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KC Fed: Ag Economy is Pretty Solid but Not Without Challenges

The agricultural economy is in relatively good shape at the end of 2022. Cortney Cowley, the senior economist for the Oklahoma City branch of the Kansas City Fed, says things in the district are solid but pressures are beginning to mount.

“I think in the country and the Kansas City Fed District as a whole, a couple of weeks ago the USDA forecast was very positive, but I would say that, overall, the outlook for the agricultural economy has still been generally positive here, more locally as well, but some pressures have just been persistent both this year and, I think, looking into next year.”

She talks about some of the biggest challenges producers in the district are facing.

“I would say that pressures associated with uncertainty about commodity prices this year, and things have continued to be pretty good but still fairly volatile, especially following Russia’s invasion of Ukraine. And then the big one for our district has been intense drought. And then, for everyone, it’s been higher expenses. But I think that the drought is one that’s been fairly substantial in the Kansas City Fed region for both crop and livestock producers.”

Several parts of the KC Fed’s district have struggled with serious drought.

“If you were to draw a line down the middle of our districts, like interstate 35 would kind of bisect our district in half east to west, it’s definitely that western side of the district. So, particularly Western Oklahoma and southwest Kansas. We also have the Mountain States in our district, including Wyoming, Colorado, and northern New Mexico. The Mountain States are more used to a little bit more arid climate, but what we’ve been seeing this year and into last year in western Oklahoma and western Kansas has been a pretty substantial drought. And also, in parts of western Nebraska as well.”

Cowley says some of those areas do benefit from more reliable groundwater sources and irrigation. He says the overall strength in the sector despite the challenges is somewhat surprising.

“Yes, I have been a little bit surprised, just because most of the comments we receive from contacts and in our surveys still focus a lot on pressure from inflationary pressure, in general, on input costs. And then once we started seeing higher interest rates, that can also put more pressure on profit margins through higher interest expense and then drought. With all those things combined. I would have maybe expected it to be a bit more pessimistic than what it is, but yes, the combination of really strong commodity prices along with carryover from previous years of fairly substantial government support, and also just really smart management overall in the ag sector from both producers and agricultural lenders.”

Looking ahead, she says the support is there for strong prices to continue into the new year.

“I do know that the fundamentals are there are fairly strong prices because, coming into the Russia-Ukraine scenario and into 2022, we have a very tight inventory for a lot of key agricultural commodities like corn, soybeans, and wheat, so international demand has been very strong. We kind of finally caught demand up with supply in the U.S., and we got into a situation of much tighter inventory the last couple of years, and that has continued this year because of the drought and slightly lower production. So, I think on the crop side that could help support prices going into next year. In the Kansas City Fed District, cattle account for about 50 percent of total farm revenues and are a very important industry for our district’s agricultural commodity. And cattle prices, I would expect to be very strong because of all the herd liquidation that we’ve seen this year due to drought.”

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