The Bottom Line on Inflation

One of the core aspects of any risk management strategy, regardless of whether you are a farmer in the Midwest or a hedge fund manager in New York City, is managing inflationary risk. Recently, the price of everything has gone up from a pound of ground sirloin at the butcher, to the gallon of gas at your local Casey’s. According to the Bureau of Labor Statistics, the consumer price index (CPI) rose 7% in December 2021 from December 2020 and is projected to continue rising in the early parts of 2022. The Federal Reserve has signaled plans to raise interest rates starting in March in efforts to combat rising inflation, however, the supply chain issues due to the COVID-19 pandemic could slow its efforts.

So, what does this mean for the farm economy and what can growers do to hedge their inflationary risk?

The good news is that farmers have one of the best hedges against inflation right in their backyard: farmland. The figure below comes from the TIAA Center for Farmland Research and shows the historical relationship between farmland returns and inflation. According to their research, farmland has had a strong positive correlation with inflation meaning that generally as the CPI increases then so do the returns to farmland.

Agricultural economists have been examining whether this relationship is continuing to hold under the recent inflationary pressure. The Federal Reserve Bank of Chicago reported an 18% increase in farmland values in its district for the later part of 2021, strengthening farmers’ balance sheets. Throughout the rest of the corn belt, farmland values are projected to be up more than 20%, fueled by strong domestic and export demand for agricultural products. The jury is still out on how much more values could increase over the next year, but experts are projecting farmland values to remain solid in 2022.

However, rising input prices for the 2022 crop year threaten to eat up these gains. Just like everything else, prices for seed, fertilizer, and diesel are on the rise from supply chain lags and overall inflation. The University of Illinois’ Farmdoc teams estimates a 16%-18% increase in overall costs for corn and soybeans with the largest increase stemming from increased direct costs in Illinois. A similar story exists throughout the rest of the country. And, with the Federal Reserve signaling an interest rate hike on the horizon, not only are direct costs rising but borrowing costs are likely to increase as well. Luckily, commodity prices have started off the year strong, but these cost unknowns are putting 2022 returns at risk.

This year, it is going to be more important than ever for farmers to protect themselves against inflationary pressure that is putting stress on the bottom line. While at this point farmers have likely locked in many of their input prices, other risk management techniques can be implemented to protect 2022 returns. Commodity prices have started strong this year with December 2022 corn trading above $6.00/bushel and November 2022 soybeans trading above the $14/bushel mark. With the University of Illinois projecting a break-even corn and soybean price of $4.73/bushel and $11.07/bushel, respectively, farmers are in a position for strong revenues. However, this is going to be dependent on a farmer’s ability to effectively market their crop and make decisions to take advantage of the current price environment.

Farmers should look at aggressively taking some price risk off the table after locking in some of those high-input purchases while opportunities for profit exist. Every farmer’s break-even is going to look different, which means every farmer’s marketing plan should look different as well.

Editor’s Note: Ailie is a current instructor of Agricultural and Consumer Economics at the University of Illinois Urbana-Champaign and a former graduate of the University. Working under Dr. Bruce Sherrick, Ailie focused her time as a graduate student researching the Role of Farmland in a Mixed Asset Investment Portfolio

Farmers Risk is a simple tool to paint your marketing picture all in one place, and help ensure that your bottom line remains strong during this unprecedented inflationary pressure.

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