July 5, 2022 | Business insights
The farm labor shortage, soaring fertilizer prices, and increasing inflation can easily put a damper on what otherwise should be a favorable time for agriculture. While the effects of these price fluctuations can be mitigated, doing so requires careful planning and preparation.
The farming industry—like every industry—has had to grapple with significant (and in some cases systemic) changes over the past few years in the way it conducts business. Demand for row crops, fresh produce, and nuts and berries has stayed robust. But the lingering after-effects of Covid-19 persist, causing supply chain disruptions, productivity issues, and inflation. Fertilizer prices have spiked and look set to remain elevated until the end of 2022, if not longer.
Inflation has risen along with demand, as agricultural commodities sit 40% above their pre-pandemic levels. The impact has rippled throughout the entire industry and will continue to affect every farming business, large and small alike. While the effects of these price fluctuations can be mitigated, doing so requires careful planning and preparation.
The Impact of the Great Resignation
The Great Resignation has dealt the farming industry another blow, as employees look for increased benefits and better work-life balance. The resulting labor shortages risk subduing what otherwise should be a robust time for agriculture.
Even with these lingering problems, there are tremendous opportunities for the farming industry as the world emerges from the pandemic and the economy continues to recover. The company that can navigate these obstacles is well-primed to succeed in these new business conditions.
By identifying upcoming trends and taking preemptive steps to navigate them, agricultural businesses can gain the edge over their competitors and make current disruptions work in their favor.
Preparing in Advance
Commodity prices overall are doing well, and planned improvements to infrastructure will ensure faster, smoother transit times for farm products. That bodes well for the long-term and can help blunt the impact of higher inflation and similar challenges. The market won’t feel the full impact of higher costs across the entire food chain for another year or so, giving companies time to plan ahead.
Now is the time to make sure vital equipment such as tractors and forage choppers are in good working order by replacing parts where necessary and following an effective maintenance program. Since equipment shortages are likely to linger, it’s also worthwhile keeping some spare parts on hand so machinery breakdowns won’t jeopardize or delay your operations. Supply chain issues are also liable to continue affecting businesses’ ability to get products to market; if you haven’t done so yet, consider strategies to avoid spoilage.
Fertilizer prices are expected to remain high for the rest of the year, and possibly even into 2023. Purchase extra supplies when you can and increase storage space to keep them ready for when you need them. Similarly, as the labor market tilts in workers’ favor and the price of labor increases, adjusting wages and other benefits to retain skilled and experienced workers is a good way to protect your business from the costs of seeking and hiring new talent.
These factors are concerning because they affect the industry at its core: its ability to grow and harvest food. However, companies that can make accommodations and find solutions to these difficulties will be better able to meet higher demand in a global market.
Inflation and Soaring Fertilizer Prices: The New Normal for Farmers?
Escalating production costs have been part of the agribusiness landscape for some time now. For grain farmers, expenses rose by 21% between 2010 and 2020, with fertilizer costs making up some 20%–35% of the total. In conjunction with consistently rising overheads, grain prices have fluctuated wildly, and don’t seem ready to stabilize anytime soon.
Global supply chain disruptions have just turned up the financial crunch another notch. International demand for fertilizer has skyrocketed, with up to 50% increases in 2022 according to studies from Texas A&M. Fertilizer prices are likely to continue rising in response, with farmers everywhere feeling the pinch.
A wide range of agricultural operations—from producers of row crops and fresh produce to nuts and berries—are feeling the impact of spiraling inflation and surging fertilizer prices. But it’s those who require more nitrogen fertilizer who seem worst affected. In January, the US Department of Agriculture (USDA) reported that the cost of the country’s three main forms of nitrogen fertilizer—anhydrous ammonia, urea, and liquid nitrogen—had increased by 235%, 149%, and 192% respectively during 2021.
To illustrate the problem, last year, one Arkansas farmer spent $400 per ton on urea fertilizer for corn, rice, cotton, and soybeans. This year, that same bill will increase by 175%, to $1,100 per ton!
