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No Recession in 2023, Says Henderson

by Jerry Goshert

Published: Friday, January 20, 2023

Despite higher interest rates, the U.S. economy will not experience a recession this year.

That's according to Purdue University Extension agriculture officials, who spoke during the university's annual "Top Farmer Crop Workshop" on Jan. 6.

"I personally think 2023 is going to be a slow year in terms of economic growth, but it's going to be economic growth," said Jason Henderson, director of Purdue Extension and an agricultural economist. "I don't think there is going to be a recession. Why? Because of strong fundamentals at the consumer level."

According to Henderson, consumer spending continues to drive the economy, even as inflation raises the cost of all goods. To counter inflation, the Federal Reserve has raised interest rates multiple times. This is expected to slow the economy but only slightly.

For farmers, production costs will remain high. Even though fertilizer and fuel prices recently have cooled off, one panelist, Mike Rahm, an independent consultant, noted that the fertilizer market has considerable upside price risk in 2023. That's partly because U.S. farmers are expected to plant 7-9 million more acres of corn, soybeans and wheat in 2023, boosting demand for nitrogen, phosphorus and potash. Another reason is due to systemic changes taking place in the fertilizer markets, Rahm said.

The fertilizer analyst also sees upside price risk for corn and other commodities, as the war in Ukraine is expected to intensify over the winter. This would result in many Ukrainian farmers not being able to plant their crops this spring. Ukraine is the world's fourth largest exporter of corn.

2022 saw a decline in U.S. corn production, due mostly to drought in the western Corn Belt. However, Chad Hart, Iowa State University agricultural economist, says 2023 will be a rebound year, with farmers planting 92 million acres of corn, up 3.4 million acres from 2022.

Even so, Michael Langemeier, Purdue ag economist, said soybeans should be "slightly more profitable" than corn this year.

Higher interest rates will be a factor affecting the ag credit market. Rates on farm operating notes moved up to the highest level in 10 years during the fourth quarter of 2022, and could rise to 9-10% in 2023, according to Brady Brewer, Purdue ag economist.

In raising interest rates, the Federal Reserve is walking a tightrope. It hopes to tame inflation without raising unemployment. Brewer said those two factors, inflation and unemployment, are always at odds. When the Fed raises interest rates, businesses cut back on hiring.

"Jason just said he doesn't think that we're going into a recession," Brewer said. "I tend to agree with that. I do think that that the growth will be slower."

As the panelists noted, higher interest rates may not impact farmer's spending very much, at least in the short term. Brewer said loan demand actually decreased in 2022.

Henderson said bankers have told him that their No. 1 competition in the loan market is cash.

"Their biggest competitor was farmers having cash in their pocket and paying things without leveraging the farm," Henderson said. "They are being prudent, fruga—however you want to characterize it—a minimalist, maybe, but they were just paying things with cash. They had the cash to do it and they didn't want to leverage up heading into a rising interest rate environment."

After several years of low interest rates and strong profitability, farmers begin 2023 with plenty of cash on hand. This could sustain higher farmland values and cash rents through 2025, but the panelists noted that farmers can't avoid the banker for very long.

"Eventually, with these higher interest rates, some people are going to run out of cash and they're going to have to borrow money, and these interest rates are going to bite more," Langemeier said. "They bite already, because there is an opportunity cost there, we all know that, but they're going to bite even more because you're going to have to borrow more money to buy the land."

He said it may take two or three years of low incomes to draw down farmers' cash reserves.

After rising to 9% or 10% this year, Langemeier said he expects interest rates to back off but only modestly. Don't expect interest rates to return to pre-2021 levels, he said. It will be more like 7-8%.

For the overall economy, the ag economists expect inflation to ease while unemployment inches up a bit. However, if the economy starts to "tank," the Fed will step in quickly to lower interest rates, Langemeier said.

For farmers, another thing to consider is that higher interest rates will strengthen the U.S. dollar, making our exports more expensive on the world market.

While a recession may not hit the U.S. economy, Hart said it could affect other parts of the world.

"I think we are definitely worried about a global recession as we look out there," Hart said, "and as global incomes take the strain, that tends to mean less export demand. I think that's the big challenge, not only in 2023 but beyond that as well."

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