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Minneapolis Fed: Drought was Biggest Challenge in 2022

Agricultural conditions in the Minneapolis Federal Reserve’s district in the Upper Midwest are “surprisingly strong” at the end of 2022. That’s the opinion of Joe Mahon, regional outreach director with the Minneapolis Fed. Despite supply chain challenges and soaring input costs, Mahon said commodity prices are keeping things in good shape.

“That has had the effect of boosting incomes even though those margins have gotten kind of squeezed. The data that we have available to us indicate that farm incomes in 2022 have increased from a year ago, and 2021 was a pretty strong year itself, so that’s, overall, a pretty good picture. It’s maybe a little bit surprising given what we’ve seen happen to the inputs. Now, one thing that we know is that a lot of producers buy their inputs, particularly fertilizer and chemicals a year ahead, and so they’re still working off inputs that they bought before the really big surge. And so, the concern then is about what might happen next year, especially if we see a reversion in crop prices.”

While the overall condition of the district’s ag economy is in solid shape, Mahon says parts of the district struggled in 2022.

“The one exception I think that you can point to this year was in the Golden Triangle region of Montana. I was out there in August during the wheat and barley harvest, and they had a pretty bad drought this year. And actually, it’s been two years in a row of pretty bad drought. What I will say is that if you look at the crop production numbers from Montana, the wheat and barley production out of Montana was actually up a little bit this year, but well-below what you typically see. And what I was hearing from producers out there was that the wheat crop was pretty good quality even though the total production was down, yields were way down, pretty good protein content, and the dry weather was kind of helped with getting the crop dried.”

Cattle producers in that region also struggled with drought. They couldn’t find enough feed and wound up reducing their herd sizes quite a bit. Looking back over the year, while there were several challenges for producers to deal with, drought was probably the biggest factor affecting success.

“In 2022, it might have been, other than just higher diesel costs, higher transportation costs and higher input costs across the board, that’s the thing that I tended to hear about most, even in some of the areas that were pretty heavily hit by drought.”

Looking to the new year, Mahon says more challenges await producers.

“Well, it’s interesting because we’re looking back over the past year, what are we just talking about? You’re talking about drought, right? Weather is kind of, especially this far out, impossible to predict. And so that’s kind of always going to be, I think, the biggest question. What happens globally is going to be another major question that people are going to worry about throughout the year, just in terms of the market staying open and various other kinds of geopolitical shocks that happened both on the input and the commodity output side as well.”

He says one protection that the ag economy has in place is that people will always need food.

“Agriculture is kind of a-cyclical with the rest of the economy. So that’s something that if I were a producer, I maybe wouldn’t be as worried about. People always need food, and so, whether the economy is good or bad, they might change their food consumption habits, but they still need to eat. And so, it’s these other factors that tend to drive the cycle in agriculture, like I said, weather, international conditions, and some trade conditions and things of that nature.”

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