US inflation vs. agricultural production

In January 2022, the Bureau of Labor Statistics released its Consumer Price Index report. It noted that, over the previous 12 months, the U.S. inflation rate was 7.5%. This is the largest 12-month increase in the U.S. since 1982, a full 40 years ago.

Inflation on this scale will have an impact on every sector, business and individual citizen, in one way or another. But anticipating the specifics of that impact, and its severity, can be challenging. In this blog, we’ve decided to take a closer look at agricultural producers, and the range of effects this high inflation may have on them and their networks.

An escalating cycle could develop

The first place most agricultural producers feel inflation is inputs. Seeds, fertilizers, agrochemicals and the like are all upfront costs. Producers who budgeted based on last year’s rates will be in a tight spot after such a significant price spike. Broadly speaking, under such conditions, there are two undesirable economic patterns that can emerge as a result.

The first is when input costs continue to rise at an accelerated rate. This happens when a significant number of producers opt to counteract the initial price increase by behaving more conservatively. They’ll tighten up their operation, in part by reducing the amount of inputs they purchase in the first place. In response to this lower rate of consumption, companies raise the cost of inputs further to try and make up their losses.

The second undesirable pattern is rising prices for the consumer. This happens when producers opt not to limit their operation. While they will swallow some of the increased input costs, some of it gets passed on. Ultimately, the result is even higher prices at grocery stores, stretching the budgets of consumers every time they go to buy necessities.

Once inflation has already begun, preventing these patterns completely is almost impossible. However, there are steps that can be taken at the individual and policy level to keep things in check.

Planning ahead is key

For individual producers, the key is to be proactive, consider all marketing tools and utilize a balanced approach. Strategies include working with suppliers to lock in prices and utilizing cash elevator contracts or futures to lock in a portion of their crop to protect risk. Also, if a producer anticipates they will need to borrow money, they should do so sooner rather than later and at a fixed rate.

Another way producers can be proactive is to embrace farming techniques that reduce the overall need for fertilizer and agrochemical inputs. Such techniques as reducing tillage, utilizing livestock manure and planting cover crops may help insulate against inflation and, once in place, could demonstrate some economic potential.

Of course, producers can’t solve inflation on their own. Studying the effects of existing policies and making necessary changes through new or existing policies are essential to addressing conditions at the root of the problem. At the moment, expanding port operations and resolving supply chain challenges is of the utmost importance. Reviewing and implementing regulations that protect producers from non-competitive industry practices is also vital.

Agri-Access helps lenders support their communities

In times of economic uncertainty, the importance of a reliable, community-based lender can’t be overstated. The relationships such professionals build with their producers are essential to getting the necessary funding to where it’s needed most. At Agri-Access, we’re excited to help expand what community banks can offer their clients, and how quickly those offers can be made. To learn more about what we do, reach out to a Relationship Manager today.

Let’s discuss how we can expand your ag lending power.