Sticker shock is the new theme of the year after the shutdown due to the COVID-19 pandemic. Chairman Powell of the Federal Reserve and members of the Federal Open Market Committee have indicated that the inflation rate is tame. However, the basket of goods used to measure inflation for the general economy is different from the agriculture industry's basket of goods. The price of spring inputs such as fuel, fertilizer, and chemicals have experienced double-digit increases in recent months. The purchase prices of new and used equipment have seen similar price increases.
Those that are involved in long-term capital expenditures have seen the price of concrete and other building materials skyrocket. Contractors are now developing contracts with cost escalators reminiscent of other periods of inflation observed in the U.S. economy. The same building or structure will now cost at least 25 percent more than it did pre-pandemic. The price of copper, the most used commodity globally, has skyrocketed from $2.30 per pound early in 2020 to $4.25 per pound early in 2021.
Do you remember when oil prices in the early part of the shutdown were actually negative? Fast-forward one year, and oil prices are now $60 to $70 per barrel. Some experts are indicating that the price of oil, a widely used input in agriculture and distribution, could exceed $100 per barrel in the future.
With generous stimulus checks and the relaxation of COVID-19 restrictions, the demand for the aforementioned goods could be much higher. In previous columns, discussions have centered around extreme volatility. This is a classic example of extreme volatility on the capital investment side of the equation. What are the possible implications for management?
Get out your spreadsheets or worksheets to recalculate your cost of production and overall break-even points. Do not forget to consider cash rent escalators as a result of non-recurring profits and stimulus payments received by many grain producers. Margin compression can quickly appear or disappear given market, weather, and trade dynamics.
Build these variables into your marketing and risk management plan and decision trip points concerning profitability expectations. Be careful to not get caught up in the hype that another commodity super cycle is here. Follow the process and build in some flexibility should prices spike.
Although the reported inflation rate may be tame, the difference between agriculture’s basket of goods and the general economy’s basket of goods necessitates that producers must maintain focus on monitoring financials. Knowing your cost of production, break-even point, and monitoring market dynamics and operational outcomes will be critical in the coming months. Yes, the government did come to the rescue, but do not expect this to be an avenue in the future if additional adversity arises.
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.