Photo taken in Clinton, Wis. by Debra Hall, First National Bank and Trust Company

By Paul Gores

Many Wisconsin farmers are headed for a profitable year, but they’re already uneasy about 2023, ag bankers in the state say.

Coming off a strong 2021 that saw rising dairy and commodity prices, farmers entered the year financially fit and, in many cases, with locked-in input expenses that have blunted 2022’s surge in inflation.

But with the cost of fertilizer and diesel fuel ballooning, and livestock feed for those who don’t produce their own feed becoming more expensive, it’s hard to see how the next growing season can be as solid as this one has been so far, bankers said.

“I think there’s more anxiety about what next year looks like than there is over what this year looks like right now,” said Dave Coggins, senior vice president ag banking for Green Bay-based Nicolet National Bank.

With diesel fuel now topping $5 a gallon, and with fertilizer prices up in part because key ingredients come from embattled Ukraine and Russia, input costs are increasing.

“A number of farmers were able to contract prices last fall and early winter before they totally took off and escalated. So some of them have fuel locked in for this year less than $3,” said Jenny Jereczek, director of ag banking for Security Financial Bank in Durand. “So they’re doing all right for this season. What I’m hearing and seeing and in talking with people is 2023. Right now, there is not really a good opportunity to contract good pricing for next year, and will there be? No one has the crystal ball.”

Bradley J. Guse, senior vice president/agribusiness banking for BMO Harris Bank in Marshfield, said many farmers, coming off a good 2021, are having a strong 2022 in spite of the rocky economy. He cited record crop prices in the first three months of the year, when prices typically are low, and the benefit of farmers growing their own feed.

“In Wisconsin, we grow a lot of our feed. That’s a big advantage to our Wisconsin dairy guys,” Guse said. “Because of that, they are feeding feed that they grew last year now, and last year’s cost to grow was a lot cheaper than this year. So we’ve got low feed prices because we grew cheaper last year, and we’re running the into these high milk prices. And we’re seeing margins that are just phenomenal.”

Milk has been selling for about $25 per 100 pounds, hovering near record levels.

But he, too, is concerned about next season.

“I’m not so worried about my clients and my portfolio this year as I am next year,” Guse said.

Ag bankers said international events and circumstances often set the stage for prices farmers pay to produce their goods and the prices they get at market.

“There was a drought in South America, a pretty serious one. That’s impacted crops — corn, soybeans — that are big crops in South America, especially soybeans,” Coggins said. “So we’ve got really high soybean prices in part because of that. But also, the war in Ukraine has had a serious impact on supplies of grains in general, but basically corn, wheat, barley, sunflower oil. Russia exports a fair amount. Ukraine exports a fair amount. I think the Black Sea region produces about 12% of the world’s calories, and so that’s a big deal.”

That affects the availability of those grains and pushes up the price. In Wisconsin, that means dairy farms that buy their feed pay more. But, in turn, it provides higher prices for the state’s grain producers.

What happens in the Black Sea region also has an impact on fertilizer prices. Coggins said 47% of the world’s phosphate and potash, which are used in fertilizer, come out of Russia and Belarus.

“There’s not a lot of other alternatives for getting that fertilizer. Most farms were in OK shape this year. Might have been able to lock in some prices late last fall or winter,” Coggins said. “But there is a lot of anxiousness about what those prices and availability might look like for 2023.”

The rise and fall of energy prices also is an inescapable fact of life for farmers. According to the Diesel Technology Forum, diesel engines power about 75% of all farm equipment, transport 90%
of farm products, and pump about 20% of agriculture’s irrigation water in the U.S.

Lance Lansing, vice president-commercial and ag loans for Wisconsin Bank & Trust, said the price rise with diesel fuel is mostly a refining capacity issue.

“Investors don’t want to put new refineries up right now,” said Lansing, who works out of Monroe and Platteville. “With electric cars coming out, nobody’s running to put new refineries up and have that sort of investment, not knowing what their return’s going to be.”

Lansing described the current farm economy as “volatile.”

“There’s a lot of moving parts. One saving grace is we have had good commodity prices. The milk price has obviously been up, and futures still look good. Same with the row crops. The row crops are still looking good, and a lot of people are locked in at a profit in 2022,” Lansing said. “2023 might be a different story.”

Although there is worry about next year, many farms today are in a good position financially, Jereczek said. But they are being cautious.

“At least in this area, we’re seeing some expansion, but maybe not like we’ve seen in the past when commodity prices have gotten to these levels,” Jereczek said. “I think farmers and bankers alike are more strategic this go-round, and have learned a lot from the past in regards to now is the time for improving leverage positions, paying down debt, paying down lines of credit and maybe stacking some cash away in savings for liquidity purposes, and those kinds of things.”

Still, some are making strategic equipment purchases they delayed when finances were tighter four or five years ago, she said.

