By Elaine Kub
DTN Contributing Analyst
Stuff costs more; the price of stuff is going up. This should be good news for the people who produce and sell stuff, right?
Not necessarily.
Just ask grain producers, who have largely been left behind by the recent acceleration in inflation.
According to the Bureau of Labor Statistics last week, as of July 2018, the prices of finished goods have been rising at an annual rate of 2.9% -- the fastest pace of inflation in the past 10 years. Perhaps that's not hugely surprising, considering that corporate profits have been doing well, unemployment is low and any time there is more cash in the economy (due to corporate spending or increased wages in the hands of consumers), price rises become somewhat inevitable. And inflation is a generally good signal, showing that the supply and demand of U.S. dollars is cranking tighter while economic activity takes place.
However, let's consider what those price rises, as indicated by the Bureau of Labor Statistics' measure of inflation, really mean. Inflation from one month to the next is tracked by the Consumer Price Index, a monthly number that is calculated by considering the actual retail prices of a basket of "stuff" -- anything from coffee and footwear to gasoline and household furnishings. More specifically, the figure that makes all the headlines is the Consumer Price Index for All Urban Consumers, or CPI-U. Separate calculations are made for individual (urban) regions and for the roughly 30% of urban consumers who are actively earning a wage.
A completely different calculation is tracked for the prices received by producers, separate from the prices paid by consumers. That would be the PPI, or the Producers Price Index, which never seems to make headlines the way CPI inflation does. It's important, though, as a leading indicator. When the price tags for the stuff producers are selling start to go up, you can pretty much guarantee that the overall price level for the stuff consumers are buying will also go up soon after.
And here's the trap farmers are finding themselves in right now in mid-2018. The PPI for agricultural products, like corn, has not been rising at a pace to keep up with the inflation in the broader economy, if at all. There is a corn-specific PPI indexed to 1982 prices (the 1982 price level = 100 and every observation thereafter compares to that). As of the measurement released last week, corn PPI is only 132. Meanwhile, the PPI for agricultural chemicals is now 223.9 and the PPI for agricultural machinery is 186.1, as just a couple of examples.
The CPI-U itself, also indexed to 1982-84 prices, is now 252.0. If corn prices (raw material prices) haven't risen and fed through to downstream product prices already, they're not likely to have much luck going forward. Meanwhile, farmers must still buy their coffee and footwear and gasoline in the same inflationary environment as everyone else.
Inflation, therefore, is a double-edged sword for commodity producers. Farmers, in particular, may feel concern after seeing that hot July inflation figure, not only because of higher input prices, but more importantly because of the ultimate implications for interest rates. As long as the economy is meeting the inflation targets set by the Federal Reserve governors, they will be more inclined to implement their planned interest rate hikes.
It's expected there will be two more interest rate hikes yet in 2018, followed by three interest rate hikes in 2019. Whether or not the markets justify and allow that plan to come to fruition remains to be seen. But we do know this: Every boost in interest rates leads to potentially lower land values, tighter farm balance sheets and obviously higher borrowing costs for farmers.
It's good when prices rise, especially if the prices of one's own products rise, but a healthy economy brings about its own challenges for the producers who underpin the whole thing.
Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.
(BE/AG)
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