US farmers sound note of cautious optimism despite inflation

US farmers of small- to medium sized farms – defined as less than 2,000 acres and 2,000 to 5,000 acres – have said they are cautiously optimism about their expectations on profits.

Some 60 percent of respondents to a McKinsey & Company survey said they believe profits will hold steady or experience growth in the next 24 months, despite supply chain disruption, high energy prices and soaring inflation that has had a substantial impact on the price of inputs such as fertilizer.

McKinsey surveyed more than 1,300 US row- and specialty-crop farmers in May 2022, the results of which were released on September 23.

“That optimism is driven by a steady uptick in crop prices,” said the Voice of the US farmer in 2022 report. “With inventories of core commodities at five-year lows, asking prices have been soaring. Looking ahead, farmers expect demand to remain strong – nearly 65 percent believe crop prices will trend upward through 2024.”

This is despite the fact 79 percent of respondents said ongoing increases in the price of inputs presents the biggest risk to their profits in the next two years. Fertilizer prices have already risen by 71 percent, while crop protection inputs prices have climbed 30 percent and the price of labor has increased by 17 percent.

In order to cope with the changing costs outlook, farmers are altering purchasing behavior to acquire inputs at an earlier stage and are focusing on yield-improving products and technology, as well as leaning more heavily on agtech.

“Nearly 55 percent of large farms today use farm management systems and more than 50 percent of large farms use some form of precision agriculture hardware. Nearly a quarter of small farms use this technology or intend to use it over the next two years,” said the report.

“Automation, robotics, and electrification are also catching on. The larger the operation, the greater the interest in such technologies.”

The increasingly important role agtech is carving out for itself in the food production space was also demonstrated by record-breaking deal and fundraising activity in the venture capital segment last year, which recorded total financing of more than $51 billion in 2021.

With virtually no food production, beverage business or agribusiness insulated from the impacts of the current macroeconomic climate, it is encouraging to see optimism among farmers that they are not expecting big losses.

If US farmer profits can hold steady or even experience growth in the next two years – as some respondents suggested could occur – it will be an additional boon for the asset class and its defensive characteristics.