Ag and Food Inflation Challenges

OMAHA (DTN) -- Beth Ford, president and CEO of Land O'Lakes, on Friday called on the U.S. Senate to relieve agricultural labor problems by finishing work on the Farm Workforce Modernization Act.

Ford spoke during a virtual forum highlighting agricultural and food inflationary pressures hosted by the Federal Reserve Banks of Kansas City and Minneapolis.

Noting labor is a problem across the agricultural supply chain, Ford said she has been pushing for Congress to move ahead with immigration reform.

"We have to get labor, especially at the farm level," Ford said, specifically pointing to problems with livestock producers such as dairy farmers. "They need assistance. They need labor."

The House passed the Farm Workforce Modernization Act, H.R. 1603, in March 2021 by a 247-174 vote, but the bill and negotiations over an alternative have stalled in the Senate. The bill would open some annual permanent visas for agricultural guest workers and legalize current farm workers now in the country illegally.

Ford noted the economy is roughly 2 million workers short of the needs right now, but talks over agricultural labor reform constantly lead back to border security issues. Yet, immigration in the past "has been a mainstay of our economy and our economic growth," Ford said.

"You recognize the number of acres that don't get planted or harvested because there is no labor," she said. "And we have a global food challenge, a supply challenge. We need to move past this to get to a pragmatic solution."

Ford suggested the window for agricultural labor reform would close after the midterm elections. Any legislation would also have to start over next year.

THE UKRAINE EFFECT

The KC and Minneapolis Fed talks on Friday highlighted the various problems with inflation but few lights at the end of the tunnel. One key issue that could dramatically dial back food and fertilizer inflation remains the war in Ukraine, which has no easy outcome in sight.

"Nobody on this call or probably listening knows when the Ukrainian-Russian war gets over, but if it were to end, you would see a lot more grain flowing out of Ukraine, and that would reverse this substantially," said Bill Lapp, founder and owner of Advanced Economic Solutions, a food and commodity economic group in Omaha.

With the war, fertilizer flows normally coming out of Russia will continue to be disrupted even though it is one sector where the U.S. and Europe have not placed sanctions. Ford said it's important that fertilizer products globally make it to the most productive areas.

HIGHER SUPPLY CHAIN COSTS

Food inflation from 2010-2020 averaged about 1.7% per year, but now is averaging more than 10% higher than a year ago, said Nate Kauffman, vice president of the Omaha branch of the Kansas City Fed.

From the agricultural side, only about one-tenth of that food inflation stems from the costs of farm production. "Changes in ag prices have only a limited effect on the prices many consumers pay for food," Kauffman said.

Higher costs for packaging, processing, shipping, retail and wholesale distribution are all driving food inflation higher, he added.

For farmers, production costs are about 25% higher on average this year compared to 2020. Fertilizer prices alone are about 50% higher than a year ago. But high commodity prices have largely offset the surge in production costs, Kauffman said.

"The U.S. farm economy is in a much stronger position than it was before the pandemic when there had been growing concerns about the industry's financial health," Kauffman said.

Touching on monetary policy and interest rates, Ford noted farmers are in a better equity position than when the Fed aggressively used interest-rate hikes in the 1980s to fight inflation. Yet, "every increase is stacked on every other increase" in costs, and it will challenge their profitability, Ford said. "Right now, their case position is reasonable," he said. "It's pretty good or OK."

Ford added that these pressures are greater on smaller farmers, pointing to the challenges facing smaller dairy producers, for instance.

ENERGY AND EUROPE

Looking ahead as producers start buying their crop protection tools, Ford said the energy challenges in Europe will affect products coming from European-based companies.

Sara Menker, founder and CEO of Gro Intelligence, spotlighted how the war has affected fertilizer access, tying it to the energy costs in Europe that have dialed back nitrogen production there. Some areas of the world already struggling with fertilizer access, such as African countries, will worsen.

"You have a major nitrogen problem," Menker said, adding that potash access is also limited.

While the United Nations Food and Agriculture Organization (FAO) on Friday cited that commodity prices globally have dropped for the sixth month in a row, Menker said food prices globally are still significantly worse than they were at the start of the pandemic in 2020. The strength of the U.S. dollar also makes it harder for some countries to buy. She cited examples such as Sudan seeing 1,800% food price inflation and Syria at 870% food inflation.

"What does that mean for the stability of many, many parts of the world? Let's not forget, you know the Arab Spring was a function of food prices," she said.

The Arab Spring, which peaked in 2008, led to a series of protests and conflicts driven heavily by food prices in the Middle East and eastern African countries.

Menker added, "So I think from a macro standpoint, tackling input challenges, I think, is the No. 1 priority around fertilizers right now."

HIGHER SUPPLY CHAIN COSTS

Rick Dusek, executive vice president for CHS Inc., said he believes there will be money to be made at the farm level for producers who understand their costs of production and are willing to make some adjustments to their operations. Still, he added, "Literally, every input farmers use to produce a crop is higher." Adding interest rates, labor and transportation increases, Dusek added, "At some point, it will start putting pressure on farmer profitability as well."

Touching on transportation, Jennifer Hamann, executive vice president and chief financial officer at Union Pacific, said fuel has been a major increase in costs for railroads that are passed on to customers. The railroad also has a challenge pulling in new workers, and she noted negotiations with unions just led to a 24% increase in wages over the next five years.

"It's tough to see an environment where cost pressure is going to come back in the near term," she said. Hamann added, "There is just a lack of workers in the United States, so I think that labor inflation is quite sticky and is going to challenge us for a while."

Chris Clayton can be reached at Chris.Clayton@dtn.com

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