Almost every segment of the U.S. economy has felt the impact of inflation, and dairy is no exception. During the July 20, 2022, Hoard’s Dairyman DairyLivestream, CoBank’s Tanner Ehmke outlined just three of the more pressing stresses inflation has caused within the dairy supply chain: tougher borrowing, constricted inventory, and changed consumer behaviors.
“The obvious initial impact would be on borrowing costs for dairy farmers and dairy processors. It's going to become more costly to borrow,” Ehmke explained.
While that is true, he also noted that there is still some value and interest in borrowing because of the difference between the nominal and real interest rates.
“For instance, if you're paying 6% on your operating line of credit and inflation is 9%, the market is paying you 3% to borrow money,” he detailed. “So even with the biggest rate increases from the fed, inflation has been rising so fast and yet there is still that incentive to borrow.”
Ehmke expects this gap to close as the fed continues to raise interest rates. Even without it, the financial expert shared that dairy farms have proven hesitant to invest because of high expenditures on inputs like feed, labor, and material costs.
A second pressure directly affects the next member of the dairy supply chain. Specifically, processors are expected to carry less inventory because of the cost of maintaining that extra capital.
“As for the processors, another major cost here is their cost of carrying inventory. There is a disincentive there for processors to carry excess inventory,” Ehmke said. “They don't want to buy excess milk, and they don't want to be carrying that extra cost in terms of working capital, which would increase their working capital needs.”
As such, Ehmke shared that he wouldn’t be surprised if processors cut back on inventory that would be obvious with tighter dairy product stocks.
The final pressure described by Ehmke comes into play at the consumer level.
“At the same time, we need to talk about what the consumers do,” he said. “If the consumer is going to be slowing down their purchases, that would have the opposite effect perhaps on what is stored in inventory because the consumer may not be aggressive in buying much of anything these days with costs so high.”
He left listeners with this final word of advice. “A lot of things are pushing and pulling against each other. I would stress that there's no clear answer,” he concluded.
To watch the recording of the July 20 DairyLivestream, go to the link above. The program recording is now also available as an audio-only podcast on Apple Podcasts, Spotify, Google Podcasts, and downloadable from the Hoard’s Dairyman website.
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