Ag Insights: Grain

by Kurt Beshore, Jennifer Coolidge, Paul Shipper, on behalf of the Grain Workgroup

A Review of 2023 

Profits remained, grain prices lowering, and changing rate environment 

Profitability for grain operations during the last three years has been extremely strong; some might say there was an unprecedented run of profits, which were gained mostly through higher-than-average commodity prices and significant government payments. While this allowed farmers to build cash reserves and pay down debt, a slowdown of profitability is expected in the near future.  

Grain prices started 2023 on a high note and most of the prices carried for the first quarter, which was the highest quarter of the year. Throughout the year, prices steadily declined, with the exception of a brief high point at the end of June. The trend from the end of June through the end of 2023 was downward, and that trend continues into 2024.  

Interest rates significantly impact grain operations due to operating lines, which tie directly to input costs and the decision of when to sell or hold grain. The Federal Reserve increased the Federal Funds Rate four times in 2023, with each increase totaling 25 basis points. Moving forward with lower grain prices and increased interest rates, grain farmers will need to put pen to paper to decide when, where, and how to market their grain for maximum profits.  

Key Factors Influencing the Industry  

Global market, production costs, US carryout 

South America continues to be an important player in the grain markets, especially corn and soybeans. This spring, there are rumors of lower corn production in Brazil and delayed planting of the Safrinha, also known as second corn. Projections of a reduced South American crop are not currently large enough to offset the increased domestic carry out and likely will not help the sagging corn price. Wheat prices have also decreased as the world market has adjusted to the impact of the war in Ukraine. A new conflict in the Red Sea impacts freight and may increase grain and fuel cost temporarily in some localities. Extreme drought in Panama has reduced shipping through the Panama Canal because of the low water level, causing global disruptions and increasing costs for shipments now being rerouted to rail containers. Fertilizer prices have eased from 2022-23 levels, with nitrogen prices decreasing by 40%, tracking the softening corn contracts.  

USDA estimates 3.6 million fewer corn acres will be planted for the current crop year. Lower corn price should spur domestic use in ethanol and feed, but projections still show a carryout of 360 million bushels higher than 2022-23, which will continue to limit price. Soybean acres are to increase for the current crop year, adding to the already large global supply. Even with increased crush capacity, higher exports and domestic use increases, projected carryout is 120 million bushels higher than the 2023-24 forecast.  

Perspectives and Projections for the Year Ahead 

Tightening margins, stabilizing interest rates, lower commodity prices 

As we move into 2024, grain prices are expected to continue to trend downward, resulting in slimmer margins for grain operations than seen in 2021-22. Global supply levels are forecasted higher than demand for corn, soybeans, and wheat. Brazil continues to hold a significant portion of the world export market for corn and soybeans.  

There are certainly variables in the forecasts that are uncontrollable and difficult to predict, which could impact supply and price levels. Weather is the biggest factor that could cause regional yield differences. As of publishing this report, weather forecasters suggest a wet spring in the Northeast and potential for a drought in a portion of the Midwest throughout summer.  

With the Federal Reserve raising interest rates in 2023 and maintaining those levels into 2024, this has a direct impact on a farm’s operating line of credit rate. At the time this information was compiled, the Prime Rate is 8.5%, compared to 3.5% two years ago. The increase in interest expense is felt on operations that have historically relied on cheap operating capital. Some operations have been able to pay down or pay off operating lines over the last few years, but those that have not taken advantage of strong prices have been feeling the impact of the increased interest cost.  

Crop prices vary for each operation due to various factors including local basis, forward contracting, hedging, and many other risk management tools. Looking ahead to 2024, we continue to see downward pressure in the grain markets. The below figures show USDA’s projections for production, usage, and prices for corn, soybeans, and wheat as outlined in the 2024 USDA Grain and Oilseeds Outlook.  

Figure 1: Corn Supply, Demand, and Price, 2021/22-2024/25 

Figure 2: Soybean Supply, Demand, and Price, 2021/22-2024/25 

Figure 3: Wheat Supply, Demand, and Price, 2021/22-2024/25 

Particularly in these markets, agricultural economist Dr. David Kohl has stated, “It’s not about the size, it’s about being a five percenter.” According to Kohl, these producers are generally five percent better in many areas of their business — such as production, operational efficiency, marketing, risk management, finance, and human resources — when compared to their peers.