All eyes on inflation and interest rates

Chris: We are grateful that you are joining us for another episode of the Ag View Pitch, as we know that your time is very valuable. Our team at Ag View Solutions is always here for you for any questions or comments that you may have. Please feel free to reach out to us at cbarron@agviewsolutions.com. And now here is your host, Chris Barron. Welcome everybody to another episode of the Ag View Pitch, and today we're going to have a conversation around the economy, and we've got with us Brent Gloy, who is a farmer in Nebraska, but he also works as a partner in Economic Insights out of West Lafayette, and Brent was also an ag professor or at Purdue in ag finance. And so Brent, welcome to the Ag View Pitch. How's it going today?

Brent

Gloy: Chris, it's great to be with you. Nice and sunny here today in southwest Nebraska, and we're kind of drying out a little bit finally.

Chris: Well, you, you were dry for a while, you were wet for a while, and now you're drying back out.

Brent

Gloy: Yeah, we're trying to, trying to get some of these pots. We went from really, really dry to, uh, pretty wet, and, uh, so it's been quite a little bit of whiplash for us.

Chris: Yeah, and, uh, it gives the, it gives the commodity prices something to chew on when, when, uh, there's the yin and the yang and it goes one way and then back the other way, and that volatility is definitely going to be a weather-related watchful eye as we move forward.

Brent

Gloy: So absolutely, it's, uh, it is, uh, keeps you awake anyway, for sure.

Chris: And, and so what I wanted to do today with you, Brent, um, I, I first got to know you at TPAP at Texas A&M. You're an instructor there as well, and obviously an ag finance professor at Purdue. And so you've got a lot of experience, and as an economist, as studying what's going on in the economy and those types of things. And so I wanted to take this opportunity to talk a little bit about what's going on in the bigger picture of the economy, and then we'll get into, you know, what does this mean for agriculture and what are some things that producers should be watching, thinking about, or maybe even taking some action on. And so let's start with inflation. I'm going to give you a quick example here.

I just talked to my wife a little bit ago and she was looking at plane tickets and all of a sudden she's like, they're like double now all of a sudden from what they were just a few months ago. And we're seeing those kinds of price increases. I also got a phone call. We do a— my family has a seed agency here and we do a plot tour every year. We always have a local restaurant cater everything here, and they grill steaks and stuff. And he called me yesterday and said, hey, just want to let you know that if you want to do steak, it's going to be double what it was last year. And, you know, we're seeing just inflation all over the place, and we keep hearing it's— it's— this is transitory. In other words, this is a short-term thing.

I'm going to ask you to give us your two cents and some more on inflation and kind of what you see coming our way and what's really happening from an inflation perspective.

Brent

Gloy: Yeah, that's interesting, Chris. I think inflation is on everybody's mind right now and everybody's talking about it. But I think it's important for us to kind of step back and think a little bit about it There are certainly things like, you know, your airline tickets, they're going up a lot. And by the way, you might want to check on your rental car before because they're a little bit in short supply too. And it's hard to get an Uber some places. So you might want to check on that as well. Right. There's certainly these places where we're seeing just a lot of inflation. And I was telling David, my partner in Ag Economic Insights, the other day that My wife and I went to McDonald's the other day and we got 2 value meals and it was $20. I'm like, "What the heck just happened there?" That seems like a little bit of inflation to me as well.

So, there is certainly some evidence I think we can all kind of observe that, "Wow, boy, there's some changes going on." Now, The issue that I think we have to think about is, you know, how widespread is it? And how long might it last? Which gets at that issue of, you know, is it transitory or not? Because this idea that we'd have transitory inflation is, you know, you get these short-term bottlenecks, whether it be, you know, airline seats on on airlines, airline capacity, so the price goes up, or semiconductors, or whatever else it might be, that there's a short-term supply disruption, and you see kind of prices go up, but then economics tends to work and drive those prices down pretty quickly. You know, in ag, we're pretty familiar with that. You know, we always say, you know, the best cure for high prices is high demand. High prices because it brings on supply response.

