Unexpected Events Impact Agricultural Markets

Food and Agricultural Policy Research Institute (FAPRI) releases annual U.S. Baseline Outlook report

Unexpected events such as trade disputes, the COVID-19 pandemic and now the war in Ukraine have added great uncertainty and volatility in agricultural markets. Farm commodity prices, production costs and consumer food prices are higher than would have been expected a few months ago.

Economists from the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri prepare the U.S. Agricultural Outlook annually in the spring with an update each August. The report gives policymakers, farmers, agribusinesses and the public an overview of the state of the U.S. farm economy. This report summarizes baseline projections for agricultural and biofuel markets.

“This report is prepared using market information that was available in January 2022,” said Patrick Westhoff, director of FAPRI. “We recognize that much has happened since then and some of the possible implications are discussed throughout the report.”

Macroeconomic assumptions are based on January forecast by IHS Markit (S&P Global), many of which would be affected by recent events, Westhoff stated.

FAPRI uses their models to develop a range of projected market outcomes that consider major sources of uncertainty about future supply and demand conditions. Several key results were found in the report.

Prices have been pushed higher for some major crops due to the global economic recovery, as well as an increased demand from China, some weather-induced reductions in crop supplies and now by the war in Ukraine.

“Based on the available information in January 2022, we were projecting lower prices for most crops in the 2022/23 marketing year,” said Westhoff. “A weather-reduced soybean crop in South America and the war in Ukraine have both pushed oilseed and grain prices higher, at least in the near term.”

Farm production expenses increased sharply in 2021 with another large increase expected in 2022. Higher prices for fertilizer and feed raise costs for crop and livestock producers. The Ukraine war has resulted in a large increase in price for crude oil and is likely to result in even higher farm production expenses.

Livestock prices have been supported by strong consumer and export demand. High production costs and other factors have limited growth in supplies of meat and milk. Projected cattle and milk prices are expected to increase sharply in 2022, while prices for hogs and poultry remain well above the 2020 pandemic levels.

Ad hoc programs to respond to trade disputes and the pandemic pushed government payments to farmers to record levels in 2020. In this current-policy baseline, payments drop back to less than $7 billion in 2023. Crop insurance accounts for about half of projected outlays on farm-related programs over the next 10 years, Westhoff said.

FAPRI’s report shows that net farm incomes increased in 2021, as sharply higher crop and livestock receipts more than offset reduced government payments and increased production expenses. Projected net income declines in 2022. Recent events add uncertainty to the outlook, as both receipts and expenses could exceed projected levels.

Farm asset values have increased with land prices in recent years, with another increase projected for 2022. Given assumptions of the outlook, lower farm income and higher interest rates restrain farm real-estate values in subsequent years.

Consumer food price inflation increased 3.9 percent in 2021. The CPI for food exceeded year-ago levels by 7.9 percent in February 2022.

“Even if food inflation slows in the months ahead, the annual rate for 2022 is likely to be the highest since 2008,” said Westhoff. “Higher farm commodity and energy prices caused by the Ukraine war could make it more difficult for consumer food price inflation to return to normal levels in the near term.

“As stated before, much has happened since the information that was available in January 2022. Two developments worthy of note are reduced South American soybean production for the crop harvested in early 2022 and the war in Ukraine.”

The United States Department of Agriculture (USDA) estimates soybean production in Brazil, Argentina and Paraguay were reduced by 669 million bushels between January and March. This is equivalent to more than 30 percent of U.S. soybean exports. This resulted in a sharp increase in soybean prices. While the USDA estimates only a modest impact on 2021/22 U.S. soybean export quantities, reduced South American supplies will support U.S. exports and prices well into the 2022/23 marketing year.

The short-run impact of the war in Ukraine has been to limit export of grain, oil and other goods from Ukraine and Russia. This and concern about 2022 production in the region caused a spike in grain prices.

“Given great uncertainty about the military and geographical outlook, there is concern that grain and oilseed market impacts could be larger than the March USDA estimates,” said Westhoff. “They could extend well beyond 2021/22.”

FAPRI recognizes that many of the near-term projections in this report are unlikely to be realized because of these recent developments. As more information becomes available, they will examine alternative scenarios and update the outlook.

FAPRI is one of CAFNR’s Programs of Distinction, a select collection of programs that exemplify CAFNR’s drive to distinction. Those programs define CAFNR’s current impact on Missouri’s agriculture and natural resource economies, providing understanding for how CAFNR is addressing challenges facing Missouri agriculture and natural resources.