in commodity markets. Familiarize yourself with marketing tools or find a knowledgeable broker. We want to be a bit more aggressive than usual with the market time horizon. If producers do not act, opportunities pass quickly.

Management practices

Smith said the uncertainty also demands careful management consideration. “Evaluate production costs. Always consider farm by farm and field by field to determine where inputs get the most bang for their buck.

He said scaling back can be a dangerous business and risks losing production and profits. “But growers should identify fields where they can justify backing off a bit without sacrificing yield.”

He adds that sticking to some basic principles is crucial in these uncertain times. “Soil Testing. Knowing pH levels in the field. Adjusting pH is a reasonably inexpensive way to improve pasture fertility.

“These types of management practices are extremely important in tough markets. Get the most out of expensive inputs. Know which fields provide the best input responses. Evaluate the materials available to you.

Smith said access to certain nutrients can be limited. Alternatives like poultry litter could fill some gaps. “Poultry litter is a good option in conjunction with commercial fertilizers. Find out where you can get it and where the best place is to apply it.

An uncertain economy, volatile markets and high production costs challenge growers’ management skills, Smith said. Monitoring costs, seeking out favorable pricing opportunities, closing financing deals earlier than usual, and taking advantage of short- and long-term marketing opportunities will improve the odds of managing the chaotic economic climate.

Geraldine L. Melton