Field crop margin outlook: A new cycle of tighter margins ahead

Agri commodity markets are inherently cyclical, driven by the forces of supply and demand. Since the end of 2023, row crop markets have shifted from a high to a low phase, bringing significant distress to the market, pressuring margins. This transition follows a period of elevated commodity prices that began around Q4 2020, when a contraction in ending stocks, due to production losses in the US and Argentina, led to a surge in prices. For instance, soybean prices rose sharply, surpassing USD 10/bushel in October 2020 and reaching USD 15.72/bushel by May 2021, significantly higher than the average price of USD 9.47/bushel observed between 2015 and 2020. Corn prices experienced a similar upward trend.

This price surge triggered a “euphoria phase” in the commodity cycle, prompting farmers worldwide to increase production. According to the USDA Foreign Agricultural Service, global soybean acreage expanded by approximately 3% per year between 2019 and 2023, compared to a 1% average annual increase over the previous four years. During this period, operating margins for row crops were exceptionally high, allowing farmers to invest heavily in their operations, including purchasing new equipment and expanding their farms. However, rising global interest rates increased the cost of these investments, although high margins helped farming operations maintain their financial health.

The subsequent increase in agri commodity supplies led to an oversupply situation, raising ending stocks and exerting downward pressure on prices. At the beginning of 2023, prices remained high but eventually began to decline due to the elevated supply levels. This downward trend is a common feature of commodity markets, which have historically followed cycles of supply and demand fluctuations.

Looking ahead, the next 12 months are expected to be a “belt-tightening phase,” where farmers will focus on reducing operating costs. Despite the financial challenges, farm input companies will continue to see demand for their products, as no significant crop reductions are anticipated. Supply contractions could occur due to acreage reductions or adverse weather conditions, although weather forecasts remain uncertain.

Farmers are likely to use inputs sparingly to manage the narrow gap between prices and costs, which is currently at its lowest since 2013. This phase of compressed margins is expected to persist for the next two to three years. Recovery in the market will likely be driven by adjustments in operating costs and potential commodity price increases, which will signal farmers to reduce supply and eventually lead to a positive price reaction. This will incentivize a recovery in production, starting the cycle over again.