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Inflation Will Change Everything, But When?

Agriculture.com Staff 07/29/2009 @ 1:00pm

It's finally hot here in Iowa. At last, heat units needed for crops in the northern Corn Belt have arrived.

Something else is heating up this summer: inflation worries. A June story in the Wall Street Journal features a hedge fund manager who's betting on inflation. Yields on 10-year Treasuries start to rise. No one knows when inflation will start or how bad it will get. Consumer confidence and commodity prices are up, but so is unemployment. It may be a while before the Fed boosts rates.

It's not too soon to start planning, though. Inflation is likely to affect you in at least four important ways: rising input costs, more market uncertainty, changing relationships with lenders, and even less support from farm programs that pay when prices fall. There are no silver bullets, but consider:

Input costs are already putting some producers into a cost-price squeeze. You've already gotten advice in this magazine to buy ahead when there's a price advantage.

Marketing looks different, too, during inflation. Does it make less sense to sell during the seasonal spring rally if inflation is so bad that prices rise later in the year? Maybe it does after all. Scott Stewart, cofounder of the Stewart Peterson Group, was giving marketing advice in the inflationary 1970s. He thought it was ludicrous to ignore the big carryouts of the time. Market fundamentals still ruled. The lesson from that era may be that you still need to have a systematic approach that helps deal with the emotions driving markets.

Even as lenders recover from the crisis of 2008, you could be affected. Solid Main Street banks are already paying higher premiums to the Federal Deposit Insurance Corporation. Farm Credit System lenders, while still raising funds on the bond market, haven't been able to sell long-term bonds. It may make sense to have more than one lender, to know that lender's financial condition, and to have the best presentation of your farm's own financials.

A tool that will help you deal with those first three challenges (costly inputs, confusing markets, and nervous lenders) is managerial accounting. You'll know your exact input costs. You'll know when selling will cover costs. Your lenders will be impressed. (See www.ffsc.org/ for details.)

Inflation will make the new farm program, ACRE (Average Crop Revenue Election), seem less attractive. If prices keep rising, it seems less likely that payments will be triggered. But there's a trap in that thinking, too. ACRE payments could still be made if your state and farm yields fall enough to lower revenue. Revenue isn't price alone. Counter-cyclical program payments are tied only to prices. ACRE isn't. It's designed for uncertain times. So at least take another look before the August 14 signup deadline.

It's finally hot here in Iowa. At last, heat units needed for crops in the northern Corn Belt have arrived.

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