We hear the term inflation all the time — in the news, on the radio, and in newspapers and magazines. Inflation affects our daily lives in all aspects, but do we understand its meaning and how it applies to agriculture? Chad Hart, a professor and ag economist at Iowa State University, touched on the importance of inflation within the dairy industry in a recent I-29 Moo University webinar.
On an annualized basis, the U.S. government has a target of maintaining a 2% inflation rate. The federal reserve has two main objectives: low inflation rates to keep a lower level of price growth and full employment within the economy. “You want prices to go up a bit because it’s hopefully showing a growing economy, but you don’t want them to go so fast that it eats up the growth in the economy,” said Hart. Since the COVID-19 pandemic, the U.S. and global economies have been faced with a tremendous wave of inflation within a short period of time.
Inflation reaches across all commodities in a very similar way. Both positive and negative effects are seen from inflation coursing through the ag economy. Hart noted that the ag industry has tended to feel the positive impacts of inflation first, but then we face the negative impacts the longer inflation sticks around.
As farmers see profits, they generally put the money back into production with hopes of maximizing profitability. Some ways producers may accomplish this is by increasing herd size, updating technology, locking in inputs such as fertilizer or feed, and purchasing land. Agricultural land tends to hold its value, making agricultural investments, especially agricultural land investments, very attractive. Because ag land has a positive impact on inflation, it is known to gain at a faster rate.
As farmers continued to invest, these investments created inflationary pressure on input costs. Interest rates are also used as a tool to control inflation. Many have seen interest rates double over the past few years, putting a strain on higher input costs and profit margins, cited the economist.
To manage profit margins, Hart highlighted some strategies to consider:
- Protect working capital
- Avoid cash shortages
- Diversify income
- Revise production costs
- Actively manage risks
- Revise farm living expenses
- Secure repayment capacity
- Revise growth strategy
- Know government support programs
When it comes to the global dairy market, what drives the swing observed in the market correlates with what is happening within the broader global market space. As we look at the change in structure throughout the global dairy market, Hart noted, “We are adjusting to a higher cost environment as we are scrambling trying to figure out what consumers are really looking for.”
Milk consumption has gone down dramatically, while the consumption of dairy products continues to rise. A challenge the dairy industry will face is how to best position the industry to meet variable consumer demand. The economist concluded that in general, farmers are still optimistic as they look toward the future.
