Inflation and interest rates present unique challenges for Iowa agriculture (2024)

The economic pressures facing Iowa agriculture are strong, but experts said there are still reasons to be optimistic during the Iowa Farm Bureau’s annual economic summit on Friday.

Farmers and ag stakeholders gathered in Ankeny to hear a forecast of the environment for the industry, which has been volatile in recent years as domestic inflation and global conditions have made costs and returns unpredictable.

Don Vaske, a conference attendee who farms in north central Iowa, said he was interested in learning about the trends facing the industry to make the right decisions on his farm.

“It’s always good to have a perspective on past and future trends,” he said. “Basically you don’t want to make the same mistake twice, and we know the farming economy is volatile, and goes up and down.”

High costs, low margins

Farmers have felt the effects of inflation and high interest rates in rising input costs, squeezing their margins and income over the last two years.

Net farm income reached record highs in 2021 and 2022, powered by inflating food costs. Food prices have since cooled while the cost of inputs like fertilizer, machinery and labor have steadily risen, driving down farm income in 2023. That’s led to a high-cost, low-margin environment for most grain producers, said Jim Knuth, a lending executive at Farm Credit Services of America.

That means farmers need to take more proactive measures to ensure their operations remain profitable, Knuth said, like enhancing risk management and crop insurance, more meticulous marketing, holding onto more cash and focusing on cutting costs.

“(2023) was the most expensive crop we've ever planted, and ‘24 will be the second-most expensive crop we’ve ever planted,” he said. “A high-cost, low-margin scenario for grain producers, it's a higher risk environment. You’ve got a lot of chips on the table.”

During the inflation peak in 2022, consumers wanted inflation on food to come down, said Austen Goolsbee, the president and CEO of the Federal Reserve Bank of Chicago. It did, but input costs did not ease along with it.

Michael Folsdick, who raises corn and soybeans in Sperry, Iowa, said he expects higher production costs to be a problem going forward. Farmers have had a high margin of errors in recent years, but he said they will need to be more stringent to remain profitable.

“We’ve had a couple really strong years of farm profitability,” he said. “Naturally, high costs have come along with that … That’s definitely one of the biggest challenges today, as far as the next couple years.”

Interest rates

The federal reserve has ratcheted up interest rates over the last two years in an effort to cool inflation, leading to higher borrowing costs for things like machinery and land.

In order for those rates to come down, Golsbee said inflation will need to go down first — something he said most economists expect to happen in the coming years.

“Inflation has to come down. If inflation comes down, it’s straightforward,” he said. “If inflation doesn’t come down, we’ve got to survive through that.”

While economists expect interest rates to ease from where they are now, Knuth said he doesn’t expect the federal funds rate to return to the 1-2% range it maintained over the past decade.

One challenge that comes with high interest rates, Folsdick said, is the ability to buy land, especially for farmers who are just starting out. At 35, Folsdick is about 20 years younger than the average Iowa farmer.

“It is certainly a little bit of a disadvantage for a younger producer, where you don't have all that operating capital built up, and liquidity as much,” he said. “So it makes it a little bit more difficult to try to move the needle forward and expand that operation.”

Technology driving productivity

Despite these pressures, speakers and attendees saw areas of optimism for farming in the near future.

Goolsbee said productivity in the farming sector is continuing to increase as technology advances allowing farmers to produce greater yields in the same amount of space.

Iowa saw sustained drought conditions in 2023, leading to expectations of lower crop yields. But crop yields came in on par with past years, largely because of engineered seeds that can survive drier conditions.

“I think it’s just the old-fashioned, people getting out, figuring out better ways to get higher yield from the same inputs,” Goolsbee said. “To whatever extent we can capitalize on these technological improvements now, I think the payoff over the next five years and ten years are potentially really outstanding.”