In recent months, global wheat markets have experienced a period of relative stabilization, following the extreme volatility caused by war, drought, and economic uncertainty over the past few years. After plummeting to their lowest levels since 2020 earlier this year, world FOB (Free On Board) prices for wheat have seen a modest recovery, clustering around $250 per metric ton.
However, despite the market’s rebound, one crucial part of the wheat supply chain—U.S. farmers—has not fully benefitted from these price changes. As competitive import prices continue to drive down costs for wheat customers, U.S. wheat farmers face an array of financial pressures that impact both their profitability and their planting decisions.
Mounting Economic Pressures
The broader U.S. economy has been a key factor affecting farm financial health. High inflation has reduced domestic purchasing power across industries, while a stronger U.S. dollar has put downward pressure on commodity prices. At the same time, rising interest rates—driven by the Federal Reserve’s efforts to curb inflation—have made borrowing both more frequent and more expensive.
A recent study by Rabobank revealed that although many farms are projected to remain financially stable through 2024, their financial health has been declining since 2021. This trend is evident in key metrics such as liquidity, profitability, and solvency. In line with this, the USDA’s 2024 Farm Sector Income Forecast, released on December 3, predicted a 9.1% decrease in working capital—a common measure of liquidity—compared to 2023. Though some solvency indicators, like debt-to-asset ratios, are expected to improve slightly, overall farm debt is projected to rise by 4.5%, reaching a record $542.5 billion. As farm profitability wanes, loan volumes have surged, with an increase of 14% in the first quarter of 2024—the sharpest rise since the 1980s. Meanwhile, interest expenses are expected to climb by 4%.
As debt levels rise and financial conditions weaken, farmers may be reluctant to adjust their crop production decisions. However, these economic conditions could signal a looming agricultural recession, potentially altering the landscape of U.S. farming in the years to come.
The Strain of Sticky Input Costs
While commodity prices have softened, many of the input costs for farmers have not followed suit. Fertilizer, seed, chemicals, and fuel prices, though slightly reduced in 2024, remain elevated compared to pre-war levels. These costs have become what the USDA refers to as “sticky,” showing little response to the falling prices of the crops themselves.
In 2023, fertilizer expenses were estimated to be 11% higher than pre-war levels, while crop protection products and fuel costs were 8% and 11.3% higher, respectively. Seed costs have proven particularly resistant to price decreases, remaining 21% above pre-war levels. Alongside these costs, other expenses—such as labor, borrowing costs, and property taxes—have continued to rise.
As a result, farmers have been forced to cut back on certain expenditures, such as machinery and fertilizer, though not all inputs are as easily reduced. Seed and crop protection products, for example, have “inelastic” demand, meaning their usage doesn’t fluctuate with price changes. These persistent cost pressures directly reduce farmers’ profit margins, making it harder to turn a profit despite the market’s recovery.
Additionally, farmers must make critical planting and input purchasing decisions months before harvest, which creates price risk and a delay between when inputs are used and when the crops are sold.
The Profitability Dilemma
U.S. farm income is projected to decrease more slowly in 2024 compared to 2023, after reaching record highs in 2022. The USDA’s estimate for net farm income in 2024 is $140.7 billion, a 4% decline from the previous year and 19% lower than the 2022 peak of $181.9 billion. Income from grains and oilseeds, including wheat, is expected to fall more sharply than that from livestock, dairy, and specialty crops.
This income decline is driven by two factors: while increased U.S. farm output in 2024 will boost income, the larger volume of production has not been enough to offset the effects of lower commodity prices. Farmers growing wheat, in particular, have seen their incomes squeezed by a combination of falling crop prices and the high “sticky” costs they continue to face.
The situation is further complicated by the failure of a proposed economic assistance and disaster relief package in Congress. Though initial bipartisan negotiations seemed to promise relief for struggling growers, political divisions have thwarted the deal, leaving farmers with increased uncertainty.
Navigating Uncertainty
Despite these ongoing financial challenges, U.S. farmers remain resilient. With continued economic pressures, including rising debt and stubbornly high input costs, the outlook for the U.S. wheat sector remains uncertain. However, farmers will likely continue to push forward, adapting to new challenges as they always have, even as the broader agricultural landscape shifts.
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