Fuel and fertilizer prices are rising, labor shortages are emerging, and the supply chain is lagging. While farmers can’t control these circumstances, there are ways to manage inflation and its impact on your farm.
For years, longtime farmers have tempered younger producers’ concerns about market conditions and high crop prices by telling them they’d seen worse in the 1980s. Unfortunately, they can’t do that anymore. The U.S. Consumer Price Index is at its highest since 1981, and it continues to rise. Over the last 12 months, it increased 8.3 percent. (For comparison, during second quarter 2020, it averaged 0.4 percent.) Meanwhile, food prices rose 11 percent from April 2021 to April 2022 – the largest 12-month increase since November 1980. Likewise, the Producer Price Index is also at a high, and that’s a widely used indicator for economic health.
What is Causing Inflation?
Many factors contribute to and continue to push this inflation forward: Chinese demand for feed (including soybeans), labor shortages, an effectively broken supply chain and the Russian invasion of Ukraine, which significantly impacts grain and oil exports.
How Is Inflation Impacting Agriculture?
Farmers are seeing the impact of inflation today in five primary areas:
- Fertilizers – where it hit the hardest.
Input prices have been on the rise for quite some time, and the ongoing supply chain issues continue to perpetuate these hikes. Analysts have said that the Russian invasion, combined with lingering and perpetual uncertainty, have put inflation on steroids, and farmers are seeing it firsthand.
“Year over year April to April, fertilizer has seen a 75 to 110 percent increase,” says Thomas Eatherly, agribusiness consultant for Kcoe Isom, Brentwood, TN. “In fuel, we’ve seen close to a 70 percent increase year over year on farm diesel.” At the consumer pump, average price for regular gas hit $5.53 per gallon at press time according to AAA. (In northern California, prices reached nearly $10 per gallon.)
Competition for labor has also been significant for farmers, says Eatherly. “We’re planning for a 15 to 25 percent increase for general repairs in our budgets,” he explains. “That accounts for parts prices, supply chain issues and labor issues.”
Even land, which analysts often call land a “good hedge” in inflationary periods, has begun to be impacted. While land can be appealing for outside investors thanks to reliable appreciation year over year, low interest rates and higher commodity prices, expansion isn’t possible for many farmers. A longer trend toward steadily rising land prices as well as increasing cash rent prices makes adding land prohibitive for the average producer. As well, it creates another barrier for younger farmers who want to get into the business or build on their family’s operation as succession plans come into play.
How Can Farmers Manage Inflation?
Unfortunately, according to the experts, there isn’t much farmers can do when it comes to prevention, but you can take steps to manage it. Smart spending and careful planning are the key phrases to live by, whether we’re talking about new equipment, land improvements, repairs or fertilizer application frequency:
1. Stick with fixed rates:
If you borrow or add a capital expenditure, stick with fixed rates, and avoid adjustable options, as those will almost certainly be counter-productive. Know your operational expenses nearly to the penny. While smart balancing and tracking is always recommended for farm and ag businesses, it may be the difference between who is in the field a year from now and who is pursuing another career path.
2. Plan ahead:
The supply chain issues won’t be fixed overnight, and in fact, many analysts project that 2023 could be worse than 2022 in terms of availability. “We’re in a very volatile market,” Eatherly says, “and there are so many unknowns right now. We have major concerns for 2023 because of the current supply chain issues.”
3. Order what you need in advance:
Order parts, inputs, supplies – anything you may need but that you can’t predict the day when you’ll need it – to have on hand, because you likely won’t be able to get it in a timely manner. In other words, don’t wait until the machine is down to get a high-wear part. “We have clients ordering parts this summer for repairs in the fall so they make sure they’re available,” says Eatherly.
4. Get ahead of your fertilizer strategy:
Likewise, think about your mid-to late-season fertilizer strategy early, and order accordingly. Make sure you’re utilizing all of your soil nutrients and leveraging soil sample tests. Consider secondary options to supplement your usual production plan, in case you can’t get your first choices. Options like micronutrients, organics and a modified fertilizer program could be worth considering to fill out your strategy.
5. Be flexible in your buying patterns:
This may also be a time to have a little flexibility in your buying patterns. “As the price goes up, people find secondaries to make up for their primaries,” he says. In other words, if you can’t get your first choice on brand or style or format, have a backup already picked out so you can quickly pull the trigger and get something in hand.
It all goes back to margin, but the fact remains that right now, commodity prices are elevated, so building the right strategy to weather through inflation is in your hands. “Input costs are up tremendously, and you still don’t have control over your yield – Mother Nature does,” Eatherly says. “At the end of the day, there’s still profit to be made, but the risk associated with this profit is the highest we have seen in a long time.”