A year ago, CoBank noted that the grain, farm supplies, and biofuels sectors would face a mixed outlook from a combination of escalating costs, supply chain bottlenecks, and rising energy prices. But 2022 is proving more turbulent than expected given the Russian invasion of Ukraine, multi-decade high inflation in the United States and Europe, and a sharp economic slowdown in China.
Interestingly, diversified agricultural cooperatives in the United States generally had above-average results driven by agronomy-related sales and services, even in the wake of fertilizer and chemicals supply chain disruptions. Meanwhile, ethanol producers have defended their profit margins (even as gasoline demand has slowed) through prudent management of commodity risks and operational efficiencies. Looking ahead to 2023, we see an environment of margin pressure amid a slowing economy, rising interest rates, rising labor and energy costs (particularly diesel), and trade uncertainty with China and Mexico. Persistent drought and unpredictable weather remain additional risk factors for crop production. The demand for animal feed is declining, reflecting steady overall growth in the domestic livestock sector.
Traders and grain elevators face a mixed picture for the year ahead. On the downside, grain exports slumped in the fourth quarter of 2022 due to transportation bottlenecks on the Mississippi River and lower Chinese purchases of soybeans and corn, both of which could lead to missed opportunities for the current marketing year. Then there is the situation in Mexico: The country’s president has decreed that Mexico should ban imports of genetically modified corn in 2024, which would have endangered nearly a quarter of US corn exports. Mexico’s economy minister recently suggested that the ban would be pushed back to 2025 and it now appears that US corn exports to Mexico will continue unabated for the next two calendar years. We still believe the GM corn debate is a bargaining tactic in Mexico’s quest to improve Mexico’s and the United States’ energy trading policies.
On the plus side for U.S. producers, Ukraine’s grain and oilseed production and export will likely remain restricted for the next few years due to the Russian conflict. This will provide essential support for grain prices, and help US corn exports. Finally, global combined end stocks for grains and oilseeds remain very tight after falling for four consecutive years to their lowest level since 2013/14. It will take at least two years to build up stocks to a more comfortable level.
Retail Ag retailers start 2023 on a strong financial footing but face many challenges. Labor shortages and higher wages will negatively affect margins. In addition, bulk fertilizer purchase costs will remain high through the first half of 2023 as cooperatives not only absorb rising barge and rail costs, but also compete with export markets for limited supply. About 70% of European fertilizer production was offline during the third quarter of 2022 as the region dealt with record natural gas (feedstock) prices.
Fertilizer prices are likely to start and end 2023 at elevated levels, reducing the opportunity for retailers to obtain the same level of carry margin that was available during 2021/22. The outlook for biofuels is very strong, supported by federal policy and demand tailwinds from 2022. Ethanol will benefit from increased use of E15, growing demand for corn oil, and aggressive pricing of CO2. Carbon dioxide, a co-product of ethanol fuel production, is seeing increased demand from industrial users (food and beverage companies) and carbon sequestration projects. The momentum behind renewable diesel will continue to grow as new soybean crushing and oil refining processing facilities come online, supported by the 2022 Inflation Reduction Act.
This article, by Kenneth Scott Zuckerberg, is part of a series of future articles for 2023 from CoBank. Read more by clicking here.