Economic slowdown to weigh on ag through 2023
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By DANIEL GRANT
FarmWeek
The economic outlook for agriculture in the second half of 2023 appears quite similar to what farmers experienced the first six months of the year.
Inflationary pressure and slower economic growth will likely maintain pressure on farm margins, according to Nathan Kauffman, senior vice president of the Federal Reserve Bank of Kansas City and Omaha branch executive.
“I’d describe the economy as having slowed recently after some sharp gains in 2021 and 2022,” Kauffman said during a webinar hosted by the National Pork Board. “It happened alongside a sharp increase in interest rates and ongoing inflationary pressure that’s proven to be challenging.”
After the U.S. gross domestic product increased 6% in 2021, it slowed to 2% in 2022 and is projected to grow by just 1% this year and 0.5% in 2024.
“It has pretty far-reaching impacts felt across a lot of segments of the economy, including ag,” Kauffman said of the slowdown. “It’s not to suggest a recession is imminent. But there’s a certain amount of trepidation among businesses (moving forward).”
Farmers are feeling the effects from tightening margins due to a double whammy of lower commodity prices and higher production costs amid the economic slowdown.
Commodity prices have fallen from 2022 highs by 30% to 40% for hogs, milk and wheat; and by roughly 20% for corn and soybeans. USDA earlier this year projected U.S. net farm income could drop nearly 16% in 2023 compared to 2022.
Meanwhile, USDA estimates farm production expenses could climb 4.1% this year to $459.5 billion. Interest expenses and livestock/poultry purchases are expected to post the largest gains this year.
“The scale of increases for interest rates has a significant impact on producers that have a large amount of borrowing or leverage relative to their operations,” Kauffman said. “It’s been a significant adjustment for businesses.”
The Federal Reserve raised the federal funds rate 10 consecutive times from the spring of 2022 until a pause last month to a range of 5% to 5.25%.
And with inflation still well above the Fed target rate of 2%, rates could remain high.
“The primary goal with interest rates is to reduce inflationary pressure,” Kauffman said.
On the bright side, many farmers entered the economic slowdown in a fairly strong financial position. But some are quickly burning through equity.
“Even though (USDA) is expecting a slight pullback in farm income for 2023, it’s still quite high in an historical context,” Kauffman said.
“And, from 2021 to 2022, we saw some pretty dramatic increases in farm real estate values,” he said. “This would suggest there’s a lot of producers in strong positions because they have high levels of equity to draw on.”
Farm loan delinquency rates recently remained at historical lows, with a dip near 1%, after steadily rising in the years heading into the COVID pandemic, he said.
This story was distributed through a cooperative project between Illinois Farm Bureau and the Illinois Press Association. For more food and farming news, visit FarmWeekNow.com.