So right now, um, you know, I think the Federal Reserve, when they look at it, they've been throwing out that term transitory inflation. And, uh, what they've been saying is that, you know, they think most of this will be, uh, temporary. And, uh, if you read their, their last statement of what they said about the economy, That's kind of what they're sticking to. And they're saying, well, we're getting a little bit more inflation than we've seen for a while. But until we're sure it's over 2% consistently, we're not gonna do much. So I think that's what they're saying as well, is that they are still banking on this being transitory. And, you know, kind of once things get back a little bit more to normal, the challenge though, Chris, is that, you know, as well, you know as well as I do, we're set for a boom here, right?

I mean, everybody's been cooped up and saved all our money and Americans are gonna spend it, I think. And I think you're set for a little bit of a boom. I think it could get a lot hotter before it slows down a little bit, right?

Chris: Well, and that's just like what I was telling Alyssa when she was talking to me about the, the plane tickets. I'm like, you know, there's, there's twofold, right? They got to get the equipment back in the fleet again because they had, you know, they, they parked a lot of stuff. Well, they're, they're trying to get everything back up running again, and the demand is hitting the market way faster than the supply can meet that. And we're seeing that with some, you know, on the ag side, we're seeing it with fertilizer, and we're side-dressing as we speak right now. And, you know, anhydrous, all these things are significantly higher priced very rapidly here. And, and it's, and it's really a supply issue as much as anything, isn't it?

Brent

Gloy: Yeah. And I, I mean, I think, I think you've got— it's really interesting because last year As the pandemic was starting, I remember I was a little bit worried about what the supply chain might look like with COVID And I went and I bought a lot of parts for my planters and thinking that, well, I'm just going to stock them in case, you know, because I don't want to be stuck if, you know, the things break down, not being able to get something right. And so I did that. And the interesting thing that kind of blew my mind is it wasn't last year that was the problem, it was this year. This year's the problem. We've had times this year where we had to drive 200 miles to get parts because nobody had them. And the people who had them wouldn't transfer them to the other dealers, so we had to go drive and get them. I mean, it's just been kind of crazy. Right.

Um, so yeah, there's a lot of this kind of stuff going on, and I— you just don't know how long that's going to take to resolve itself. But you got to think that the supply shock thing will, will resolve itself. What I think anyway.

Chris: Yeah. What do you think with regard to commodities? And we don't spend a lot of time on, on on livestock on the Ag View Pitch, we're primarily row crop. But, you know, you just like I said, that the restaurant guy that we work with, you know, talking about steak being double, it's not double for the cattle producer, you know. Explain what's going on here in the middle. Why, you know, what's causing that inflationary side of it at the, you know, at the consumer end and we're not seeing it on the production end. You talk lumber, kind of the, you know, we're seeing the same thing in the lumber industry, right?

Brent

Gloy: Yeah, there's a lot of commodities that are in tighter stock positions than I think most of us would have ever thought of 18 months ago. I mean, it really caught a lot of people, I think, by surprise. And the lumber one, the housing market is just on fire. I don't know what it's like where you live, but even in my little town, you cannot it is really hard to get a house to buy.

Chris: Yeah, same here.

Brent

Gloy: Find a house to buy, and it's hard to get a builder to build it, and it's way more expensive to build than it was not long ago. And so, it's this combination of really low interest rates, tight supplies, everything's just exploding. So, you have to think a lot of this is gonna, like we said, work its way through the system eventually, I think. And I think that's what the Fed is saying as well, that eventually some of that kind of stuff will shake out. But everywhere we see it, even in the job market, right? I mean, unemployment numbers have come down. I can't tell you how many businesses you go to and you see signs, you know, some kind of excuse for why service is bad because they can't hire people. Right. So you're just seeing it everywhere.

So the economy has kind of gotten thrown out of its equilibrium and it's just gonna take a little while to bounce around until it gets back to normal.

