Inflation in agriculture is a big deal at the moment.
The basic definition of inflation is “too much money chasing too few goods,” and that is exactly what is happening now. Over the past couple of years several factors have led to the circumstances we find ourselves in today. Federal monetary policies, COVID-19, the national response to it, and resulting supply chain issues have created a situation in which everything is more expensive.
All across the country, Americans are noticing the prices of the goods and services they regularly consume continue to rise. Farmers and those involved in agribusiness operations are especially feeling the pinch.
Effects of Inflation in Agriculture on Farmers
One of the most noticeable price increases has been at the gas pump. For ordinary Americans, getting from point A to point B is more expensive as prices continue to climb. For diesel consumers, it is even worse. As of May 2022, diesel prices in Tennessee (where we have several branch offices) averaged $5.33 per gallon. One year ago, it was closer to $3.
For farmers, fuel is essential to the operation of their entire business. Rising prices mean that filling up a tractor could easily cost over $1,000. Even a small farming operation usually has multiple pieces of equipment that need to be refueled frequently. Those costs quickly add up.
Pamela and David Thompson, owners of Thompson’s Farm near Lebanon, TN, reported to Nashville’s News Channel 5 that their farm expenses have nearly doubled this past year. She told them, “Diesel prices are outrageous. The cost of fertilizer has doubled, and gasoline has tripled. It’s just one thing after another and then you have to worry.”
Worry and anxiety are simply a big side effect of inflation in agriculture on farmers.
Commodity Inflation
The U.S. Consumer Price Index isn’t the only measure of inflation that is used to measure inflation. (Currently 8.5%…the highest since 1981.) The United Nations’ Food and Agricultural Organization (FAO) regularly releases a “Food Price Index” report that measures the changes in raw food prices around the world.
Their most recent index currently shows an incredible 33.6% year-over-year increase. It also shows that the prices have risen 75% since their low in May 2020. Even though operating costs are going up, the fact that farmers can realize higher prices for their crops can be a positive aspect of inflation.
IHS Markit (part of S&P Global) posted a Special Report on Food and Ag Commodity Inflation recently in which they listed several of the factors that have contributed to high commodity inflation. These include:
- High Chinese demand for soybeans, corn, sorghum, wheat, and grains for feed.
- COVID-related production issues as a result of labor shortages and less acreage being planted
- Decreased livestock production as a result of higher feed prices
- Supply chain issues affecting processing and logistics
- Poor policy decisions that have led to fewer workers at a time when there is more money in circulation and fewer goods to be had.
Commodity prices are historically a reliable measure of inflation in agriculture. They usually respond quickly to sudden increases in demand. For example, when there’s not enough bread on the shelf (for any combination of the reasons above), the wheat needed makes it becomes more valuable.
Likewise, sudden shocks to the agricultural system cause commodity prices to skyrocket. That’s good news for the ones who have commodities to sell!
What Happens to Land Prices During Inflation
Like gold and silver, land is always seen as a good hedge during times of inflation. It is a stable asset that reliability appreciates year over year. Farmland has an added advantage during inflationary periods because of its ability to produce commodities that are suddenly in high demand.
This is known as asset inflation. Low interest rates and people seeking a safety net against consumer inflation are what drive the cost of land and real estate higher.
When these factors all come together, they create a “perfect storm” for land values:
- Low inventory of available land for sale
- High commodity prices making people want to invest in farmland
- Investors moving to land as a hedge against inflation
- Historically low interest rates that are beginning to rise
Some individuals looking to purchase farmland may want to jump in quickly knowing that prices will only continue to rise due to consumer inflation, and they can likely get a good return on their investment because of what the land can produce. Other potential buyers may decide to wait in the hopes that land prices will level out as interest rates rise and the market eventually corrects itself.
Owners of farmland often find themselves at a crossroads, too, at times like this when land values are at (or near) all-time highs. On one hand, if they are thinking about selling they can be assured of finding a buyer willing to pay top dollar. On the other hand, they may want to hold onto it knowing that land prices will only continue to go up even further as time goes on.
One thing is certain when it comes to farmland…everyone is paying a lot more attention to it right now!
Will Farmland Prices Crash?
It isn’t likely that farm values will decrease any time soon. Even following other points in U.S. history (like the early 1980s) when land was overvalued, farmland didn’t crash. It has proven to be a solid investment regardless of economic circumstances.
And unlike the recession of 2008 which was largely caused by a crash in the housing market and wild lending practices, our current situation isn’t the result of any over-inflated bubbles. If you have farmland or are considering purchasing some, we’re confident that it will be a reliable investment. However, every situation is unique. So we recommend doing your due diligence and seeking dependable expert advice before making any big decisions.
We’re Here When Farmers Are Struggling
For over 40 years, our team at CRS CPA has been partnering with farmers all across Tennessee…helping them set up their businesses, manage their finances, stay on top of taxes, and weather all kinds of storms.
We know what it is like to struggle through difficult economic seasons as a farmer. Even though your products are in high demand, what it takes to bring them to market can sometimes be incredibly stressful…sometimes unbearable if you’re working with a razor-thin margin to start with!
To find out what it means to “expect more from your CPA”, schedule a call with one of our ag experts today.
