US grain’s third super-cycle is coming to an end – Farm Credit of America

Rising input costs and interest rates mean last year’s US grain production could represent the peak of modern agriculture’s third super-cycle, according to a Farm Credit Services of America senior vice-president.

Speaking at Peoples Company’s Land Investment Expo in early January, Jim Knuth described recent profits of $500 to $700 per acre for corn and soybeans as market highs supported by unprecedented levels of post-covid government support. Although land values have risen, he noted, more cash and collateral are being required for purchases and his firm already finds itself able to finance less debt per acre for its clients.

“The first cycle was the late 1970s. The second was the ethanol boom and the third cycle is today. If that is true, as we go into 2023 and beyond, we are navigating the road from the peak,” he said. “How long, how short? How steep, how gradual? We don’t know. That will play out in the months and years ahead. Today, we’ve just experienced our best margins ever.”

Farm Credit Services of America manages $35.7 billion in credit extended to 16,000 farmers, ranchers and agribusinesses in Iowa, Nebraska, South Dakota, Kansas and Wyoming. The farmer-owned co-operative was established in 1916 and is the largest lender to production agriculture and also manages the US’s largest crop insurance agency.

Knuth leads Farm Credit Services of America’s Iowa operations. He noted that just as it took about two years for corn production to ramp up and meet demand from ethanol plants built in the late 2000s which then became oversupplied, developments since government support was increased in 2020 suggest a margin squeeze is ahead.

A related lesson of the ethanol boom applicable to current markets, he added, is that declining commodity prices are unlikely to be matched by declines in input costs in the near-term.

“2023 will be another profitable year for grain production agriculture, but we will not enjoy, more than likely, those record margins. Our costs and other issues are starting to squeeze our margin,” he said.

Whereas the decline from the ethanol boom was cushioned by low interest rates, Knuth noted, the current environment is more challenging for lenders.

“The problem with today’s environment; the math won’t work. Our interest rates are higher, not lower. Most of the land debt we’ve already put on longer-term amortizations,” he explained. “As we stand here today, we cannot have this easy solution, restructuring debt will be very difficult.”

The current “rising tide lifts all boats” dynamic, he said, also makes it harder for lenders to identify top-tier operators and structure loans that can sustain payments in traditional bands of 30-35 percent of gross farm income over periods of 15 to 20 years, not just during market peaks.

“Most lending and credit mistakes are made at the top of the cycles. A lot of times everybody jumps into agriculture. A lot of times people who don’t understand agriculture, they get aggressive and optimistic. Sometimes our producers get aggressive and optimistic,” he said. “We don’t actually learn any new lessons; we just learn the same lessons all over again.”