Ask Tom Crave what’s keeping him up at night and the answer is clear: inflation.
“The cost of goods, fertilizer this coming spring, seed, machinery, parts, repairs — everything is going up, even fuel,” says Crave, part-owner of Crave Brothers Farm in Waterloo, Wis. “We’ve had a respectable milk price this last year. But inflation is gouging into that.”
Crave, whose operation includes 2,100 Holstein cows and 2,500 crop acres, isn’t alone in battling this growing concern. Inflation and rising costs weigh on farm operations across the country.
The Inflation Equation
Inflation has become a pandemic reality. Core inflation rose 3.6% in August from a year ago, the biggest jump in more than 30 years. Personal consumption expenditures rose 4.3% in August versus 2020, which marks the highest data for the cost levels of goods and services since 1991.
“Everybody is talking about inflation and interest rates, and everybody seems to have an opinion about it,” says Brent Gloy, economist at Agriculture Economic Insights. “They are largely outside of our control, but we want to be able to be nimble enough to just make business adjustments accordingly.”
The trend points to higher inflation for the rest of the year and probably in 2022. But will it tick up then settle back down around 2%? Or will it stay in the range of 2.5% to 5%? Gloy is watching the following factors to gauge the outcomes.
Sustained inflation is ahead because:
- Multiple price categories have risen, such as used cars, lumber, etc.
- Consumers have saved more in the last two years.
- Costs for producers of goods have gone up, which are being pushed onto buyers.
- Economic stimulus efforts from the U.S. government continue.
Higher inflation will be brief because:
- The COVID-19 pandemic was a supply shock that will eventually be resolved.
- The labor supply will likely increase.
- Future stimulus efforts could be smaller.
- Technology, automation and globalization, which are deflationary trends, continue and put downward pressure on prices.
“At the end of the day, you have good arguments on both sides,” Gloy says. “But remember, we’re not talking about double-digit inflation. This is a period where we’re higher than we have been for quite a while.”
Your Debt Strategy
One of the tools the Federal Reserve System uses to combat inflation is interest rates. Many farmers are seeing all0time lows for interest rates on fixed and variable rate loans. As inflation concerns rise, take the time to analyze your debt structure, encourages David Widmar, economist at Agriculture Economic Insights.
What share of your debt portfolio has a long-term structure and is fixed? What share is short term and is hard to fix, such as a line of credit?
“You might need to rebalance your portfolio if you are concerned about inflation,” Widmar says. “You could figure out a way to get rely less on a line of credit, for example. To do so, you could restructure to get more long-term debt and free up some working capital. That’s a conversation you can have as your trusted lending partner to line up your concerns with strategies.”
A Look Back and Forward for Inflation
The Personal Consumption Expenditures (PCE) price index is a monthly measure of how much Americans are spending on goods and services. So far in 2021, the PCE has shown a sharp uptick, says David Widmar, economist at Agriculture Economic Insights. “In looking back, you can see these large increases are from previously very low rates,” he says.
