On the other side you have a national economy that dictates the flow of input costs on the farm.
In 2021, we are sitting in a “wild” time of commodity prices responding to unclear trends following the COVID-19 pandemic, according to David Widmar, co-founder of Agricultural Economics Insight and former researcher at Perdue University.
On a macro level, 2020 was one of the best years for agriculture in a long while. After the ag economy bottomed out in 2016, net farm income is expected to exceed $120 billion this year. However, swings in the economy are also leading to a lot of unpredictability.
“A year ago, we projected the average price for corn would be about $3.15 a bushel. Now that same measurement says $5.50 a bushel,” Widmar said during an address at the South Dakota Governor’s Agricultural Summit in Sioux Falls July 9.
With a global pandemic and reduced access to the food chain, Widmar said the most likely cause of economic expansion for the ag industry in 2020 was simply direct payments made by the government.
“We have never seen farm payments exceed $35 billion and then we went to $41 billion,” he said.
Even with high payments, Widmar believes agriculture may not be as stable as reported. Agriculturalists are not improving as steadily as needed on the balance sheet. With a drop in both working capital and real debt, producers are struggling to maintain a healthy ratio between debt and income. Now that we are in the beginning part of a strong farm economy, he’d like to see working capital improve in the coming months.
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The real question for ag economy, Widmar said, is whether or not we are in a supply or a demand shock. Situations such as poor overall yields lead to what is known as a “supply shock,” and it normally fixes itself quickly. However, if the economy is in a true demand shock, agriculture could ride high for quite some time.
The biggest indicator of what type of shock we are in are the world’s harvested acres. In a demand shock situation, the world finds more acres to harvest for more food.
“Everyone likes to say farmland is a good investment because we aren't making more, but for an economist, this is troubling because the world’s harvested acres continue to rise,” he said.
In 2020, there were 2.4 billion acres of farmed land as opposed to 1.7 billion in 1960. Widmar said that if we are in a true demand shock, acres will rise in 2021 to meet that demand.
How do exports fit into the story?
Exports are a large part of the U.S. agricultural story, and recently, China has been the No. 1 player. Even with a trade war during the Trump administration, China remained the top priority for exports, and the country continues to purchase six out of every 10 shipments of exported soybeans.
Widmar expects corn exports to follow. China’s corn demand outpaced domestic production for the first time in 2020. Perhaps a rising trend in corn products will allow for a whole new corn market moving forward.
“The question that none of us know the answer to is: ‘What is this going to look like in a few years?’” he said.
Things like beef consumption are also outpacing production in China with the country now purchasing 30% of the world’s beef. Should China attempt to produce all the food the country currently consumes, 400 million farmable acres would be needed. China roughly has 300 million and hasn’t increased that amount in roughly a decade.
“We can speculate a lot as to why that may be the case, but they have not expanded their production,” Widmar said.
The overall economy
While the U.S. economy is recovering faster than expected out of the pandemic recession, Widmar said there are concerns on how stable this recovery period is.
“Everything was going wrong a year ago for agriculture and the U.S. economy and now everything is going right in both,” Widmar said. “We are all living through an experiment here.”
The big picture looking ahead now becomes how stable the supply chain is — something producers are well aware of after shortages of supplies such as fertilizer, lumber and steel.
Because of this, Widmar said producers need to be careful of the cost of production in 2022, something he expects to rise dramatically as companies typically react a year behind as commodity prices rise.
“Some of these are supply chain issues with broad trends, but there are a lot of moving pieces out there,” he said.
At current estimates, Widmar said he expects the per-bushel cost of production of corn to be about $4.50.
To keep yourself grounded, Widmar said you should ask yourself these main questions:
What kept you awake in May 2020? What’s the temperature of the room? What costs can you control in 2022? And, what decisions can you make that improve your position in 2026?
Widmar said asking yourself those four main questions will help ground you. The post-pandemic life of agriculture is not a promised boom period, he said, however, there is no reason to not jump on the wave of optimism rolling through the industry.
