Economic hurdles: inflation, interest rates, supply chain issues

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch, and today we are going to have a conversation about the economy and some of the things that a lot of you have been asking us. We're starting to get out in some of the farm operations and do some visiting, but we're lucky enough today to have with us Bill Connerly. Bill, how's it going?

Bill

Conerly: I'm great.

Chris

Barron: Good deal, good deal. And so you are going to be one of the keynote speakers at our Ag View Executive Business Conference. We're excited to have you there. So what are, what are some of the things that, that you think we need to be— or that you're going to be talking to us about that we need to be paying attention to?

Bill

Conerly: Well, I'm an economist, not a farmer, but I look at a lot of the factors that impact agricultural operators in a lot of different ways. I'm following inflation and energy prices fairly closely right now. Supply chain issues and labor in particular is getting a lot of my attention, and I'm happy to use this information for whatever will help, uh, the, the conference participants make better decisions in 2022.

Chris

Barron: Awesome, that's great. And, you know, kind of what we wanted to do, or the purpose of this conversation, is kind of twofold. Number one is to, is again just to kind of have a little bit of an update of what's going on in the economy from your perspective, and then just also as a bit of a preview of what we can expect as we interact with you. You'll be at the conference the whole time from the, uh, the beginning of the welcome, uh, welcome, uh, evening there at 5:30 on the 26th. And then we've got the 27th and 28th where there's going to be a lot of opportunity. You'll be doing your presentation, but you'll have— be able to have a lot of one-on-one conversations with, with producers. And we're really excited to have you there.

Bill

Conerly: And so exactly, you know, my presentation will have a question and answer session, but some people have questions they don't want to ask in public. And so I'm Always ready for somebody to grab me by the elbow and say, hey, Bill, let me tell you about this, this thing on my mind that I don't want to share with everybody.

Chris

Barron: Right. And the other thing we're going to try to do too, as we get towards the end of the conference and start wrapping things up, we're probably going to corral all of you guys and get you up on the stage and have you guys banter back and forth. And maybe the audience is going to want to spitball some questions at you guys too as we wrap up. Based on what we hear from everybody collectively. And so excited for that. So let's get going here a little bit. In terms of a preview for some of the things you're going to talk about, what I'd like to do first is just kind of throw a question at you with regard to inflation right now. As farmers, we're seeing a tremendous amount of inflation, particularly in the energy side.

As you said, that relates to anhydrous ammonia, nitrogen, A lot of concern on crop protection because you're looking at a lot of chemicals and things that are not only going to be expensive, but also probably hard to get a hold of in some cases. Glyphosate as an example, and some other things that come out of China, and some of those things are really a big disruption in creating some kind of a price, big-time price concern. So any thoughts as we continue to chug away in toward '22 and into '22 on things we should be paying attention to?

Bill

Conerly: Sure. Um, and I think inflation is going to be relatively high. Consumer prices are run— running, uh, up 6%, and I think we'll see that for the next couple of years. But, uh, energy is connected to overall inflation, but it has some different patterns. You know, when, um, we had a corn shortage, what you might call a corn shortage, just prices went through the roof. And I think that was 2012. Does that sound right? Midwestern drought. And the world's farmers were pretty good at getting more corn produced in 2013. And prices came back down. But when oil prices go up, man, it takes a lot more than one growing season to get more oil. The exploration and development of new field— oil fields and transportation systems. Oftentimes it's 10 years to get oil supply dialed up. So I think that we may see high oil prices more so than overall consumer price inflation.

We've had a retreat in world oil prices in the last week since we've heard about the Omicron variant. My guess is that there's a bit of a panic going on, and we're going to see oil back up close to $80 a barrel by a month or two from now. But that's, that's kind of a wild guess rather than a very precise forecast.