Chris: Labor issues obviously are something we hear from our clients all the time too, is, you know, and especially, um, you know, you can pick on North Dakota, you know, there's just not as many people there either, but those who are there, you know, it's— it depends. I mean, if you're— if your unemployment check is— it's pretty good, um, there's a lot of people I think that are willing to work, but they're— they'd rather work for cash, right? That limits a lot. And so, you know, hopefully we see some, you know, you talk about equilibrium, but hopefully we see some policy change there too that continues to help incentivize people to get back to work as well.

Brent

Gloy: Right. And, you know, this economy is set to boom, you know, by itself just because people are sick of being locked up for COVID, right? And everybody wants to get out and get back to normal, and it's, it's going to take off. And then, you know, we've just thrown a huge amount of government stimulus into the mix, and, you know, we probably— they probably way overdid it. And, um, I think, you know, you're going to see a boom. But the question again with inflation is Okay. How high, how soon, and how long? So, how high in the short term? We could see much higher than we want. But let me just give you some statistics. So, these are the average inflation rates for some different decades. In the 1970s, we averaged 6%, 6.4% inflation. In the '80s, it was 5%. And then for most of us, like what we remember as professionals, at least I remember, you know, in the '90s, 2.3%. 2000s, 2.1%.

2010s, 1.6%. So far, up to this point, we've been at 1.2% in 2020s. So, you know, we have been through the last 30-some years with very, very modest inflation. And so most of us don't really have any clue what it's actually like. And I think the biggest risk— I hear people say things like, "Really high inflation." I don't worry about that for the long term, but what I think maybe the market might be underappreciating is the chance that we have 4%, 5%, 6% inflation per decade. And that would have a big impact. I mean, the markets, I don't think, are thinking about that as reality. I mean, that's double what we've normally experienced. And you know that rule of 72, you know? Yep. That would really make a big difference. 2% is pretty modest. 4 or 5% doesn't sound like that much more than 2, but you're going to be— it's just a lot more.

And that's where I think the meat of the issue is really going to be. I'm not so much worried about really, really high inflation on average, but this kind of higher level for a sustained period of time, I think, is the bigger risk.

Chris: So, we're used to fairly low inflation. We've had extremely low interest rates for a long time. And so, that leads me to another question then for you is interest rates. Obviously, you know, for a long time we kept saying, "Well, they can't go any lower." We kind of saw a little adjustment for a period of time there. And COVID hit. And, you know, what's your thoughts, I guess, is what I'm getting at, on interest rates? Where do you think we start to see some increases in interest rates?

Brent

Gloy: Well, so I think when you look at just the grand scheme of things, interest rates— and I always use the joke that like every economist you've heard talk to the last probably 5 years and said, "Well, interest rates will only go lower or only go higher, so you better lock me in." I don't say that anymore. They can go lower. But if you look at it in the big picture, they're very low. And if you haven't locked rates in, I think you're taking especially long-term rates and borrowed borrowed long-term money and had it at a variable rate, you're taking quite a bit of risk in this environment because those rates could go up. And if we do get inflation, you know, the question is kind of how much is the Fed going to tolerate? So, if we see 4% inflation, are they going to move to aggressively try and bring that back to 2% or are they going to tolerate that for a while?

And if they do tolerate it, then, you know, I think interest interest rates won't move as fast. If they try and say, look, we don't want inflation expectations to get going, we're going to cut this back, then rates could move rapidly and a lot. And that's where we really want to— the crux of the matter is really going to come down to, because the Fed— can the Fed get expectations if inflation starts picking up, how hard is it going to be for the Fed to kind of get that under control? And so, I think if you haven't locked those long-term interest rates, it's something you should definitely think seriously about. And like I said, I can't say that interest rates are only going to go up. I won't do that. But think about what your risks are. And the risk of having even lower, missing out on even lower rates to me seems, boy, I don't know.

They're probably still not going to pay you to take out that first-year mortgage. So when you can borrow that long-term money at those really low rates, that's a decent hedge against inflation.

