When asked about the outlook for agricultural commodities, I simply go back to the most basic economic equation – supply and demand. For many decades, the world has been able to produce more agricultural commodities than what there was demand for. In the past decade, this has fundamentally changed. For each of the three major crops grown in the U.S. (corn, soybeans and wheat) the demand side of the equation has been phenomenally strong and the world now struggles to keep up from the supply side. Until this picture changes significantly, I will remain bullish on all three of these crops. There are certainly nuances and different factors driving each of the different crops, but at a very high level I believe that strong prices will persist for as long as we see this exceptional demand remain in place.
World corn production will likely be limited by a potentially weaker-than-usual South American crop as well as reduced total acres due to the relatively high cost of nitrogen. Of the three main crops it appears that for this year corn will likely have the most catalyst to the upside. International demand for U.S. corn was dampened last fall by a very strong U.S. dollar, but the U.S. dollar has come down significantly from it’s highs and this should be very supportive to improve U.S. corn exports in 2023.
Argentina is struggling with their worst drought in over six decades and this is likely supportive for soybean prices in the coming year. This is, however, at least partially offset by a very strong Brazilian crop. Over the intermediate term, the renewable diesel initiatives could prove to be very important in the soybean market as big oil and big ag come together to add what is estimated at over 550 million bushels in new soybean crushing capacity by 2026. Renewable diesel is 100 percent substitutable for traditional diesel and this again is likely very supportive to the soybean market out to the intermediate term.
The wheat market continues to be impacted by the ongoing war in Ukraine which unfortunately does not seem likely to be resolved anytime soon. Global supplies remain tight and a good portion of the U.S. wheat acres face drought concerns. A weakening U.S. dollar is also very relevant and helpful to U.S. wheat exports.
On the input side, farmers are glad to see some lower prices on the chemical side, especially for 2-4-D and glyphosate and many believe that most of the drop we would see here has already happened. Fertilizer prices are well of the highs of the spring of 2022 and continued to drop throughout the month of March. Despite these drops, fertilizer remains stubbornly high when compared to the spring of 2021. Energy prices had seen a big reduction with WTI crude oil dipping below $70/barrel but have now jumped back above $80/barrel with the recent OPEC production cuts. Interest rates have become much more of a key consideration with the Prime rate of interest now at 8%. Managing each of these primary inputs will be absolutely key to farm level profitability in 2023.
So, what will 2023 look like for ag producers in the U.S.? I remain optimistic and bullish. Timing of input purchases and crop sales will be key. I’m reminded of my high school algebra teacher who always admonished the class: “if you do something on one side of the equation, be sure to do it on the other side of the equation as well.”
Lance Albin is the president of UMB Bank’s Agribusiness Division. He can be reached at [email protected].
