TOP FARMER WEEKLY PERSPECTIVE 07/16/2021 BY BRYAN DOHERTY

Inflation and Interest Rates

There has been some debate as to whether the Federal Reserve should raise interest rates to cool the economy. At least it seems there is debate within the Federal Reserve. Most of us have probably experienced higher prices in almost every avenue of our spending. Gasoline prices are higher, lumber prices are higher, food prices are higher, labor costs are higher and consequently, the value of our dollar is eroding. The debate seems to be that due to post COVID-19 supply disruptions, higher prices are reflective of limited availability in the short term and not necessarily a sign of long-term inflationary concerns. It is just a spike. Central bank officials in June suggested a 3% gain in 2021 and 2.1% the year after. This week, the New York Fed’s survey of consumer expectations over the next 12 months jumped to 4.8%.

The problem with that thinking (only a spike) is once prices go higher, it is very difficult for the retail and labor world to lower prices. It takes a mass decline in commodity prices or other inputs to believe that inflationary concerns are only temporary. There does not seem to be any significant sign that tight grain or livestock numbers, limited fuel production, or many other goods are to the point of decline. World vegetable oil prices have recently reached all time new highs. Low interest rates have fueled homeownership, and while you might think the housing market is in a bubble, it appears that low interest rates since the early 90s have continually fueled an up-trending valuation in the housing market. Yes, there have been bubbles and housing price declines, all only temporary over the last 30 years. Anyone find any real estate bargains this year?

Perhaps more importantly, labor costs have risen, and it is unlikely that the retail value of goods (if they do decline) would be able to pay for labor. Does anyone believe labor prices will decline anytime soon? While the Federal Reserve does seem to be acknowledging inflation can be challenging to gauge and harness, it also seems the attitude of pre-emptive strikes against inflation by raising rates (a practice used after tax cuts established by the previous administration) is not being practiced in 2021 when rising prices are real.

Nonetheless, farmers recognize that interest rates are low from the long-term view. They do fluctuate, and the Federal Reserve could be dead right. Or not so right. Acknowledge that inflation is likely here and ask, what if it stays? Take a hard look at paying down debt and an even harder look at refinancing. Now is the time for critical and strategic conversations with your lender.

If you have comments, questions, or suggestions, contact Bryan Doherty at Total Farm Marketing. You can reach him at 1-800-334-9779, extension 300.

Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.

Author

Bryan Doherty