Cycles and Changes Impacting Today’s Agricultural Industry

Cycles and Changes Impacting Today’s Agricultural Industry

Author: Chris Kalkowski, Vice President, Agribusiness Banking

Heading toward the 2023 harvest season, farmers’ balance sheets are on solid ground, better than we’ve seen in quite some time. However, we know that the nature of agriculture is cyclical. What goes up, ultimately comes back down, and we rarely have foresight into when the changes will begin.

Adding to the weight of uncertainty are the outcomes we do know. When agricultural markets turn downward, input costs remain elevated longer than revenues, squeezing margins as well as the business’ wallet. We also know that farmers are masters when it comes to capitalizing on favorable conditions, such as weather. When financial and growing conditions are advantageous, growers will maximize acreage, resulting in a large harvest that can drive down prices.

While past cycles like these can guide expectations about the future, looking at history can never fully tell the tale of what lies ahead. Today, new and evolving issues could play a part in determining eventual outcomes, altering how the industry reacts to pressures as well as how farmers will profit in the end.

Cattle Industry Changes Offer Possible Patterns for What’s to Come

In the cattle industry, breeding stock has declined more than 2 million head over the last two years. Environmental conditions, mainly drought, remain one of the biggest causes.

By the end of August of 2022, range land conditions were rated poor to very poor across 48 states. Without a suitable grazing environment, ranchers were forced to send more heifers into the slaughter pipeline, reducing tomorrow’s breeding herd size.

How this will impact the future comes back to the cyclical nature of farming. Ultimately, there is a finite number of dollars to share in the system from cow-calf up to the retail point of sale. Over the past couple of years, profitability has been primarily on the packing and retail side of the industry. During the pandemic, for instance, gross profit margins for meat packers hit all-time record levels.

However, as feed prices become favorable, leverage should start flowing back to the production side over the next two to three years. That means ranchers will once again begin to build breeding stock numbers. As they do, the number of animals being sent to feedlots will decrease, sending the price of feeder cattle higher (being seen right now), while turning feed lots into margin players as they compete to purchase cattle.

As feedlot profits decline, we often see smaller businesses leave the industry or consolidate with larger organizations. Unless changes are implemented to increase efficiency, consolidation may likely be the industry theme for years to come.

Of course, these predictions are based on historical precedent. Across today’s agricultural industry, a new set of issues are emerging, inspiring farmers to take unprecedented actions that could easily alter the outcomes that lie ahead.

Understanding Some New Challenges Impacting the Agricultural Industry

One issue that could have an impact on the future of agriculture, particularly the cattle industry, is the age of the average farmer—nearly 60 years old by most reports. As the beef industry rebounds, will aging ranchers still have an appetite for rebuilding their herds?

With enough profit incentive, we may be able to entice younger generations to enter farming and ranching, but too often, the odds are stacked against new industry participants. According to a recent survey, more than 40% of young farmers say it is a challenge to find available land for farming. That isn’t surprising when you consider that 98% of farms are family farms, meaning land rarely comes up for sale but is passed from one generation to another.

Fifty-nine percent of new growers say that finding affordable land impedes their ability to enter the industry or increase their operation.[i] That number rises to 68% among farmers of color.[ii] Easing the roadblocks against younger generations needs to be a priority as we look to the future.

We need those young farmers and ranchers as we seek out ways to react to the perceived impacts of climate change and help those not involved in agriculture understand issues and challenges. Agriculturalists are natural environmentalists, since caring for the land is equivalent to earning a paycheck. Eighty-three percent of young farmers say they are entering the industry to engage in conservation or regeneration.[iii] Simultaneously, new technological advances are making it easier and seemingly more climate friendly, to produce crops and raise livestock.

The question is how our stewardship of the land and its resources will influence outcomes for good or bad. We don’t always know the ramifications of our actions until years down the line, if ever. If humans are not careful in selecting innovations, today’s environmentally friendly pursuits could be tomorrow’s foes.

As the agricultural industry continues to take on challenges, both new and familiar, we can still let the past set our expectations on one thing. Farmers and ranchers are resilient and have always found ways to adapt to change and overcome challenges. If we let that precedent be our guide, the future will always look bright for agriculture.

About the Author

Chris Kalkowski has been at First National Bank of Omaha since 1998 and a member of our agribusiness banking team since 2003. As Sr. Director of Agribusiness Banking, he works closely with agribusiness leaders throughout the Midwest. In his spare time, Chris enjoys hunting, ranching and giving back to his local community.