Commodity prices are good now but what about 2022?

Editor's note: This is the second in a three-part series on the current state of the farming industry and ag banking. In our first installment, we covered current trends in the industry..As they near the end of 2021, many community ag bankers say their farm clients are feeling optimistic. Commodity prices — from corn to dairy — look favorable. Low interest rates are driving the price of farmland in some areas, but expansion is an obstacle in others. Some of the sunnier projections for the coming year are partially offset by higher costs for feed, fertilizer and fuel..Some banks reported a decline in ag loan volume over the past eight to 10 months. Limits on growth and farm consolidation are two other issues affecting farmers. Weather remains, of course, the factor that tempers even the sunniest outlook..We asked six Midwestern ag bankers from across the region to reflect on the past year, and share their insights into what the next year might look like for them and their ag customers. Here's what they said:.Commodity prices have been on the rise this year. How do you anticipate farm income (or profitability) will be impacted?.Ed Sullivan, CEO, State Bank of Bussey, Iowa: "I had a farmer come in the other day. He's sitting on last year's crops, so he's been fortunate. He's got a quarter of a million dollars with the crops in the bins and he prepaid for a lot of fertilizer last year, so he's going to have a banner year. … We're seeing some folks who really are going to have a banner year in 2021; [but] 2022 is going to be different. We've got good prices, but we're seeing higher or at least strong cash rents and higher land prices. And fertilizer costs are up pretty significantly. … Commodity prices have really been on the rise and that's been good. ."[In] the PPP program this spring the maximum a farmer could get was $20,832. We had a number of farmers who were able to qualify for both the first and second round. In 2020, there was a lot of Covid-type money coming out and this spring we had a bunch of farmers qualify for both draws of the PPP. For those who got the [maximum], we're going to see some really good incomes again this year. I think '22 is going to be the more telling year.".Dave Coggins, executive vice president-chief banking officer, Investors Community Bank, Manitowoc, Wis.: "Total revenues are likely to improve, but with higher operating costs, margins are not likely to rise proportionately. Some areas are also being negatively impacted by low rainfall totals, thus crop yields may be negatively impacted in those areas, stressing profitability.".Jacob Jenniges, branch president, Integrity Bank Plus, Walnut Grove, Minn.: "I anticipate that farm profitability will increase compared to the past five-year average, especially if you take out the government support from 2020, mainly due to higher commodity markets. This will be offset going into 2022 with the projected increase in inputs and the creation of term debt to cover the upgrading of equipment, construction of new shops and installation of tile that will happen as part of a tax strategy. The producers that can manage this potential tax burden while working to keep their annual debt service in line will find success over the next three to five years. Producers may have to pay some income tax to do this, but it will be worth the expense if they can avoid overloading their operation with too much in annual debt payments in the future.".Joseph Carlson, president and CEO, Community State Bank, Royal Center, Ind.: "Almost every discussion with my customers includes a section for marketing and forward-looking discussions. Marketing strategies are allowing my farmers the opportunities to market multiple years, attempting to lock in profits well into the next down-price cycle. The 2021 weather in the bank's market area has been favorable and yields should be at or above trend-line, generating above average net incomes. In addition, prior to the significant price run-up for carryover 2021 and 2022 crop production, bank customers had tightened their belts and were monitoring expenses very carefully and have continued to remain tight-fisted. Above average net income should occur again in 2022, always subject to weather conditions. Net farm income will begin declining in the following years as input expenses, rental rates and machinery and equipment costs will rise significantly. Opportunities for profitability will remain but will be available for a very limited time and will need constant vigilance to capture.".Powell Becker, branch president, Stockman Bank, Stanford, Mont.: "It seems like every time we get higher commodity prices, our input costs just seem to go up accordingly. But overall depending on where you are and how this drought has affected you, that's a huge part of our area up here in the Northwest — specifically, whether you were directly affected by the drought or if you were able to get by — that'll have a large impact on your overall profitability as well.".Scott Zimbelman, vice chair, Homestead Bank, Cozad, Neb.: "Certainly our grain farmers will see increased income resulting in increased profitability in 2021. Preliminary numbers show good increases in farm working capital. Cattle feeders are holding their own but certainly increased feed costs are weighing on cost of grain and I do not anticipate large increases in income or profitability for those folks. ."Cow/calf producers are keeping their head above water but, I would not anticipate increased income or profitability. In many areas of western Nebraska drought has affected grazing. It'll be interesting to see how weaning weights turn out and if ranchers are forced to bring in higher-priced hay to supplement the herds. I'm guessing those running yearling cattle on grass are in a similar situation with relation to grazing. They may have to pull them off sooner than expected with weights reflecting the shorter time on grass. ".How are producers dealing with labor shortages or other challenges specific to your region?.Sullivan: "I'm 67 and I'm getting ready to go part-time and work my way out. I've had two or three farmers say, "Hey, if you're looking for something to do let us know, we're always looking for labor." ."There is a labor shortage. … When you're looking at the labor, it's more on the hogs and the cattle because in the grain, so much of that is machinery-driven. What they're doing though, with high-capacity combines and semis, they're just making it so that they can take care of that labor shortage by doing it more with machinery.".Coggins: "Hourly wages for competent farm labor have been rising accordingly. In some cases, employee housing can be an important benefit to offer. In the dairy industry, robot installations are getting greater consideration as a potential labor replacement. In Wisconsin, a recent court ruling regarding the Department of Natural Resources' authority to put certain restrictions on the expansion of animal agriculture is concerning to the industry.".Jenniges: "Labor is not a large concern with the operations that we work with. We focus on what most would consider to be smaller operations that work with family members or other neighboring producers to complete the field work.".Carlson: "My bank's customers are family farm operations that rely on family and some part-time help in the fall. The major challenge to our customer base is the average age of the family members and the lack of viable successors to remain or return to the operation. A generational roll is coming, and land and operation ownerships will change dramatically, changing the face of family farms.".Becker: "Most of our operations are family-driven, not so much large corporate, so we don't have to rely on a lot of outside labor. Technology continues to advance, and that allows us to get more done with less from a labor standpoint. But I think overall just dealing with other challenges is just always managing your bottom line and hopefully not letting the government have too much influence in your day-to-day decisions or what you're trying to accomplish.".Zimbelman: "Obviously, technology is leveraged at almost every opportunity due to labor shortages. I can't speak to a specific situation but I'm guessing the labor shortage would factor into any expansion plans an operation may have."