USA Inflation and Interest Rates in the Agribusiness Marketplace –Part 2
US Food Price Inflation Drivers
Farm input costs and wholesale prices of food commodities have mainly increased on year-over-year reports. The increase is due to the supply and demand variations brought by the pandemic with higher energy prices. In this year’s report, the non-farm labor costs increased by 7.3%. Shipping costs add to the food price inflation, where delays on international containers and US rail shipments continue.
Russia’s invasion of Ukraine has also curbed the general global trade patterns, causing agricultural commodities, fertilizer prices, and international food prices to escalate. Russia contributes a large agricultural share globally, being the world’s sunflower grower, third-largest wheat grower, and fourth-largest corn producer.
Recently, oil prices have increased at USD5 per galloon and have been recorded as the highest compared to around USD3 in the past year. The increase is followed by the conflict between Russia and Ukraine and is expected to soar at USD6 per galloon if the friction continues.
Meanwhile, Europe’s avian influenza outbreak is further pushing the prices of eggs and poultry to the highest. More factors are driving the inflation rates to increase, like the changing weather patterns during the growing seasons in the US and South America, which contributes to limited grain production.
Interest Rates Considerations in Agribusiness
According to reports, the Federal Reserve increased interest rates on May 5, 2022 to help reduce the global inflationary pressures. This policy consideration by the Federal Reserve may increase the value of the US dollar against other currencies, leading to lower demand for US export products and agricultural commodity prices.
However, this approach of lowering the inflation rate has increased interest rates, leading farmers to increase their borrowing due to higher farm input prices. Economists expect that rate hikes will be experienced again by the end of July and another in September. If it happens, another great recession will likely be experienced more than inflation risks.
Similarly, by the end of the third quarter, economists expect a 1.5% rise in short-term rates like operating loans and long-term rates, such as mortgages and land purchases.
Effects of Increased Interest Rates on Farmers
While bankers increase interest rates, causing a rising value in the US dollar, the rising input costs of agricultural and energy goods will lessen the economic growth. The increased interest rates will affect the cash flow expenses and farm income, eventually leading to hostile farmland prices.
Aside from the changing weather and farmlands, farmers are now keeping an eye on the banks’ increasing interest rates. Many farmers carry debts from starting their farmland and buying seeds, fertilizers, and farming tools. But with the inflation, increasing their profit by investing in more expansive lands, buildings, inventories, machinery, and innovative equipment means an increase in loans, which will put them more in debt.
Therefore, agribusiness investors and farmers will have lower incentives and investment rates if interest rates continue to rise. Farmers’ profitability reduces, and at the same time, agribusinesses are discouraged from investing, reducing the farmland values.
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