Inflation is rising, and it’s taking your farm’s profits with it. During the past four decades, it was a docile bullet point of economic outlooks. Today, inflation, which measures general price trends across the economy, is on the move. U.S. inflation accelerated to a 7.9% annual rate in February — a 40-year high.
“The inflation genie is out of the bottle and might be as difficult to get back in as it was in the 1970s,” says Jerry Gulke, president of Gulke Group and Illinois farmer. “Politicians will be forced to do something, and history suggests that might not be pleasant.”
Read More: Adios to the Ag Dollar: A Farmer’s Story on Inflation and Inputs
Inflation is exceptionally difficult to tame, adds Chip Flory, Farm Journal Economist and “AgriTalk” Host: “To tame it, you have to kill it. If you kill it, you kill the economy, and it sends you into recession.”
The presidents of the Federal Reserve Bank and members of the Federal Open Market Committee will provide clues and warnings to their upcoming decisions, says Ernie Goss, Creighton University economist.
“They do not want to surprise anyone; they want to deliver what the markets expect,” he says. “They also want the markets to expect what they deliver. If the Fed is going to take the Paul Volcker approach [see page 14], they will warn you.”
Double-digit inflation is buried deep in the history books, and those who lived through the boom of the 1970s and rapid bust of the 1980s are smarter for it.
“But the problem is farmers who survived that time are starting to age out of farming,” says Bob Utterback, president of Utterback Marketing. “It’s easy to listen to the stories and think this time it will be different; this is where the trap occurs.”
As you face rising interest rates, higher input costs, asset scarcity and more, consider these strategies to face the economic realities of inflation.
“Take care of your health, which remains the highest inflation component. Here are some other ideas:
- Remember inputs are not consumer products and have almost nothing to do with headline Consumer Price Index (CPI) numbers.
- Study your time horizon (retirement, reducing rented acres, etc.), and get a good set of soil tests. Make a withdrawal from high-fertility tracts by skipping phosphorus and potassium.
- If you are close to retirement without a successor, sell out now. Like $16 beans, it will be hard to lose much upside.
- Avoid investments you don’t understand, like meme stocks, crypto, etc. Regardless of how promising they look.”
~John Phipps, Illinois Farmer
“Lock in current low rates now before they really start to rise. Also, lock in some amount of higher crop prices as those opportunities are presented to you. But if there is hyperinflation, the opposite is warranted, i.e. lock in input costs and let your crop prices rise. However, this is not hyperinflation — yet.” ~Paul Neiffer, CLA Partner and CPA
“Stay consistent in marketing crops and livestock; don’t go ‘all Argentina’ on us and start hoarding crops in storage. Inflation will be a rising tide in commodity prices, but don’t double-down and add scarcity by hoarding crops. Also, own physical inventory when you can: fuel, fertilizer, other crop inputs and equipment.”
Chip Flory, Farm Journal Economist
“Build funds to be spent when the eventual economic correction develops and economic stress forces assets into the market at below-market value. It’s time for producers to keep their heads down, work hard and minimize mistakes. Emotional stress will be high, but if you have a plan of attack of how you will manage risk, you will enjoy farming a lot more!”
~Bob Utterback, Utterback Marketing
Watch These Inflation Indicators
Inflation is complicated. Supply-chain disruptions, labor shortages, demand increases and economic shocks can all play a role in inflationary pressure. “A modest amount of inflation is good for agriculture, but we’re not in modest territory,” says Ernie Goss, Creighton University economist. He suggests watching these two factors.
“The yield on the 10-year U.S. treasury bond tells you about global risk and inflation,” Goss says. “When inflation ticks up that yield will move up. If it bounces over 2%, consider it a warning sign inflation is worse than we think. If it comes down below 2%, it tells us investors are not seeing as much inflation as we economists see.”
Inflation and oil prices are often labeled as a cause-and-effect relationship. As oil prices move up, inflation follows. If oil prices jump above $100 per barrel it will push the fed to raise rates even more briskly, Goss says.
How to Kill Inflation
In 1965 inflation was 1%. By 1980 it hit 14%. To rein in runaway inflation, cigar-chomping Fed Chairman Paul Volcker took unprecedented steps and raised interest rates to 20%.
“I was Secretary of Agriculture and met with Volcker twice encouraging him to cut rates,” says John Block, senior policy advisor for OFW. “He said he had to fight inflation by raising rates.”
It worked, Block admits. By 1983, inflation had retreated to just over 3%, but businesses and families paid a big price.
Will today’s farmers face the same tough medicine delivered in the 1980s?
“Our debt costs are low now,” Block says. “But U.S. government debt is over $30 trillion. For our government, the big risk will be the interest we will have to pay on that debt. To pay the interest on our growing debt, we will have to raise taxes or just stack up more debt.”
Read More: Adios to the Ag Dollar: A Farmer’s Story on Inflation and Inputs
Sara Schafer, content manager for Farm Journal and editor of Top Producer, knows asking good questions creates the most useful stories. She uses her Missouri farm roots to cover innovative operations, business topics and more.