Chris: So if, if there's listeners on here thinking, okay, yeah, I've got 2 or 3 long-term notes set up, and, and let's say, you know, they're out there, you know, 10 years or something, and they could consolidate some things, stretch some stuff out, and lock this in for even a longer period of time, restructure a little bit from a cash flow perspective Is that, is that something that, that you're kind of leaning toward then? What you're saying, you know, let's, let's really clean house here, get stuff structured correctly long term, set yourself up for cash flow while, while it's a good time to do that right now.

Brent

Gloy: Absolutely. And the window on that, it may be getting narrower all the time. So if you, if you're out of balance. And by balance, what we're talking about is, you know, you have a lot of long-term assets and a lot of short-term debt, that's not balanced. You know, you kind of want to match your assets and the liabilities up in term and, uh, you know, try and get that done. And, you know, I, I did it. Dave and I do a webinar for Farm Credit Services America we were talking about this issue, we had Tim Cook, who's their Chief Credit Officer, on, and he gave what I thought was some pretty good advice. And he said, look, you know, if you're borrowing operating money, get yourself in a position where, you know, don't pay off all that long-term debt until you're to the point where you can kind of fund the operating side. And I thought that was a reasonable way to think about it.

So get that, get that long-term stuff, you know, spaced out so cash flows nicely.

Chris: And then, and then be disciplined with that cash, right? Yes, on the operating side, because sometimes—

Brent

Gloy: go ahead, because I mean, jeez, Chris, you know, what, what do you think is going to happen right now? I mean, this is the most profitable time we've had for ag in what, the last 8 years?

Chris: Yeah.

Brent

Gloy: Yep. Uh, it's good. Yeah. So it's, it's really good and people need, you know, this is the kind of discipline. Um, you use the, you know, windfall wisely. Um, yeah. Enjoy it a little bit. I was telling people, you can always enjoy it a little bit. I mean, I don't You don't have to live like a pauper if you're not a pauper. That's fun, but, but at the same time, you know, let's, let's make good investments with the windfall we're getting here. Don't just, uh, don't just blow it.

Chris: I'm gonna pick on you a little bit here on a specific question on land. If a producer is in a position where there's land available, land that they need to be buying, and you can lock that in, like you said, for long term. But on the converse side, we are seeing what land prices are doing in certain areas. We're seeing some really high sales. Um, what's your thought there? I mean, is it— is it— I mean, it's— you can never— it's hard to ever make land cash flow. Um, inflation will continue over time. What's your thought there on the land side of things and purchasing and, and financing?

Brent

Gloy: Yeah, it's a tough question. What I normally say is that most of the time when you buy land, you can pay a fair price for it. There's a few times when you're going to pay such a low price that it's just a ridiculously good investment. You can't screw it up. There's also a few times when you're going to pay— overpay for it so much that it's going to be a terrible investment. It's going to drain your operation for 30 years and you want to avoid those deals. And I think in this environment, it's getting a little bit to the point where we have to start at least paying attention to that possibility that we could be buying it when it's really bubbly or really— and really optimistic market. So, you know, use discipline, but over the long run, you know, farmland's going to be a good investment for most people.

You just have to be a little bit careful in times I think like this, because we're set up right now for, you know, really high land prices. I think you're going to see them real soon. It just There's lots of talk of inflation, commodity prices are good right now, so profits are there. You've got some people that are convinced there's going to be a lot of money on the carbon side of things. So there's a lot of things that seem good and getting better. And sometimes that's the time to kind of step back from those things. A few years ago, it was a much better time probably to purchase land. Land. Yeah, it's hard to know. And, uh, I just, you know, you tell people all things are best in moderation. And, uh, you know, if it fits strategically with your operation, you can work it in and make it work.

It'll probably work out in the long run for you, but, but it's not at all, all prices kind of thing.

Chris: Is it something with, you know, you look at currency levels and all the money printing we've done I mean, it just feels like it's probably an okay time with low interest rates. If a person has sufficient capital and with interest rates where they're at and with the currency value being down, holding on to the cash may not be the smart thing to do. I mean, cash is king, but it seems like we just keep making the cash worth less and less and less, right?

