2022 is shaping up to be one of the most significant years on record for agribusiness. And not in a good way. Conditions have never been as bad for the sector as they are now. Currently, the industry is dealing with a deadly combination of drought, fertilizer shortages, and high gas prices. It’s leading to lower yields and other issues, including reduced profitability. Now many firms are asking what they can do to fight back.
The Story Of 2022 So Far
The seeds of today’s agricultural crisis were already becoming evident in 2021. But the problem accelerated considerably in 2022, especially after Russia invaded Ukraine.
Gas prices started to rise in the latter half of 2021. As Russia began restricting supplies, the world price steadily rose. Consumers from richer Western countries began ordering gas from other sources, such as the US and Qatar, increasing demand on the wholesale market.
At the same time, the price of oil also went up. With limited Russian supplies, gasoline prices also increased, leading to higher diesel input costs. The rest of the world responded, but it wasn’t enough to keep up with demand. Therefore, the wholesale price rose considerably at the start of the year.
This crisis affected agribusiness directly, making it more expensive to refuel tractors and other farm equipment. But it also increased costs indirectly by raising the price of fertilizer. Many farmers worldwide don’t have the capital to fund the fertilizer they need to ensure a good crop next year. And that means that yields will go down.
At the same time as this, the northern hemisphere countries, particularly grain-growing regions, have seen an unprecedented heatwave, from China in the east to Europe through to the prairies of North America. The crop devastation is highly likely to affect harvests later in the year.
How Agribusiness Can Respond
2022 has been a dire year for agriculture. But it doesn’t necessarily have to be bad for agribusiness. Lower yields will put up the world price of food. So farms enjoying high production today may earn bumper profits next year, and commodities will become scarce.
There are two things that farmers should be doing right now to prepare:
- Planting as many crops as possible that are likely to be in demand next year
- Raising capital to invest in yields
The first point is worth considering. Currently, farmers are responding to what they believe will be a recession, particularly in Western countries. Many are considering reducing food production in anticipation of lower demand.
However, this recession is going to be different from prior ones. This time around, the problems are not financial; they’re resource-based. And that means that we are in very different territory. Next year, the problem will be a food shortage, and prices will skyrocket. Farmers who prepare today can take advantage of higher margins in the future.
But, of course, that requires capital, bringing us to our second point: raising capital. Farmers need to go to capital markets today and borrow the money they need for inputs, such as fertilizer. They then need to produce a bumper crop next year to satisfy what will likely be sky-high demand.
Farmers should also explore other ways to cut costs in the short term to support their financial position. Choosing used John Deere parts instead of new ones, for instance, can help save money on repairs. Farmers should also negotiate higher rents for their land, convert to solar power production, and explore cost-sharing programs if they are available in their country.
Coping In 2022 And Beyond
Farmers have already seen increased costs across the board. Pesticide and fertilizer prices and seasonal labor and diesel have ballooned. Glyphosate, for instance, is up more than 250 percent in a year because of supposed supply chain challenges.
Ultimately, this means less food on people’s tables in the future. There may even be a need to switch from growing crops for animal consumption to human consumption.
Unfortunately, the current crisis is unlikely to abate anytime soon. Problems are entrenched. However, farmers taking advantage of higher prices instead of reacting to them are likely to fare considerably better.
On the face of it, it seems like the financial incentives to the farm are low. But those who understand how to price dynamics are going to work will prosper. Supplies will be down next year, so anyone producing food will likely be a winner.