How Are Rising Inflation and Interest Rates Impacting Agriculture in 2022?

Mark Wilson

Jan 19, 2022

With inflation at the highest it’s been since 1982, the impact on agriculture will be significant. But the difference between 1982 and today is that the economy has changed significantly.

Join FBN® Finance’s Head of Sales, TJ Wilson and Kevin McNew, FBN’s Chief Economist as they discuss rising inflation and interest rates and the impact they will have on agriculture. 

What you’ll learn

  • How do rising inflation numbers impact farmers? (01:01)

  • How inflation is going to impact input supplies (02:45)

  • How inflation will impact interest rates in 2022 (04:05)

  • How interest rates will affect ag loans (05:03)

  • What farmers can do to hedge inflation (08:54)

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Audio transcript 

TJ Wilson (00:00):

Hey everyone. Welcome to our quick chat here today. This is TJ Wilson head of sales, FBN® Finance, and I've got Kevin McNew FBN’s chief economist with me today. We're going to do a little bit of a chat about inflation and interest rates. Kevin, welcome.

Kevin McNew (00:16):

Thanks TJ, really interesting times for sure. Inflation and interest rates are really important as we move forward.

TJ Wilson (00:26):

They just came out with the new inflation numbers this week. It sounds like we were at a new high since 1982 on inflation numbers. 

This is going to have a major impact on everything. And when you look back at 1982, that's a big point in agriculture, obviously going into the '80s and the downturn in agriculture in the '80s. 

How do these inflation numbers play into that? And is there anything that ag producers and consumers should be looking out for?

Kevin McNew (01:00):

The press wants to paint parallels between now and 1982 and other than inflation being high, I think they're very different animals.

If you will, around what's going on today, we're really talking about uber strong demand and supply constraints. 

Back in the '80s, we had a much different economy. We had an economy that was really kind of constrained from unemployment being record high. We were coming off really high interest rates. 

I think as producers think about inflation and what it means for them, I don't think we need to be fearful of revisiting the 1980s.

There was a lot of farm financial debt and, and bankruptcies in the '80s really, really prolonged periods of low commodity prices.

Those were the days of old government programs that tried to manage acreage and things like that were very much different in that sense today.

Kevin McNew (01:59):

I see an agricultural sector that's heavily underpinned by strong demand whether it's global grain and oilseed demand out of specifically China, but other markets as well. You have biofuels that are highly linked to the price of energy and that wasn't the case in the '80s. 

If crude oil or energy prices went up, farmers were mostly victims of higher energy prices today. We still have some of that with fertilizer prices going up but we now have a play in the energy space thanks to biofuels. 

TJ Wilson (02:37):

How do you see that as far as input supplies for farmers and how is inflation going to affect that over the next year or two?

Kevin McNew (02:45):

We've been talking about this for months at FBN about the supply constraints and the price increases not going away anytime soon. When we saw a little bit of a downgrade in your rear prices in the last month, but nothing akin to what happened in natural gas falling, natural gas prices have started to come up. 

Crude oil prices have started to come back up again. I remain pretty bullish on energy prices going forward. I think we have a pretty big gap between world demand for energy and supplies of energy.

You have this kind of push to move to green renewable fuels. But our economy as a world is really heavily dependent on fossil based fuels. 

There's a big gap and I'm concerned that $80 crude is not anywhere close to what we're probably going to see in the coming months and year or so.

From a farmer's perspective, what you see today in terms of input costs, I think that's what you're going to see for the better part of the 2022 growing season. Maybe in 2023, we'll see some relief if supply chains ease up a bit.

TJ Wilson (03:52):

Anytime we talk about inflation numbers, we turn attention to interest rates. What are your thoughts on how the inflation numbers and what that could look like for interest rates going forward here? 

Kevin McNew (04:05):

That's the tough one because in, in my opinion, in many other economists opinions, the Fed has really been too slow to pick up the pace on raising interest rates.

We've seen inflation, we've seen numbers that were bad in terms of inflation for some time. 

I think the problem with that now is that as we enter say the next 12 months, the Fed is going to have to get aggressive about curbing inflation, which means not just maybe one or maybe even two interest rate hikes. It means probably three or four fair, early sizable jumps to really try and stamp down on inflation. 

TJ you're in the midst of loans and, and interest rates for farmers and producers. I mean, how are you thinking about that and what are you seeing on ag loans across the board, short term types of situations?

TJ Wilson (05:03):

You bet. On the longer term rates on the real estate side of things we've seen probably a quarter point to a half a point jump in rates over the last month.

The treasuries have started ratcheting up, which in turn takes most of those loan rates on the longer term stuff up a little bit the short term rates of stayed steady and intermediate rates overall. 

Equipment pricing has stayed pretty steady as far as rates are concerned. And your short term operating loans overall have stayed pretty steady. 

I haven't seen a whole big move in that obviously we're trying to position borrowers to expect those rates to start going up.