Brent

Gloy: Yeah. In a slightly more inflationary environment, so if you're thinking 4 or 5% inflation, land ought to be a pretty good investment. Any kind of real asset is kind of what you want. Something that can generate those cash flows over time is Things are good to have. A good business is a good investment as well. So, you know, just, I guess, all I try and tell people is, you know, don't, if it puts you in a really precarious financial position, then you have to think carefully about it.

Chris: Yeah, you don't want it, you still want to be able to cash flow. The name of the game first and foremost, for sure.

Brent

Gloy: Well, you know, how many of us honestly, uh, 18 months ago thought we would be looking at the kind of profits that we're looking at on the farm?

Chris: No one.

Brent

Gloy: I, I really don't think there's very many people. I certainly wasn't. Yeah, it was a time where you're sitting there going, man, we've got You know, grain stocks are on our ears. We were in a trade dispute, uh, but didn't seem to be getting much better. Um, there just wasn't a lot of reason for optimism. Boy, it shifted fast.

Chris: Oh yeah, yeah. The, the lender, uh, from what we're seeing with, with lenders and a lot of our producers, the, you know, we— the lenders went from extremely concerned to pretty happy and pretty comfortable all of a sudden. So, but again, I think that comes with, that comes with a caution though, right? I mean, when times are good is when you, like you just said, that's when it's time to be disciplined.

Brent

Gloy: Yeah, that's when, I mean, all the decisions that people, you know, all the pain that people had to deal with in the last, you know, 5, 6 years when things weren't so good and the things that they, you know, were causing them problems, well, those decisions, most of them were made in, you know, 8 through what, 14?

Chris: 14, yeah.

Brent

Gloy: 12, 13, I mean. Yep. Um, so it's just, it's important to kind of, you know, most of us are in this for the long, the long game. And, you know, I think it's important to remember that. And, you know, slow and steady often wins the race in the long run. And, uh, you know, focus on the things that make your operation better, um, and, uh, invest in those things.

Chris: Yeah. Hey, one last thing I want to hit on briefly and quickly here is the, um, the just kind of where the tax implications starting to look for transitioning to the next generation. Is there any concerns there, anything you're watching that You know, or is it just a matter of we better just keep paying attention as these policies either do or do not get implemented and stay tuned all the time? Anything other than that?

Brent

Gloy: Well, yeah, I think it's important to pay attention. And yeah, it's frustrating. It's almost the point where, you know, you kind of wish I don't know, I'm not gonna get political here. I just wish we could get to a point where they're like not making big changes all the time. You know, we get one administration in, they make big changes, and another one comes in and make big changes back the other way. And it's kinda like, man, I wish we could just like find some kind of steady state where we're not switching this stuff around all the time because it does, it creates big problems. Some of the proposals that they're talking about are scary, frankly. I mean, they would cause a lot of problems. I mean, for, I'm sure a lot of your listeners, I mean, me personally, it would be a bad deal. And that makes me really nervous.

So we're trying to watch it and be prudent, but the only thing that ever gives me Cole is this idea that, man, there's just so few politicians that actually go about actually increasing taxes. And I keep that in the back of my mind when I get worried about it. But I just don't know. The key difference here is they're really trying to talk about taxing raising taxes on, you know, a few people. And we'll see what happens with it, but it's definitely something to watch.

Chris: Yes, it is. That's for sure. Well, hey, Brent, this is a great conversation. I'd like to have you back here in another month or so, and we'll see how things are, are changing, what's going on, and get an update if you'd be willing to do that.

Brent

Gloy: Absolutely would.

Chris: That'd be great. So hey Brent, thank you very much for, uh, for your time today, and we really appreciate your insight.

Brent

Gloy: Thanks, Chris. Great, great to be on.

Chris: You bet. Again, Brent Gloy, a farmer in Nebraska, partner in Economic Insights, and past professor at Purdue University in ag finance. And so again, we really appreciate Brent being on. We appreciate you listening. And if you've got other questions or anything that you'd like us to be talking about, please reach out to us. Let us know what you need to be hearing, what you're looking for, and we'll be back again next time on the Ag View Pitch.