Nate Kauffman isn’t just a senior vice president with the Federal Reserve Bank of Kansas City, he’s also an avid cyclist. His time on the road has led to plenty of time ruminating on how to get the most out of every mile. It also has some interesting connections back to the agriculture industry.

For instance, most farmers are familiar with the concepts of headwinds and tailwinds – various factors that can either help or hinder grain prices. But Kauffman’s time on a bicycle has also educated him about the potential hazards that crosswinds can bring.

Crosswinds essentially create a game of “push and pull” between the cyclist and the wind because they force the rider to lean their body into the wind and steer their front wheel into the wind to maintain their balance.

“Crosswinds can be worse than headwinds because you never really know where they’re coming from or how severe they are,” Kauffman says. “They’re hard to anticipate.”

With that in mind, what are some potential crosswinds in the ag economy that farmers should be aware of?

Sources of uncertainty

Kauffman has his eyes on several ag-specific factors and some more general economic factors worth monitoring. First and foremost, he has concerns that the high levels of farmer profitability seen in 2020-22 are not sustainable moving forward.

“It’s reasonable to conclude that at some point – and it’s hard to say when – we will see profit margins come back. We’ll see commodity prices pull back while input costs stay elevated. We’ve seen it in the past where input costs don’t fall as quickly as commodity prices do.

Secondly, Kauffman has spotted an increase in financing needs from borrowers. “This is not a crisis, but some operations are facing more pressure because profit margins are down and their financing needs have also risen [as interest rates are also on the rise].”

Also worth noting is the downward trend of governmental payments, which represented a significant percentage of farm income in recent years.

“It’s reasonable to suggest the possibility that there won’t be the same level of funding available by way of direct and ad hoc payments for agriculture,” Kauffman says.

The final ag-specific crosswind is the ongoing threat of drought.

“Areas that have been hit by extreme drought are facing substantial challenges that aren’t appearing to go away any time soon,” he says.

Kauffman adds that there are four additional macroeconomic crosswinds that have the potential to throw farming operations off balance this year: