Doug Oachs has input price increases on his mind. Oachs, who runs a corn and soybean operation near Herman in west-central Minnesota with his wife, Kim, locked in most inputs for this year’s crop in 2021, but price volatility has him concerned about 2023.
“When you don’t know your input costs, it’s nerve-racking to figure out where your breakeven is,” says Oachs, a fourth-generation producer who started farming with his father in 1980.
With the national inflation rate hitting 8.5% in March 2022 (the highest since 1982) — and input expenses that are seeing up to triple-digit increases — Oachs is not alone in being concerned. Even the experts are finding it hard to understand the complicated relationships between inflation, supply chain disruptions related to the COVID-19 pandemic, and high demand and low supply.
“Are these increases due to general inflation, the Federal Reserve’s monetary policy or supply chain issues? Economists are really struggling with this right now,” says Michael Langemeier, associate director of the Center for Commercial Agriculture at Purdue University.
While high costs probably won’t decrease overnight, there are glimpses of blue sky. World demand for U.S. grain is positive, crop prices are likely to remain high and many operations have been able to build working capital in recent years. The USDA projects that cash receipts at the farm gate look promising for 2022, as well.
For Oachs, some of it comes down to four decades of experience weathering the ups and downs of farming, including tough times in the 1980s. “I don’t think you can be an agricultural producer without being optimistic,” he says. “We plan for a good crop, we manage the inputs and market risks with the tools we have, and we go from there. I try not to borrow worry.”
Learn more about agricultural inflation:
- Three myths about ag inflation
- How today’s financial picture is rewriting the 1980s script
- 5 things to know about crop nutrient costs
Inflation 101
We asked Jason DeVinny, research analyst with the CHS global research team, to answer some key questions about inflation. The team seeks to educate farmers, ranchers and cooperatives on market information, analytics and insights to help inform decision-making.
What’s the scale and scope of inflation right now?
On a global scale, no nation has gone untouched. Before the pandemic, global inflation was averaging around 4% per year. The U.S. was at approximately 7% when the calendar turned over to 2022, and the International Monetary Fund thinks there will be another 4% increase for developed nations including the U.S. this year. That’s big.
What caused this rise in inflation?
Some of it is supply-driven. Coming out of the pandemic, people have cash and they want to spend it. There are industries that can’t keep up with demand because of labor shortages or lack of materials. Other industries could have kept up with demand, but ran into significant logistical challenges across almost every area of global transportation. And some of it is labor costs: As inflation rises, workers demand higher wages and businesses raise prices to cover those increases. It becomes a vicious cycle.
What can be done about it?
The Federal Reserve’s goal is to delicately bring prices down and get inflation more in line with long-term goals of around 2% annually without harming business growth, which could toss us into a recession. Historically, periods of high inflation have been followed by a recession.
On March 16 this year, the Fed made a long-awaited announcement that it would raise interest rates by a quarter point. What markets and observers are watching now is the pace and size of interest rate increases over the balance of the year.
Is inflation good or bad for farmers?
We can only loosely answer that question right now. The USDA has reported that cash receipts at the farm gate in 2021 were way up versus prior years. It’s great when the top line of your income statement is healthy. The USDA is also suggesting that the forecast for 2022 looks promising.
But that’s only half the equation. When you look at the other side of the coin, farm production expenses are up significantly.
I think the opportunities to make money were there in 2021 for farms that had a good growing season and/or crop to sell and were able to effectively manage margins through input and marketing decisions. And the USDA is forecasting that the opportunity could be there again this year.
What about borrowing costs?
As the Fed raises interest rates, borrowing costs will increase for everyone, including farmers. Farmers today actually have a bit more cash than in past years and are enjoying greater liquidity. They’ve been able to cut down debt in both real estate and non-real estate holdings. In an April 2022 report, the Federal Reserve noted that farm loans had increased at the fastest pace in nearly four years but remained modest by recent standards.
Any advice for farmers during this time of volatility and uncertainty?
Stay nimble and consult with experts across the spectrum of input needs and marketing opportunities. They are dialed in to their respective markets and can provide advice on decision-making. Opportunities are there for 2022, and I think there can be good upside for farmers.
Related stories:
- Three myths about ag inflation
- How today’s financial picture is rewriting the 1980s script
- 5 things to know about crop nutrient costs
Check out the full Spring 2022 issue of C magazine with this article and more.
The material provided is for informational purposes and should not be viewed as a recommendation to buy, sell or hold any commodity contract, investment or security or to engage in any risk management strategy or transaction. This information is taken from sources that we believe to be reliable, but is not guaranteed by CHS as to accuracy or completeness. The information and opinions represented are those of the author, are subject to change and may be inconsistent with the views of CHS Inc. or any of its subsidiaries.