Farm Income: Obstacles and Assistance
The USDA anticipates farm cash receipts reaching the $391 billion mark in 2021—the best result in seven years. Further, commodity prices are currently high for many crops.
Despite these positive signs, actual farm income is expected to drop in 2022 to the tune of $23 billion—a 19% dip from 2021—according to recent reports from the Food & Agricultural Policy Research Institute (FAPRI) at the University of Missouri. This projection is based largely on two factors: higher input costs and the expected loss of federal Covid-19 subsidies. Although US farmers netted almost $30.6 billion in relief payments through October 2021, many of these programs are now scaling back.
While some programs wind down, the USDA nonetheless plans to issue an additional $1.8 billion through traditional farm subsidy programs. A new $6 billion initiative—Pandemic Assistance for Producers—also aims to target a wider group of producers, as well as provide support for the food supply chain and producers of renewable fuel. The new program encompasses the Coronavirus Food Assistance Program and other existing initiatives.
Strategic Planning to Overcome
When expenses surge and prices sink, farming businesses get caught in the middle. The USDA predicts that “nearly all categories of expenses” will be higher in 2022 than last year. The results can be devastating—but anticipation and preparation can help protect your business from the worst of it.
The supply chain has faced significant problems as well, with many of the factors beyond anyone’s control. While these complex networks are working overtime to meet the demand surge, we wind up stuck with inflation and cost increases in the interim. The question is not how to avoid these problems (there’s no getting around them) but how best to confront and overcome them.
Labor Shortages in Agribusiness Are Getting Worse
The challenges created by rising fertilizer prices are compounded by the worsening labor shortages. According to Farm Journal’s 2019 Ag Labor Study, nearly 40% of farmers and ranchers cited finding qualified workers as their biggest challenge. And the problem has only grown more critical in recent years.
What is Driving Labor Shortages?
A variety of factors have contributed to the situation:
- Rural communities are aging as younger people move to urban areas. This has led to population decline in areas focused on agriculture. With an aging population, labor availability has suffered accordingly.
- It’s easier to find a job away from the farm. The advent of remote and hybrid working conditions means prospective employees can perform many office jobs remotely. With increased options, they can more easily look outside the farming industry for work.
- Other industries offer better pay. It's not just unemployment benefits keeping job-seekers away. The agriculture industry finds it hard to compete with the wages, hours, and benefits offered in other sectors.
- Immigration policies. Current restrictive policies prevent many would-be laborers from filling US jobs.
- Automation affects labor. The farming industry benefits from automation far more than most industries. But increased automation changes both the need for and availability of qualified workers.
- Covid-19 continues to have an impact. Health regulations and the necessities of quarantining to prevent the spread of illness can sap worker availability.
As with fertilizer prices and other operating costs, the labor shortage isn’t predicted to improve anytime soon. Rural population decline will most likely continue. Meanwhile, the shift to remote labor will only accelerate as technology continues improving and business becomes increasingly global. And as long as Covid-19 lingers and variants evolve, health precautions will remain necessary.
Key Strategies for Coping with Higher Fertilizer Prices and Labor Shortages
With both higher fertilizer prices and labor shortages a reality today and in the foreseeable future, it’s time for farmers to develop some forward-looking coping strategies. This includes practical steps you can take right away and measurable goals to work toward through 2022 and beyond.
Every business and farm is different, and what works best for you may not work well for somebody else. But given the shared conditions of the agricultural market and the predicted trends in the medium- to long-term, there are a few key strategies everyone in farming should consider. These can help address the challenges of labor shortages and higher fertilizer prices. And if implemented effectively, they might also help you navigate similar situations should they arise again in the future.
Manage Nutrients to Mitigate Fertilizer Costs
With spring on the way, you’ll be testing the soil for all of your fields. Once you know which nutrients are at optimal levels, and which are too high or too low, check against your fertilizer inventory to determine what you actually need to purchase to minimize waste. Alternatively, if you have some cash reserves, you can also stock up on your preferred fertilizer to offset future price fluctuations while still keeping an eye on what your crops need.