We're having those conversations day in and day out, to start preparing themselves for that.

Kevin McNew (05:42):

If I'm a farmer and I'm thinking about where's the biggest risk here, short-term debt long-term debt, should I be going out and locking up land and long-term loan type of situations.

Are you more concerned about just kind of the short term debt exposure?

TJ Wilson (05:59):

Well, I think both of them have a major impact on the farmer right now.

Every farmer should be taking a look at their long term debt and trying to refinance that to make sure they're in a position to take advantage of their rate environment where we're in right now.

Especially with the outlook of rates going up they need to be taking what their balance sheet looks like from that regard. 

There is a huge risk on the short term rates. Obviously a lot of times the short term rates when they start ratchet up, they start going up pretty quick, especially if the Fed starts moving rates. That's definitely something that needs to be taken into account. 

The other major risk on the short term side of things is obviously we just talked about input prices. As inflation continues to go up, input prices continue to rise and the margins get pretty thin.

If you combine higher input prices with all of a sudden, your short term rates start moving up it starts to put a major pinch on those farmers' balance sheets and their operations, no matter what the working capital portion of their balance sheet needs to have a lot of attention.

And that's what helps the farmers survive the times.

Kevin McNew (06:59):

Lastly, I think about credit standards as we enter a phase where the Fed's going to be raising rates, they're limiting bond purchase.

That kind of in my mind means that credit standards are going to go up. Do you see that coming down the pipe where there's going to be a little lesser availability of credit or credit standards?

TJ Wilson (07:30):

Yeah. I don't know if there's going to be less availability of credit overall. I can't see credit standards tightening too much, but what is going to happen is farmers' operations are just going to get tighter. 

I think the credit standards are going to stay the same overall. You just may see that those margins continue to shrink, that operations are going to get tighter and maybe not be able to meet all of those credit standards all the time. 

The flip side of that is that as interest rates are staying low, right now land values need to rise and what the risk of inflation out there right now, a lot of people have been buying land which takes those land values up. 

What we are seeing is that maybe just a pullback of how much lenders are willing to loan against a piece of property.

Typically that's somewhere between 70 to 80%, they're willing to lend on a piece of ground that may drop back down 60% or something in that range so that they build a little bit more cushion for these higher land values.

Kevin McNew (08:24):

Are you seeing any pull back in land values for the coming year, or are you seeing kind of a continuation?

TJ Wilson (08:33):

I anticipate a continuation of where they're at, obviously there's, there's still people with the year that everybody had in farming this year. Farmers want to continue to grow and buy land just for their operations to grow and have a hedge against inflation out there right now. 

On the flip side of that Kevin, I'll kind of put you on the spot here. I was listening to an economist earlier this week and, and he was kind of talking about inflation and he was talking about values out there.

He basically said that as an operator right now, you should go out and try to borrow as much money as you can right now as a hedge against inflation looking at where rates are probably going to go in the future and what that may look like.

What are your thoughts on that? What kind of recommendations do you have for people looking at their balance sheets?

Kevin McNew (09:16):

I can't disagree with the logic, but I think the devil is in the details. You don't wanna just go out and make investments just to make investments.

You have to make them wisely. And that's always true in agriculture. Land is something that is a critical limiting asset that you need for growth.

I think looking at those choices very carefully under the microscope's important equipment sizing, you know, all those kinds of things that improve your ability to operate as a farm.

I think those are always the things you should be looking at. And especially at times like this, where the interest rate environment is likely going to change for the coming couple years.

TJ Wilson (09:56):

The last thing I kind of have here, Kevin, is where can these farmers and producers go to learn more? There's a lot of information out there about inflation, about interest rates.

What are some good resources for them to be able to tap into, to, to help get educated on their operation as well?

Kevin McNew (10:12):

If you want to follow the Fed, you know, Fed releases, its meetings, it'll give you their guidance. I mean, overall, I don't wanna say don't go read there's always good articles to read on this stuff. But I think by and large, farmers need to spend their time just focusing on their operation. 

Literally it is pen to paper, get out the spreadsheet, work with your banker at FBN, work with your crop insurance person.

This year is going to be a little more challenging on the budget than last year because of tighter input costs, higher input costs. I think farmers have to just know their operation really well.

TJ Wilson (10:53):

Yeah. And as we've talked about before, kind of add onto that farmers have enough on their plate. They have to know a lot of things to manage their operation, but they can't know everything. 

Working with a team of advisors no matter who that is definitely pays dividends for farmers as they're looking and dealing with these types of situations. Any final thoughts for our guests?

Kevin McNew (11:13):

It's going to be a fun year. Obviously we've been talking about the negative elements that are coming this year, higher interest rates, higher costs but commodity prices are going to be strong.

We're having problems in South America that are getting manifested more aggressively every day. Hold on your hats, folks. It's going to be a good one.

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Mark Wilson

Jan 19, 2022

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