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Corn+Soybean Digest

Get Ready For Inflation

If you've looked at your insurance or gas bill lately, you're keenly aware that the costs of living and farming are a lot higher than last year's. Odds are good the cost of farming will continue to increase.

We can list five major factors that suggest inflation will kick into high gear within the next one to three years:

Five Inflation Factors:

  • First is that the U.S. dollar continues to fall. The weaker dollar does help ag exports, as demand for U.S. soybeans continues to increase throughout the world. The combination of the lower dollar and low hog prices is also forecast to boost pork exports back to the record levels of 2001. After the hard down move in commodity prices during the 1990s, most farmers will welcome a slight increase in inflation and commodity prices. The negative side: the cost of inputs is likely to jump as well. So you will run more money through your business, but struggle to keep it.

  • Second is the large projected deficit. With the major tax cut being proposed and huge military expenses this year and for the foreseeable future, the Congressional Budget Office projects a deficit of nearly $200 billion this year. The current projection is for $300 billion-plus in federal deficits in the next two to four years. The economic plan is that, when the economy picks up employment increases, and the tax coffers will start to recover. Until that recovery in revenue starts, we're in an economic situation where you have more dollars chasing fewer goods.

  • Third is the low-interest-rate environment. With short- and long-term rates at 41-year lows, consumers are spending more and saving less. Investments in farmland, real estate and natural resources have paid off big time in the last three years while the equity market continues to trend lower. Long term, this creates more spending and less capitol investment.

  • Fourth is the dramatic increase in money supply — and the Federal Reserve Board's (Fed) attempt to stimulate growth. The Fed is more worried about deflation and a Japanese-type, slow-growth economic train wreck than inflation that could start to show up this year or next. Until the stock market, U.S. employment and the consumer price index move higher, the Fed will keep pumping money into the system.

  • Fifth is the action in the commodity markets. The Commodity Reserve Board (CRB) Index rose to new five-year highs again in February. This signals a global improvement in demand for raw materials. That will ultimately increase consumer demand and the cost of living. If the increase continues, it starts an upward spiral vs. the downward spiral of the last several years. If the velocity — turnover of money — starts to pick up, inflation will develop.

What to do:

First, make sure you have your long-term real estate loan rates locked in. You may pay a little higher rate for the next couple of years, but long term the savings could be huge.

Second, focus on managing input costs. The timing of when you buy fuel, fertilizer and feed is just as important as when you market your crop.

Third, make sure when you price new crop ahead that you're selling at a price level that is above loan and also above your cost of production. Selling too much ahead at a low price level has a history of being a financial mistake when we enter an inflationary time period.

Alan Kluis is executive vice president of Northstar Commodity Investment Co. If you have marketing questions or want more information, write: Northstar, 1000 Piper Jaffray Plaza, 444 Cedar St., St. Paul, MN 55101; call: 800-345-7692 or e-mail:

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