2023 FARM ECONOMY RECAP
Macro Policy
A "soft landing" is looking more likely for the U.S. economy in 2024 than at the start of 2023, but the high interest rate environment affected some landowners more than others. The banking sector challenges we experienced in 2023 could change the way farmers seek finance moving forward.
Economic growth exceeded expectations.
Economic growth, as measured by the percent change in real GDP, has remained relatively strong despite higher interest rates. Once thought to enter a recession in 2023, the U.S. economy instead grew nearly five percent in the third quarter.
Consumer spending is the primary driver of this growth. While growth slowed in the fourth quarter, most experts agree the Fed will achieve the soft landing they were aiming for and begin to cut rates by mid-2024. However, the growing federal debt remains a concern.
NOT-SO-FUN FACT
The national debt relative to GDP is the highest it's been since World War II.
IMPORTANT NOTE
While the recession question has lessened, the widening federal budget deficit is pressuring lawmakers to tighten spending in 2024. One example of this is the Fiscal Responsibility Act passed in 2023, which is expected to limit future overall spending. Another is the looming federal shutdown currently under negotiation that could affect USDA programs.
Banking blunders shifted the way farmers finance.
In 2023, the ability of the U.S. banking system to navigate economic uncertainties was pushed into the spotlight. The U.S. banking system faced multifaceted challenges that continue to reshape the financial landscape today. Without getting too deep into the intricacies involved, there is a majority consensus that the dynamics between alternative private credit and public fixed income is evolving.
This evolution involves an interplay of factors:
- An upwards shift in interest rates
- The injection of a substantial amount of money into the economy
- Tightening restrictions among traditional financial institutions
From a macro policy standpoint, the federal government played a pivotal role in this trend. The resilience of banks emerging from the pandemic was attributed not to their inherent capital strength, but to the extensive support provided by taxpayer-funded initiatives. This external assistance played a crucial role in safeguarding financial institutions.
BOTTOM LINE
Many experts predict the monetary policy events in 2023 to influence a shift towards “debanking”, meaning the significance of the private credit sector will increase. This will provide more financing options for American farmers and ranchers. However, education and nomenclature will be instrumental in choosing the right option for you.
Inflation vs. Interest Rates
To curb persistent inflationary pressures, the Federal Reserve implemented a series of eleven interest rate hikes since March 2022, constituting the fastest rate increase in the Fed's history and resulting in the highest federal funds rate since February 2001.
The latest Consumer Price Index (CPI) for all items indicates a year-over-year inflation rate of 3.1 percent.
The core inflation rate, excluding food and energy prices, stands at four percent, down from 4.1 percent from the third quarter of 2023.
In the farm sector, some relief was reported, with farmers reporting input costs and supply issues have increased at a much lower rate compared to 2022.
2023 FARM ECONOMY RECAP
Farm Legislation
It’s official. The 2023 farm bill is now the 2024 farm bill, after a stopgap spending bill passed in November included a one-year extension with additional funding for select programs that expired on September 30. A whirlwind of events happened in the realm of farm legislation in 2023, but several key pieces of the puzzle could shape the industry in 2024 and beyond.
The Increasing Land Access, Security, and Opportunities Act
New program could lower barriers to land ownership.
The Increasing Land Access, Security, and Opportunities Act is a $300MM program proposed in the new farm bill that aims to address land access, market access, and capital access issues that underserved farmers, including beginning and young farmers, face while trying to start up their farming operations.
Updating reference prices is easier said than done.
The 2018 farm bill has a rule that adjusts reference prices used for certain crops in the Agriculture Risk (ARC) and Price Loss Coverage (PLC) programs. If the average price of crops over the last five years is higher than the set price, payments are based on the higher "effective" reference price.
In 2024, corn and soybean payments might qualify for higher effective prices, but these adjusted prices are expected to be lower than the projected prices.
U.S. Secretary of Agriculture Tom Vilsack estimated that updating reference prices for every commodity would cost roughly $20 billion over the next ten years.
And while major farm groups, like the National Corn Growers Association and the USA Rice Federation, have expressed their support to increase reference prices, other industry groups have voiced their opposition, saying these programs do not cover diversified operations that also need support in times of volatility.
Crop insurance accessibility is also an issue.
According to surveys by the National Corn Growers Association, crop insurance is among the most important titles for farmers in the 2023 farm bill. But similar to reference prices, accessibility is a concern. The American Farm Bureau Federation has an expansion of insured commodities among their top priorities for the 2023 farm bill, and strongly opposes any changes that would place the burden of required production practices on farmers.
Conservation will be part of the conversation.
Perhaps one of the most divisive parts of the farm bill, the $20 billion allocated to climate-smart agriculture is predicted to be the source of significant debate. Many groups are interested in improving and increasing access to conservation programs.
DID YOU KNOW?
More than half of farmers who apply for programs like the Environmental Quality Incentives Program (EQIP) or Conservation Stewardship Program (CSP) are rejected. Not only does this deny access to those farmers, but also discourages others from attempting to apply at all.
All too often, farmers are turned away due to funding issues, which shows how high in demand these programs are. There is a backlog of applications for many programs due to a mixture of USDA understaffing, sheer volume of applications, and other bureaucratic inefficiencies. Some representatives are hoping to increase funding and paint with a wider brush, giving a range of farmers greater access to existing conservation programs.
FARMERS AWARDED EQIP CONTRACTS
(Percentage of total applicants between 2010 and 2020)
FARMERS AWARDED CSP CONTRACTS
Source: United States Department of Agriculture (USDA), Economic Research Service (ERS), Foreign Agricultural Service (FAS)
But budget is the biggest barrier.
Farm bills operate on a five-year cycle, with a projected budget scored by the Congressional Budget Office (CBO). The 2018 farm bill had a $867 billion budget for fiscal years 2019 to 2028, with 99 percent allocated to four mandatory titles: Nutrition Programs, Crop Insurance, Conservation, and Commodities.
The new CBO Baseline update for fiscal years 2024 to 2033 sets a budget of nearly $1.5 trillion, with the Nutrition title projected to represent 84 percent. The record-breaking price tag comes with many hesitations on both sides of the aisle, as the national deficit reached $1.7 trillion in 2023.
2023 National Deficit
2023 FARM ECONOMY RECAP
International Tension
On the global front, several events in 2023 heightened geopolitical tensions. The resolutions of most of these events are yet to be determined, but here is a quick overview of three geopolitical events in 2023 and how they could impact American agriculture in the coming years.
Ukraine and Russia
The ongoing conflict between Ukraine and Russia has severely disrupted the global grain trade, particularly impacting the Black Sea Deal, which expired on July 17, 2023. Russia's refusal to engage in a new deal and hostility towards Black Sea trading routes, including attacks on Ukrainian ports, has allowed Russia to benefit from global wheat and fertilizer trade.
Despite efforts by the United Nations and Turkish President Recep Tayyip Erdogan to mediate, no resolution has been achieved. In response, Ukraine has sought alternative export routes, collaborating with neighboring countries and receiving EU support to subsidize grain delivery costs to European ports. But the conflict's logistical challenges have led to increased shipping expenses, impacting farmers' margins.
Additionally, the EU's support has faced resistance from some member states, including Poland, Hungary, Romania, and Slovakia, which have banned Ukrainian grain to protect their markets. Ukraine plans to pursue compensation through the World Trade Organization by suing these countries.
Israel and Palestine
The Israel-Palestine conflict holds potential indirect implications for U.S. agriculture. Global economic conditions may be influenced by instability in the Middle East, affecting international trade, commodity prices, and market stability for U.S. farmers. Fluctuations in commodity prices, particularly in oil and gas, may influence farmers' input costs. The conflict could impact U.S. agricultural exports to the Middle East, leading to changes in trade policies or restrictions. Changes in diplomatic relations related to the conflict may affect international trade agreements, influencing agricultural trade dynamics. The specific impact on U.S. farmers will depend on the conflict's duration, intensity, and broader economic implications.
U.S. and Mexico
The U.S. and Mexico have officially appointed delegates to a third-party panel to determine a resolution to Mexico’s plan to ban GMO corn by the end of January 2024. Canada, who shares the concerns of the U.S., has elected to participate in the panel as well, echoing sentiments that Mexico’s decision is not scientifically supported and has the potential to disrupt North American trade markets. A resolution is expected in the summer of 2024.
2023 FARM ECONOMY RECAP
Trade Balance
Global macroeconomic events combined with a strong U.S. dollar led to a decline in U.S. farm exports as our farm imports continue to grow. This has created a widening trade deficit that the U.S. farm sector has not experienced before.
One major event that happened in 2023 is the agricultural trade balance in the U.S. fell into a rare deficit in 2023. Several factors contributed to this, including greater domestic consumption, higher demand for imported commodities like coffee and wine, and a strong U.S. dollar that is making us less competitive in a global market.
Soybeans, soybean meal, and dairy products are the main drivers of the $5.5 billion reduction in U.S. agriculture exports. A combination of low U.S. production, competition in South America, and high domestic demand has reduced the amount available for export.
U.S. AGRICULTURE TRADE
(billion dollars)
Source: USDA, ERS, FAS analysis and forecasts using data from U.S. Department of Commerce Bureau of the Census