Inflation: plan for higher prices for a while

There’s been a lot of chatter in the news lately about inflation. Is it just a flash in the pan as markets regain their pre-pandemic equilibrium or are higher prices here to stay?

“The pandemic disrupted a lot of supply chains,” says Bruce Burnett, director of markets and weather information with Glacier FarmMedia. “But, if you go through commodity by commodity, I think some of this is going to be a little more permanent than people think.”

While economists debate whether inflation will be transitory or sticky in the overall economy, Burnett is looking more closely at what farmers regularly spend money on, like fuel, and he thinks many would be wise to start penciling in some higher costs as they make future plans.

A TALE OF TWO COMMODITY POOLS

As the pandemic stomped on the brakes of the global economy, it revealed some truths that Burnett thinks we may have ignored or just missed.

“Commodities were priced quite low for a long time,” he says. “We were lulled into a sense of complacency before the pandemic. For a long time, no one thought oil would get above 60 bucks a barrel. Everyone thought that, unless we got a drought, grain prices, would stay fairly low.”

“We’re going to have to get used to paying a bit more for things for a while”
Bruce Burnett
DIRECTOR OF MARKETS AND WEATHER INFORMATION GLACIER FARMMEDIA

And this really is the story of two commodity pools: agricultural and nonagricultural. Burnett is watching the capacity of both to respond to reopening economies and sees investment in the means of production as a key factor in that response.

As he points out, investment in producing agricultural commodities happens continuously and is responsive to demand — crops are planted every year, transportation runs year round, ship holds filled constantly and so on.

But what about energy, lumber, steel? “Basic commodities have been in a longterm deflationary cycle here for a while,” he says. “But for things like copper, aluminum, steel, and so on, it’s been longer than that because there was no hope of prices going up anytime soon, so the investment wasn’t there.”

We’re seeing the effects of this in real time as lumber mills struggle to keep up with demand, vehicle assembly lines shut down for want of steel and computer chips, copper piping gets harder to find, and everything costs more as a result.

TWO SIDES OF THE SAME COIN

Burnett says farmers are experiencing two sides of the inflationary coin just now — high prices paid for their product, high prices spent on inputs such as fuel, fertilizer and grain bins.

Ideally, farmers would love to see inflation maintain on the former and subside on the latter once the pandemic is over and supply chains return to normal. That would be great for the balance sheet, but Burnett isn’t convinced it’ll go that way.

On the income side, take a look at Canada’s recent grain exports — record amounts of barley have shipped to China in the last eight to 10 months, not to mention enormous amounts canola, wheat and peas. “China was the first country to experience the COVID crisis and it is the first country to get out of it,” says Burnett. “And when they did, they needed stuff.”

He says that at the same time the Chinese economy was reopening, its hog herd was recovering after a bout of African swine fever. “As the country was trying to recover, it was also ramping up hog herds,” says Burnett. And when China opened up its silos, more feed grain was needed than it had.

So China went shopping. “Chinese demand is taking up all the supply that was thought of as surplus,” he says. “We underestimated demand. The stocks that we thought were very large turned out to be what the market actually needed. So the question for 2021 is: Can we produce enough to satisfy this demand? It’s a complete juxtaposition from where we were planting in 2019 and wondering what would make money.” Burnett thinks that, in spite of the rocky relationship, this will likely be Canada’s second biggest export year to China in terms of gross tonnage.

In terms of inflation, will this permanently lead to inflation on the ag commodity side? “Well, nothing is permanent, but it’s probably going to take more than a year before prices decline,” he says. “It means that in the short term for farmers, these are very good crop prices, but in the long run, some of these prices are going to look lower.”

What about the other side of the coin — expenses. “I’m more worried about oil, steel, lumber, things we haven’t invested in,” says Burnett.

The supply side on these types of commodities is struggling to meet demand and will continue to do so for a while because the means to expand production is lacking. It’s likely these markets will remain tight and prices higher than usual for some time, maybe even beyond the time that ag commodity prices start to fall again. “We’re going to have to get used to paying a bit more for things for a while,” he says.

TALK TO YOUR DAD

The fact is that many people have no practical experience with inflation and how to manage through it. If you were a kid in the 1980s, it’s likely that an 18 percent mortgage feels as mythical to you as a unicorn and none of this inflation talk is real.

But think about this: before the pandemic, you could waltz into your local farm supply outlet and buy a steel bin or some lumber. No waiting, no problem. Today, you might have to put in your order then wait a few months for your item to arrive. “On demand shopping for some things is gone,” says Burnett. “That’s why I’m worried about inflation being a little longer lasting.”

He has some advice. “From a business preparedness perspective, you have to look at one-time capital purchases, like land, and build in a contingency when you’re doing your financial modelling because it might cost more to operate on that land,” says Burnett.

“In terms of fertilizer and fuel, you can’t do a lot about that, but be aware of it, look at what and how you purchase to avoid that ‘gotcha’ moment if prices suddenly rise.” For instance, he knows of someone who, in the early days of the pandemic when oil prices tanked spectacularly, bought additional fuel tanks and filled them before prices recovered in 2021.

“And maybe listen to your dad,” says Burnett. “Ask him what was the smartest thing he did back then, or the dumbest thing for that matter.” Extra fuel tanks, for instance — smart.