Because we are experiencing rising costs across the country due to inflation, will commodity prices go up as the economy starts to reopen and demand for products, such as gas and food, increase? This question came from one of 250 webcasts I have conducted since April 2020. This was a great question that seems to be a common thread in educational venues.
The rising cost of inputs does not necessarily mean prices received will continue to increase. This has been an issue that has caught agriculture producers flat-footed in the past. To the contrary, often commodity prices will taper first and farm expenses, particularly inputs and variable expenses, will lag creating margin compression and, in some cases, negative margins for an extended period of time.
Over the next few months, a few items should be added to your dashboard. Close monitoring of the value of the dollar compared to other countries' currencies will be imperative for agriculture producers. Attention must also be placed on growing conditions, especially in the Southern Hemisphere. If abundant supplies were to occur, do not be surprised if China moves towards importing more commodities from producers in the Southern Hemisphere. This is a part of the investments they have made over the past nine years in the Belt and Road Initiative.
Monitor global economic growth, particularly as new variants of COVID-19 spread throughout the world and create uncertainty for U.S. and global consumers. Keep in mind that commodity industries are usually the first to experience the impact of any new variant or any new conditions that may arise.
Worldwide consumer confidence will be a leading indicator. If the consumer is confident, demand for food, consumer goods, and services will be strong. If consumers are not confident, commodity prices could soften before eventually seeing a decrease in input costs.
To counter these trends, a strong balance sheet with adequate working capital is necessary. Close attention to profit and loss statements will be necessary to navigate the downside of this roller coaster economics.
Veterans of this type of economic cycle have seen this movie before. It can be challenging, but also opportunistic if one is proactively positioned to capitalize on the downside of the economy.
Source: Dr. David Kohl, which is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset.