Agriculture, Food and Fuel Summit: Upstream Results Under Pressure | Insights | Bloomberg Professional Services

This analysis comes from Jennifer Bartashus and Jason F. Miner, senior industry analysts at Bloomberg Intelligence. It first appeared on Bloomberg Terminal.

The outlook for corn and soybean prices in 2024 remains under downward pressure as experts at the BI Farm, Food and Fuel Summit stressed that big harvests loom over the dumpsters still occupied. Despite negative margins, farmers are likely to resort to planting savings. With greater macroeconomic risk, the cost of debt is adding pressure.

Risks to agriculture include rampant inflation

The risk of higher inflation was among our key takeaways from comments from Ken Zuckerberg, director of global research at CHS. If interest rate cuts are delayed, agricultural budgets risk coming under even further pressure. According to the USDA, farm debt is outpacing cash receipts, a relationship last seen after the 2012 drought. Pressure to raise long-term interest rates comes from a range of credit risks, including the approach of U.S. federal debt-to-GDP to its post-World War II peak.

Despite optimism about potential demand for biofuels, a cycle of declining crop prices and declining farm incomes is increasing pressure on (ever larger) U.S. farms to innovate. We saw significant, if incremental, potential in Zuckerberg’s claim that agriculture has been less transformed by digital technologies than any other $1 trillion industry.

Larger, cheaper harvests put the biggest strain on margins in upstream markets

Lower crop prices prompt farmers to cut costs. This is leading to earnings pressure upstream as margin decline due to lower prices outweighs improved volume at fertilizer leaders such as Nutrien, Yara and Mosaic, as well as chemical and seed leaders such as Corteva, Bayer and BASF. In the fourth quarter, median Ebitda margin in BI Agriculture Upstream’s peer group fell 480 basis points, while Ebitda fell 15% over the last 12 months.

In contrast, cheaper and higher-yielding harvests mean less pressure on margins for companies in the BI Agriculture Downstream peer group. Here, the Ebitda margins only fell by 40 basis points in the fourth quarter. Consensus suggests that this group’s revenue growth will average 4.4% in 2024 versus a 0.6% decline in the upstream cohort. Moving forward, the consensus suggests that major players – including JBS, Wilmar, Tyson and Marfrig – could see modest growth.

An oversupply of corn can lead to price increases and pressure on margins

Krista Swanson, senior economist at the National Corn Growers Association (NCGA), emphasized that there is a greater likelihood that the U.S. corn surplus would rise and depress prices. The group’s calculations show that U.S. corn yields have increased for 90 years. If extended, 2024-25 could see the largest corn surplus since 1987 and the highest stockpiles since 1995. Weakness in key markets has meant that the composition of demand has remained stable. As local growth slows, exports will have to partially fill the gap. But growing competition from Brazil and a strong dollar pose challenges.

While these pressures support a negative outlook for corn margins and yield growth could push inventories into the high teens this decade, Swanson emphasized that several agronomic factors are limiting a decline in corn production.

Robust soybean production; Fuel opportunities compete with export risks

Weak demand in China, a strong dollar and record-breaking soy production in South America are among the challenges to prices and U.S. exports we gleaned from comments from Scott Gerlt, chief economist at the American Soybean Association. Increased use of renewable diesel, supported by carbon credits, is increasing U.S. soybean oil consumption and is expected to offset the decline in exports. But lower oil prices and concerns about a rise in alternative low-carbon feedstocks are threatening the value of soybean oil. Although input costs are below recent highs, weaker soybean oil prices are keeping U.S. soybean processing margins tight.

On the soybean supply side, U.S. farmers face regulatory issues that could limit their options in 2025. Limited availability of herbicides can increase production costs and reduce environmental benefits as farmers return to more tillage to control weeds.

In Brazil, the bottom of agricultural incomes is underway

Despite lower crop prices, Brazilian farmers’ profit margins were improved by reducing input costs. Farm profits, which have fallen in all major regions, are expected to rebound toward the 10-year average next year. This was a key takeaway from comments by Ruy Cunha, CEO of Lavoro, the largest agricultural inputs retailer in Latin America, at our 2024 Farm, Food & Fuel conference. Crop protection prices are up 36-47% year-over-year fell, and fertilizer prices have also returned to pre-pandemic levels.

Falling prices in 2023 put pressure on the balance sheets of some participants in Brazil that had built up inventories following Russia’s invasion of Ukraine. As inventories return to normal, we believe conditions in 2024 support a resumption of steady growth in Brazil’s agricultural sector.