Soil pH concerns should take priority, and are first on the list to address in the event of a limited budget. In addition to looking for fertilizers that will maximize efficiency, adopt a “build-and-maintain” approach that will let you replenish the nutrients consumed by your crops each year, so you can keep expenditures to a minimum year over year.
Explore Alternative Sources of Fertilizers
Exploring alternatives to traditional sources can help keep fertilizer prices down and save your company money without a loss in productivity or efficiency. They may also be less affected by the market fluctuations, making their pricing more predictable in the future.
Biosolid fertilizers are made from treated and processed domestic septage and sewage sludge. Organic and rich in nutrients, biosolids can be recycled again and again to keep the soil productive. According to the Environmental Protection Agency (EPA), biosolids can enhance water quality, pollution prevention, and sustainable agriculture.
Industrial wastes can also be used beneficially in fertilizers when properly manufactured and applied, and are frequently a good source of zinc and other micronutrient metals. The EPA sets strict guidelines for waste-derived fertilizers, specifying limits on the levels of heavy metals and other potentially toxic compounds. Keep in mind, you may need a permit to use these fertilizers.
Similarly, the efficient harnessing of ammonia emissions found in livestock farming has the potential to reduce overall emission levels while providing liquid nitrogen for fertilizers. While the system, which uses gas-permeable membranes to capture and recycle ammonia from livestock wastewater, has yet to roll out commercially, it holds great promise for the future.
Leverage Smart Farming Technology to Address Labor Shortages
Automation has been part of farming for decades, and new advancements can help you readily fill the labor gap. Autonomous combines, tractors, and scalable drones can perform many basic functions with row crops. Current agritech solutions also use the Internet of Things (IoT) to leverage the benefits of predictive forecasting models, wireless sensors, robotics, and data analytics.
Specialty crops in particular can benefit from increasingly flexible forms of automation that you can tailor to suit specific needs. For instance, after a decade of industry R&D berry farmers have begun piloting a mechanizing the picking process with robots, improving precision while reducing time and labor costs.
Effective use of the right technology can mitigate many labor shortage concerns. It also has the potential to improve the quality and quantity of output through remote monitoring and efficient automation. However, not also of these technologies are broadly applicable across crops—some only make sense in particular applications. Further, the initial investment may prove prohibitive to smaller farmers. Your individual business needs will inform you best on how to proceed here.
Consider the H-2A Program to Hire Temporary Agriculture Workers
The H-2A Visa Program lets farmers fill labor shortages by hiring workers from different countries, and works for both seasonal and short-term labor needs. The total number of H-2A visas has risen from just over 16,000 in 1997 to 213,394 by 2020.
The process is complex and has strict requirements, and Covid-19 has added even more layers to it. But if you anticipate a shortage of workers in the future and can begin the application now, it’s a ready way to fill your need and make sure you’re not stymied by a lack of available hands.
Moving Forward and Managing Fertilizer Prices
The immediate future unfortunately does not forecast quick relief for agricultural businesses; however, with thoughtful planning and implementing a few new strategies, you can adapt your operations to cope with the new realities of the industry—and prepare for the new normal over the long term. If implemented smartly, they can even improve your profit margins considerably.
However, these strategies also require some financial investment, and an eye appraising the next few years instead of just the next few quarters. With so much changing so quickly, it’s vital to have a financial partner with deep industry expertise at your side to help. Understanding the industry from farm to fork, they’re able to help you predict cashflow, develop financial strategies and build solutions to invest in new strategies to meet your needs in the current business environment and for longer-term success.
The farm industry is unlike any other, and its various sectors all have their own unique needs and methods. We know the challenges faced by farming businesses every day, and we have the knowledge to help you pilot through both today’s environment and the unexpected challenges the future holds. Reach out to First Bank & Trust, a division of HTLF Bank today to speak to a team member and get started!