Innovation key as margins narrow, says USDA Economist

VAIL, COLO. — Profit margins for nearly all US commodity producers have come under increasing pressure from rising input costs and intensifying competition from global suppliers. As a result, major geopolitical disruptions, such as Russia’s invasion of Ukraine or threats to shipping through the Strait of Hormuz, have become some of the few catalysts capable of providing meaningful support to agricultural commodity prices.

“The question becomes is this something that the market can rely on long term,” Justin Benavidez, chief economist at the US Department of Agriculture, recently asked attendees at the 41st annual International Sweetener Symposium in Vail. “I would think it’s pretty clear that no, we can’t continue to rely on shocks to provide injections of profitability. You have to start looking for new markets, new uses and new markets for those new uses.”

Benavidez reviewed the challenges that have unsettled agricultural commodity markets this year and offered insight into how producers can navigate them, beginning with a clear understanding of why production costs have been steadily rising. He noted that commodity prices and production expenses generally moved in tandem until around 2015, when the relationship began to diverge. Since then, increasingly efficient global competitors have expanded production and captured market share, which has narrowed margins for US producers.

“When you have an increase in total supply coupled with an increased demand for inputs and not a whole lot of production of those inputs, what you begin to see is a higher cost of production with a lower rate of return,” he explained.

That situation has been further complicated by disruptions to shipping through the Strait of Hormuz, a critical corridor that typically handles about one-third of the world’s seaborne fertilizer trade. The strait also is a vital conduit for global energy shipments, and disruptions there have supported higher fuel prices across the entire agricultural commodity supply chain and squeezed margins even tighter.

“This will become important not only for the crop year we’re in but for the upcoming crop year as we think about preplant applications in the fall,” Benavidez said. “We know that the opening of the Strait of Hormuz does not mean that fertilizer will show up immediately. There’s going to be some sort of delay between the opening up of the Strait and the filling of ships and their arrival at the port of New Orleans. We think that between the opening of the Strait and the return to normal shipping will take anywhere between four to six months. So, we are at a place where there could be some challenges this fall for new plant in terms of the cost of production. It could lead to changes in overall planting choices for next year’s crop.”

Volatility in trade policy also has clouded the outlook, injecting uncertainty across global markets and discouraging some long-term trading relationships. Compounding the challenge, the sustained strength of the US dollar over the past decade has reduced the competitiveness of US agricultural exports relative to those of rival suppliers.

Still, Benavidez said there were some bright spots. Strong demand for corn, particularly from Mexico, coupled with record high mandates for the domestic renewable fuel standard program have provided profitable outlets for corn and soybean producers.

Also, challenging weather events, from droughts in the Plains to damaging floods in parts of the Midwest, have complicated crop production, but the threat these conditions pose to yields has provided support for agricultural commodity prices.

“We’re at historically low wheat production in 2026,” Benavidez said. “Low acres, low yield and an increase in overall abandonment have led to historically low wheat production, which is supporting prices but also making it a little less competitive for exports globally.”

Benavidez noted that while federal financial assistance has helped cushion the impact of recent market challenges, such support was never intended to serve as a permanent solution. Long-term success, he said, will depend on producers’ ability to innovate, identify new opportunities and stay actively engaged in the marketplace as they navigate an increasingly volatile operating environment.

“I do truly believe we are still competitive,” he said. “Knowing the costs, marketing at the appropriate moment, taking advantage of short run ups in price are really important because you fundamentally can’t change long-term price without changing supply and demand.”