The 2023 crop is in the ground and growing steady, just like ag’s financial risks this year, according to Alan Rosendahl, farmer and senior vice president at Iowa State Bank in Kesley, Iowa.
“Over the last three years, wider margins, government payments, fantastic yields and marketing opportunities we could never dream up have created a lot of working capital in farm country. But the inflation has given a false sense of security on the balance sheet, and farmers need to be careful about the moves they make right now,” Rosendahl says.
With this caution in mind, here are 5 items Rosendahl says farmers should consider in 2023.
1. Interest rates
From 2010 through 2021, the bank prime loan rate averaged 3.67%. As of December 2022, the rate hiked to 7% and has maintained that number to today. However, Rosendahl suspects a rate change on the back-half of the year.
“I expect rates to be a half-point higher by the end of the year,” Rosendahl says. “There is a chance we could see some downturn in the next 6 to 12 months, but are we going back to where we were three years ago? That’s not going to happen.”
Growers looking to expand their operation in this interest rate setting would be given a yellow light from Rosendahl—not quite red, nor green.
“I would not hesitate to expand, but I would be a little cautious,” Rosendahl says. “Don’t consider buying any ground unless you are certain it’s highly productive and can produce top-end yields. With land prices where they are, you need to know, at minimum, the historical fertility. Then we can have a conversation about a loan.”
2. Capital expenditures
While Rosendahl would give a yellow light on expansion if the yield guarantee is secured, he says he would quickly switch to a red light if the venture required more overhead capital.
“This is a good time to pull back and not get out of hand on spending unnecessarily. The interest rates could change at any time in this market, and that’s especially important when considering a new venture such as land or livestock. Now isn’t the time for a new tractor or planter,” Rosendahl says.
3. Rework line-item projections
Because these “risky” markets can change at any time, Rosendahl suggests producers add extra security in an operation’s balance sheet.
“Maybe corn prices are in the low $5 instead of $6 or $7. If that’s the case, we should look at those 10-year averages on our federal crop policies. I’m not talking yield-adjusted 10-year averages, I’m talking about trendline adjustments,” Rosendahl says. “From there, instead of these guys putting 200- or 220-bu. projections in their cash flow, they should instead put in 190 to keep a lid on things.”
4. Full-time vs. part-time
If a grower Is considering an expansion or selling land, Rosendahl says to review the acreage sweet spot between full-time and part-time, as the “survival numbers” have changed with inflation.
“If you want to be a full-time row crop producer right now, it’s pretty tough to do unless you have at least 1400 acres,” Rosendahl says. “The sweet spot is in the 1,800 to 2,100 range. You get beyond that size and you’re either going to be hiring a lot of custom work or you’re a family operation that hires non-family members to assist.”
5. Experiment
“Every one of us farmers should have some kind of test plot on our farm to see what goes on under different situations,” Rosendahl says. “We should be doing something different—be it no till, population differentials, etc.—on a few acres of land every year. We need to be quasi scientists.
