The beginning of 2022 has seen quite a few challenges for the American economy overall and specifically the agricultural industry. Escalating inflation and interest rate hikes by the Federal Reserve have hinted at continued high costs for everything from daily expenses to business supplies and employee wages. A third wrench was thrown into the mix with the Russian invasion of Ukraine. Those two countries supply roughly 30% of global wheat exports, 20% of corn exports and more than 70% of the world supply of sunflower oil. The associated disruption has exacerbated already strained supply chains.
Let’s dive into how rising interest rates, high inflation and geopolitical conflict are impacting food, fertilizer and fuel – key factors for the agricultural industry.
Cash crops and commodities prices have been steadily increasing over the past two years, and the latest USDA study shows that the war in Ukraine sent them soaring even more with wheat prices rising almost 110%, corn and vegetable oil more than 140% and soybeans up 90%. On the surface, this seems like only good news for U.S. farmers, but there are two sides to the coin. While these soaring prices are great for farmers growing and selling the product, increased prices are a major thorn in the side of those who need grain for livestock feed. These increased expenses will have a big impact on the bottom line for farmers.
Both Russia and Ukraine are key suppliers of fertilizers and fertilizer components. The current conflict is worsening fertilizer shortages. This may not prove an issue for the current growing season, as most farmers have already purchased what they need, but if the conflict drags on and supply chains are disrupted in the long term, farmers may encounter difficulties in getting necessary product for the 2023 season and beyond.
A third impact of the current geopolitical climate is that fuel prices have also spiked. Russia is a global supplier of oil, and recent weeks have seen consumers — and farmers — getting hit where it hurts: their wallets. Farmers have no choice but to adjust for these rising prices in their spending plans, as they require fuel to run their operations.
It might seem like the current environment is setting farmers up for failure, but that isn’t necessarily the case. These factors make it imperative for farmers to revisit their business plans and create financial buffers to allow for potential unforeseen price increases and expenses. Farmers are innovative and adaptive by nature, we are confident with the proper planning they will be able to find ways to adjust.
The other silver lining here is that while much of the U.S. economy might suffer during volatile or even recessionary environments, the agricultural industry tends to thrive. Export markets can be very active as other countries turn to the U.S. to fill gaps in agricultural commodities supplies and farmers are often able to charge more for their products during these periods of high demand.
Interested in discussing what your options are as you financially navigate today’s market? The agricultural lending team at Univest is here to help. Contact us to start a conversation.
Univest Bank and Trust Co. is Member FDIC, Equal Opportunity and an SBA Preferred Lender.