We'd Like To Mention

Monitor These Five Financial Forces

Gregg Hillyer
By  Gregg Hillyer , Progressive Farmer Editor-in-Chief
(United Soybean Board)

The 2022 growing season is in full swing. Your focus is on getting crops planted and off to a fast start, while keeping weeds and other plant pests at bay. But, while your attention is on agronomy, there are financial forces that require monitoring, as well. Purdue University ag economists Brent Gloy and David Widmar have identified five macroeconomic factors to watch that have implications for your farming business not only this season but in seasons to come.

1. Inflation. No surprise here: The cost of everything seems to be going up. Both ag economists stress inflationary pressures of today are far different from the double-digit rates of the 1970s. But, the fact remains: That dollar in your wallet doesn't go as far as it once did. The issue is how short or long term inflation will be.

For agriculture, the primary repercussion is how assertively the Federal Reserve (the Fed) responds. Gloy and Widmar note if short-term issues like supply chain disruptions clear up and reduce inflationary pressures, the Fed can be less aggressive with interest rate hikes. However, if inflation continues higher or persists above 5%, pressure on the Fed to act decisively will increase.

2. Energy. The cost to fuel up your tractor or truck is certainly painful. Yet, energy prices were already trending higher before Russia's invasion of Ukraine sent prices soaring. Crude oil prices operate in a global market. Short of increasing supply, policymakers have few tools at their disposal to bring down prices. Gasoline prices have increased around 32% since the start of the year. Two years ago, crude oil was trading at negative prices. The ag economists say a wide range of possible future outcomes exist.

3. Interest Rates. Accelerating borrowing costs for inputs, machinery and land affect cash-flow, debt structure and overall financial health. The ag economists suggest not focusing so much on the Fed's action on short-term rates. "For agriculture, the broader debt market and long-term rate are arguably more important," Gloy explains. In many cases, farm loans are more sensitive to the longer-term debt market than the Fed adjustments to short-term rates.

4. The Deficit. A bit of history is needed to understand implications for today. In 2013, the farm bill expired under Congress' deadlock to pass a new bill, leading to a one-year extension of the 2008 farm bill. At the time, legislators were focused on tackling the deficit, limiting spending and sequestration following the 2008 financial crisis. Neither party today seems to have deficit reduction as a priority. There are no clear signals about how policymakers will approach the deficit as they start working on a new farm bill. But, the ag economists say the challenges faced trying to pass the farm bill nearly a decade ago could resurface at some point.

5. Global Supply Chains. So much uncertainty remains about a return to normalcy. Ships queued at ports waiting to unload. A shortage of drivers to transport goods. COVID spikes continuing to reduce the workforce and output. Sanctions because of the Russia-Ukraine war. It's nearly impossible to gauge what might happen in the months ahead. But, Widmar says key areas in ag to watch will be corn and wheat exports, fertilizer prices and trade.

Bottom line: Better buckle up for a bumpy ride.

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-- Write Gregg Hillyer, 2204 Lakeshore Dr., Suite 415, Birmingham, AL 35209, email gregg.hillyer@dtn.com, or follow Gregg on Twitter @GreggHillyer

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