This is an abridged version of the agricultural outlook for Q3 2024 from Terrain, our service for agricultural insights. For the full text of this article, visit terrainag.com.
Interest rates likely will remain elevated through most of 2024, which could force more leveraged producers to reduce inventory holdings while offering underleveraged producers some marketplace bargains.
In the near term, the fed funds rate is likely to remain elevated, with the possibility of rate cuts later in the year should inflation soften.
The USDA estimates that the interest cost on capital nearly doubled per acre of planted corn in 2023 compared with 2022. Tax data from the Kansas Farm Management Association indicates total interest paid by non-irrigated crop producers increased 22% in 2023 from a year earlier and was 10% above the three-year average. I expect total interest expense in 2024 to be similar to 2023 as slightly cheaper input costs help balance elevated interest rates and loan volumes.
Elevated interest rates come at a time when inventory levels for some commodities are at or near historic highs. By my calculations, the cost to store the March inventory of corn, soybeans and wheat for one year would be the second highest on record and 72% higher than the 2014 to 2023 average, using national average prices and interest rates (see Chart).
At the farm level, the carry for new-crop corn from a December 2024 contract to a July 2025 contract is about equal to the interest cost to carry the grain on a simple loan, using the Fed’s average fixed rate on operating notes. This would leave no margin for utilities, handling, drying, and other transactional costs associated with on-farm storage and marketing.
Carrying Cost Considerations
I expect interest rates, and the resulting cost of carrying inventory, to remain elevated through most of 2024. So who carries the cost of inventory in 2024? If it is you, how do you prepare for the cost?
Farmers have already shown the ability to reduce their inventory levels for inputs, as shown on the USDA’s Farm Sector Balance Sheet. The Federal Reserve Bank of Kansas City and Purdue University surveys also indicate farmers are tightening their spending.
On the storage side, basis have widened or become “more negative” compared with recent averages as grain elevators look to buffer some of the interest cost. Though basis levels at end users have declined somewhat from the elevated levels of 2022 and parts of 2023, they are still near historical averages. Still, end users are also looking to avoid large, costly inventories.
Given the fight over who carries the interest costs, farmers should consider the interest — and opportunity — costs of carrying inputs and storing commodities when analyzing their break-evens. Without proper care, the farmer may end up absorbing the full cost of carrying inventory. For unleveraged producers, the market may also provide some pricing bargains as input dealers look to unload inventory to avoid paying extra to carry on their end.
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