Lansing said he isn’t seeing many farmers interested in spending to expand herds or land right now, even though commodity prices are high.

“I’m just a small section of the state here, but a lot of people aren’t reinvesting as far as in growth mode. They are more in, ‘Let’s find out what’s going to happen, pay down debt, right-size debt type’ mode,” Lansing said.

Higher interest rates might be dampening some spending by farmers, but it’s hard to say how much.

“I think the interest rates are maybe a little bit inhibiting some of that stuff,” Jereczek said.

But she said a lot of operating lines already were done over the winter and early spring.

“So they are not necessarily impacted by the rate increases we’ve see more recently,” Jereczek said.

Ag bankers said crop conditions generally look good around the state, but rain will be needed in early August.

“Rain in July makes corn, rain in August makes beans,” Guse said.

Coggins said it appears soybeans are likely to be a winning crop this year.

“Soybeans are really at all-time highs for price right now, in large part because of what happened in South America,” he said. “And the input costs of soybeans are less than corn, so that’s a crop that has the potential to be a winner this year, absent any major weather events.”

As for how farmers fare next year, much will depend on inflation and its upward pressure on input expenses, ag bankers said.

“Financing of inputs for next year could be a completely different story,” Jereczek said.

A recession might also be looming. While demand for Wisconsin farm products is high right now, a recession could change the outlook.

“I think every ag banker right now is worried about a recession destroying that demand,” Guse said. “I think we’re all concerned about that — what’s on the horizon.”

Gores is a journalist who covered business news for the Milwaukee Journal Sentinel for 20 years.

Commentary by PNC Chief Economist Gus Faucher

Real gross domestic product (GDP) fell 0.9% at an annual rate in the second quarter of 2022, according to the advance estimate from the Bureau of Economic Analysis (BEA); this followed a 1.6% decline in the first quarter. This is the first time GDP has contracted in two consecutive quarters since the first half of 2020, when the pandemic came to the U.S.

The big drag came from inventories, which subtracted 2 percentage points from growth. Trade was a major positive adding 1.4 percentage points to growth in the quarter as the trade deficit declined. Exports rose a very strong 18% while imports rose just 3%; higher imports subtract from GDP. Consumer spending rose 1.0% adjusted for inflation, adding 0.7 percentage point to growth. Goods spending fell 4.4% in the quarter, with declines for both durable and nondurable goods, but services spending rose 4.1%.

Business fixed investment was essentially flat in the second quarter, with a big increase in investment in intellectual property products almost offsetting declines in investment in structures and equipment. Housing investment was a major drag, subtracting 0.7 percentage point from growth, as higher interest rates weighed on homebuilding and repairs and renovations. Government subtracted 0.3 percentage point from growth, with small declines in federal and state and local government spending.

On a year-ago basis real GDP was up 1.6% in the second quarter, down from 3.5% growth in the first quarter.

Final sales of domestic product — GDP minus the change in inventories, which measures demand for goods and services produced in the U.S. — increased 1.1% in the second quarter, following a 1.2% decline in the first quarter.

The National Bureau of Economic Research (NBER) is the widely accepted arbiter of recessions in the U.S. according to the NBER, a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” The NBER explicitly states that two consecutive quarters of contraction in GDP does not necessarily equate to recession. Instead, the NBER considers many economic series, including personal income (excluding government transfer payments) and consumer spending, both adjusted for inflation; employment; wholesale and retail sales, also adjusted for inflation; and output in manufacturing, mining, and utilities.

Using these indicators, the economy was expanding through the second quarter. The second quarter GDP results reaffirm this view, with consumer spending and final sales of domestic product both up moderately, and with inventories the major drag on growth. Demand remains solid.

Strong job growth is another indication that the economy is expanding in mid-2022; the economy added 375,000 jobs per month on average in the second quarter. Additionally, the decline in real GDP (unannualized) in the first half of 2022 was 0.7%; it is unclear if this would meet the NBER’s definition of a “significant” decline. And an alternative measure of the size of the economy, real gross domestic income (the income going to households and firms from economic activity) rose in the first quarter; the BEA will release the first read on real GDI for the second quarter next month. Real personal income excluding transfer payments rose slightly in the second quarter.

The GDP price index rose 8.7% annualized in the second quarter, up from 8.2% in the first quarter. The personal consumption expenditures price index increased 7.1% in the second quarter, the same pace as in the first quarter. The core PCE price index, excluding food and energy prices, rose 4.4% in the second quarter, down from 5.2% in the first quarter. The PCE price indices are the Federal Reserve’s preferred inflation measures and are running much higher than the central bank’s 2% objective. The central bank is raising interest rates in an effort to slow growth and bring down inflation.

Economic growth slowed in the first half of 2022, but the U.S. economy is not in recession. Demand, especially from consumers, remains solid, thanks to the very good labor market and about $2 trillion in extra saving relative to before the pandemic, and despite the drags from inflation and higher interest rates. Consumer spending is shifting from goods to services; consumers bought a lot of goods in the initial recovery from the pandemic and don’t need as many now and are feeling more comfortable going out and spending on services.

