How Long Can the ‘Good Old Days’ Last?

Many producers have found this winter to be a bit more bearable on the heels of what was likely a very profitable 2022. Now nearing the end (we hope) of winter, many have finished their income taxes and are spending a lot of time planning for 2023.

With the help of some massive tailwinds, the last two to three years have been the most profitable many producers have ever seen. No doubt, some didn’t share in the prosperity, for a host of reasons – most beyond their control. Still, we’ll likely look back on these years as “the good old days.” Even with a 36.3% drop in direct farm payments, net U.S. farm income was still up 13.8% from 2021.

What did most producers do with their nice profits? A recent survey shows:

·??????40% planned to build working capital.

·??????30% planned to pay down long-term debt.

·??????Many bought farm equipment or made other capital purchases or improvements. (Interestingly, Reuters reported John Deere is practically sold out of farm equipment and combines for 2023.)

Why It’s Vital to Stay Focused

Production expenses increased by a whopping 19% in 2022, led by large increases in fertilizer costs, 47% increases in fuel expenditures and 41% increases in interest expenses. With interest costs nearly doubling for new and variable rate loans, many leveraged operations are getting close to interest costs making up 10% of total expenses – a level not seen in many years.

Is it reasonable to expect 2023 will continue that streak of profits and improved balance sheets?

It’s no surprise financial statements have gotten much healthier over the past few years, even as overall farm sector debt has continued to rise. Since 1990, farm debt has increased an average 4% per year. In 2022, farm debt rose 5.9%. But the value and growth of assets has outpaced debt – contributing to a 10.6% increase in total farm equity. Nationwide, total farm sector assets rose 10% in 2022, reflecting a 14.3% increase in cropland values and 11.5% increase in pastureland values.

Often, a healthier balance sheet tends to take on more risk. For example, there’s still a fair amount of 2022 crop inventory that’s unsold, despite decent prices. But with healthy financial statements that include strong working capital levels to buffer future downturns, any major credit problems are likely a few years off.

While a recent survey of producers showed 75% expect lower 2023 profits compared to 2022, profitability still seems possible this year. Undoubtedly, there will be some margin compression, and it’ll take cooperation from Mother Nature to ensure decent yields – but relatively profitable marketing opportunities for 2023 crop, combined with prudent input expense purchases, gives reason for optimism.