Agricultural producers fought through the ramifications of drought conditions in 2012 to produce solid farm earnings, and the longer-term prospects for the industry are excellent, says BMO Economics.

"Demand for agricultural products is growing rapidly, particularly in emerging markets, which has put agricultural prices and profitability on an upward trajectory," said Aaron Goertzen, Economist, BMO Capital Markets. "Meantime, the industry's international competitiveness has been bolstered by a lower U.S. dollar."

Goertzen also notes that technological advances in production techniques have provided a major boost to overall efficiency, and he expects that interest rates should remain manageable even when they inevitably begin to rise.

Recent rain and snow across the Great Plains and Corn Belt have raised prospects for this year's crop. "Mother Nature is working overtime," said BMO Harris Bank's Sam Miller, who leads the bank's Agriculture lending practice. "The latest U.S. Drought Monitor shows that, compared to last August, the drought is all but eliminated east of the Mississippi, and greatly reduced west of the Mississippi."

However, there are still reasons to be cautious. "While interest rate increases should be manageable, they could lead to a moderate correction in farmland values," said Goertzen.

Other industry challenges highlighted by Goertzen include:

  • high feed costs, resulting from the drought, are posing a challenge for livestock producers
  • competition from foreign producers is increasing
  • producers remain vulnerable to increases in energy prices.