Despite a very small decline in the second quarter, business investment demand remains solid. A narrowing trade deficit will also contribute to solid economic growth in the second half of 2022. Housing will remain a drag, however, as higher mortgage rates continue to weigh on the housing market. PNC expects annualized growth in the second half of 2022 of around 2%, with growth slowing to around 1% in 2023 and 2024 as higher interest rates continue to weigh on the economy.

Although the U.S. economy continues to expand, recession risks are elevated, with a probability of around 45% over the next couple of years; this is more than double the probability before the Russian invasion of Ukraine. The risk is that Fed interest rate increases to reduce inflation could lead to an outright contraction in economic activity, either in late 2022 or sometime in 2023.

WBA Releases Results of Bank CEO Economic Conditions Survey

In the Wisconsin Bankers Association’s biannual Economic Conditions Survey of Wisconsin bank CEOs, 71% of respondents rated Wisconsin’s current economic health as “excellent” or “good.This marks a decline from the mid-year 2021 survey, when 91% of survey respondents gave “excellent” or “good” ratings. Nearly all (over 98%) of the Wisconsin bank CEOs who completed the most recent survey predict that the economy will stay the same or weaken in the next six months. 

“Wisconsin bank CEOs have a unique vantage point in that they are both financial experts and highly involved individuals in their local communities,” said WBA President and CEO Rose Oswald Poels. “While the economy remains relatively stable, bankers are keeping a close eye on important indicators and stand ready to support their customers through possible economic challenges over the coming months. 

Among the economic bright spots cited by bank CEOs in the survey were strong tourism, construction, manufacturing, and agricultural industries. Survey results indicate that the hiring market and real estate market are cooling down. Top economic concerns reported by bank CEOs were inflation, cost of living/childcare/education, rising interest rates, oil and gas prices, staffing shortages, and the war in Ukraine.

The midyear 2022 survey was conducted May 24–June 10 with 56 respondents. Sums may not equal 100 percent due to rounding. Below is a breakdown of the survey questions and responses.

Wisconsin Bank CEO Economic Conditions Survey Results
How would you rate the current health of the Wisconsin economy. . .  Mid-Year 2022  End-of-Year 2021  Mid-Year 2021 
Excellent  7%  6%  15% 
Good  64%  73%  76% 
Fair  29%  20%  10% 
Poor  0%  1%  0% 
In the next six months, do you expect the Wisconsin economy to. . .        
Grow  2%  21%  48% 
Weaken  63%  15%  39% 
Stay the same  36%  64%  13% 
Over the next six months, do you expect inflation to. . .       
Rise  50%     
Fall  22%     
Stay about the same  28%     
How likely would you say a recession is in the next six months?       
Very unlikely  4%     
Unlikely  16%     
Neutral  20%     
Likely  45%     
Very likely  16%     
Rate the current demand in the following categories:        
Business Loans        
Excellent  2%  9%  10% 
Good  48%  48%  30% 
Fair  48%  39%  52% 
Poor  2%  5%  8% 
Commercial Real Estate Loans        
Excellent  7%  11%  13% 
Good  52%  44%  44% 
Fair  36%  41%  33% 
Poor  5%  4%  10% 
Residential Real Estate Loans        
Excellent  2%  25%  40% 
Good  20%  48%  48% 
Fair  50%  24%  12% 
Poor  29%  3%  0% 
Agricultural Loans        
Excellent  2%  1%  2% 
Good  37%  22%  34% 
Fair  51%  58%  56% 
Poor  10%  18%  8% 
Excellent  5%     
Good  55%     
Fair  38%     
Poor  2%     
In the next six months, do you anticipate the demand for the following categories will. . .        
Business Loans        
Grow  11%  28%  43% 
Weaken  48%  14%  7% 
Stay the same  41%  59%  51% 
Commercial Real Estate Loans        
Grow  13%  24%  31% 
Weaken  48%  21%  8% 
Stay the same  39%  55%  31% 
Residential Real Estate Loans        
Grow  4%  11%  14% 
Weaken  63%  56%  41% 
Stay the same  34%  33%  46% 
Agricultural Loans        
Grow  6%  15%  18% 
Weaken  31%  14%  6% 
Stay the same  63%  71%  76% 
Grow  11%     
Weaken  36%     
Stay the same  53%     
In the next six months, are the businesses in your bank’s market area likely to. . .        
Hire employees  31%  68%  82% 
Maintain current staffing levels  61%  33%  15% 
Lay off employees  7%  0%  3% 
In the next six months, is your bank likely to. . .        
Hire employees  34%  55%  48% 
Maintain current staffing levels  63%  43%  45% 
Lay off employees  4%  3%  6%