2022 Year End Review
David Thien, AFM, ALC, Broker
The Covid-19 pandemic has had long-term and lasting effects on the entire economy. It has also brought unprecedented levels of uncertainty to the agricultural sector. I expect these effects and uncertainty to continue for several years to come in relation to agricultural production in the United States.
2022 Growing Season
The 2022 growing season was very challenging on all levels of production agriculture. The most impactful challenge from the pandemic was managing input prices. Starting in the Fall 2021 input prices started increasing drastically due to supply chain issues and fears of limited supply of inputs that are produced domestically and around the world. The largest increases in input prices have been in fertilizer and chemicals, with most prices doubling when compared to 2021. The increase in prices has leveled off but remain very high and will impact production costs in 2023.
Producers in the western corn belt, specifically from Des Moines west, dealt with excessive heat and expanding drought conditions during the 2022 growing season. By the end of the 2022 growing season most western locations were 8-11” behind of normal precipitation. Although not a complete disaster, both corn and soybean yields were limited by these conditions and most yields were well below the 5 year average. High commodity prices and crop insurance helped to offset some of the loss of production, but overall 2022 income was reduced significantly when coupled with the higher input costs described above. Drought conditions are ongoing and will likely impact production and marketing decisions in 2023.
At the writing of this report, spot prices for corn and soybeans into Council Bluffs are near $7.00 per bushel on corn and $15.00 per bushel on soybeans. The basis is very strong for 2022 production and is a reflection of reduced yields in the area. Fall 2023 corn and soybean prices into Council Bluffs are $5.75 per bushel on corn and $13.50 per bushel on soybeans. The Fall 2023 prices are very attractive historically, but with much higher input prices and potential for reduced 2023 production from drought, leave very little room for error and have compressed margins.
The saving grace for commodity prices has been very strong demand domestically and from China. Ethanol and soybean crush margins have been at historically high levels throughout 2022 and have incentivized domestic producers to aggressively source corn and soybeans. With potential expansion of E15, Bio-Diesel, and several large soybean crush plants coming on line in the near future, I expect exceptional domestic demand in 2023 which should support prices at current levels. Should the U.S. or South American has any production problems in 2023, both corn and soybean price could move higher in 2023/2024.
During the pandemic land prices have skyrocketed to historic levels. This was due primarily to inflationary fears, limited supply, low interest rates, 1031 exchange money coming into ag. markets, high commodity prices, and very strong farm income in 2019, 2020, and 2021. As an example, within our appraisal business, in 2019 we were using CSR2 values of $95 per point in Pottawattamie County. Now at the end of 2022, we are using CSR2 values of over $190 per point in Pottawattamie County. This rapid increase in land prices is beginning to level off, but remains at historic highs.
Not all farmland enjoyed the rapid growth explained above. Low to medium quality farms, with CSR2 values between 50-60, have been difficult to market as farmers and investors seem much more willing to pay up for high quality. These types of farms have been selling but are seeing CSR2 values between $150-$165 per point. High quality farms in SW Iowa have been selling very well with prices between $190-$225 per point and values between $12,000 to $15,000 per crop acre. Demand for cropland is still very strong and is supported by high commodity prices, 1031 exchange money, and inflationary fears. I expect cropland prices to remain elevated into 2023 and 2024, however higher interest rates and any reduction in commodity prices may have outsized downward impacts to values given the rapid increases seen over the past 2 years.
I anticipate difficult growing conditions in 2023 due to the expanding drought in Nebraska and Iowa. I am optimistic that drought conditions will ease this winter and hope that winter precipitation will provide enough moisture to get the crops starting this spring. Even with good winter precipitation the subsoil moisture in western Iowa is severely depleted and timely rains will be needed during the growing season to produce average corn and soybean yields. The production set-up for 2023 has given producers some pause when considering commodity marketing of expected 2023 corn and soybean production. Crop insurance will play a large role in giving producers some peace of mind when making marketing decisions going forward and will help insure at least break-even income levels.
I expect domestic demand for corn and soybeans to remain strong throughout 2023 due to expanded ethanol and soybean crush capacity. The wildcard on the demand side is China, as they have historically been huge importers of soybeans, but have recently been in and out of the U.S. market. China seems to prefer importing from South American due to geopolitical tensions with the U.S.,but may be forced to use U.S. supplies once South American production has been depleted. This may set up a battle for bushels between China and domestic end users and has potential to support or increase corn and soybean prices into 2023 and 2024.
Overall, I am optimistic for 2023 and 2024 as limited 2022 supplies and potential for 2023 production problems should support farm income and land prices at current levels.