Chris

Barron: With, with regard to energy and the green movement and some of those things, you know, there's a, there's a lot of pushback and a lot of push forward on that. Yeah, on that topic. And It just seems like there's almost a direct correlation there to energy prices and some of the policies. Are there some policy things that you think are really influencing this, not as much, or some things we need to watch for?

Bill

Conerly: Yeah. Policy has an effect, but I don't think it's the biggest impact. And I'll just say that the Biden administration is trying to reduce our energy production, and then they're whining that OPEC is not sending us more oil. It's like, wait, wait a second, if you want oil, we know how to produce that here in the United States. So that's kind of weird, but that is small potatoes compared to the big picture on energy, which is global consumption, global demand for energy versus global supply. And the demand side can fluctuate a lot faster than the supply side. I mentioned the sluggishness of supply changes when oil prices change, but consumption, we can dial up our driving right now. In a cold winter, we'll dial up our heating. So we can swing things around on the demand side a lot faster. And thus we're going to have many price variations.

So one thing I would recommend is, uh, um, plan on, um, energy costs going up and down over the next 5 years. And I'm not sure exactly the pattern. Uh, I think there'll be more upward pressure as we see the global economy do better, but at some point, uh, the producers are going to say, holy cow, we've developed too much capacity and we need to cut prices to get this oil moving.

Chris

Barron: So you're talking 2 years of inflation potentially, that this is something that could last, you know, quite a while yet. And obviously nobody knows exactly how long and what that could turn into. I mean, could— is there some danger there that we could, you know, revert and go a different direction if interest rates go up? And, you know, could you get into like, you know, almost an accelerated inflation where it's really hyperinflation for a bit of time and then actually vert revert, go the other way and get into a deflationary—

Bill

Conerly: is that all? Well, I, I'm not worried about deflation, but I think that we may go from this period of booming demand for goods and services and high inflation into a recession. I'm not thinking 2022 for a recession, but there is growing public concern about inflation. So a person gets a 6% pay raise. What do you think? You know, you thump your chest, I'm worth 6% more, it's really wonderful. But then you go shopping and all the price tags are 6% higher and you say, I've been ripped off. Right now, we economists look at this and say, eh, you know, it's a wash. 6% more income, 6% higher costs, no big deal. But people really feel in their gut that they've just been punched. And I think that there'll be enough public pressure that the Fed will start fighting inflation.

I think, well, they've already tapered their bond purchases, but short-term interest rates, I think they'll start raising them in the spring. And over 2 years, maybe see a 3 percentage point increase in short-term interest rates. So for folks who have operating lines, I think that by the end of 2023, say 2 years from now, maybe plan on interest rates 3% higher, plus or minus a little bit.

Chris

Barron: Okay. I'm going to come back to that one in a minute, but I—

Bill

Conerly: I'm not guaranteeing this.

Chris

Barron: Yeah, right. I'm going to come back to that one, but I did want to correlate, you know, you're talking a couple of years of inflation potentially, and then, you know, the supply chain, issues are all— there's almost like a direct correlation there too with these supply chain issues. What's your crystal ball say there? I mean, how long does it take to unwind these issues? Because they're pretty deep, right? I mean, is it something you think we can unwind in less than a couple of years, or is this something that will last?

Bill

Conerly: Yeah. Well, the supply chain is kind of a whipping boy for an economy with too much stimulus. So the federal government fiscal policy increased government spending. They borrowed money to spend and push it out to us in various stimulus payments. And the Federal Reserve printed money to give to the Treasury for this stuff. So there's a lot of stimulus. And the biggest challenge is we've— we're overstimulating the economy. So everybody's seen pictures of the ships at anchor off Los Angeles, Long Beach harbors. But we're actually getting more, more containers through, through the harbor than we did before the pandemic. We're bringing more stuff in. And the problem is we're bringing a little bit more in, but we want a lot more in because we have all of this, this money and we haven't been spending our money on vacations.

So, uh, let's get a bicycle, let's get a boat, let's get some blinds for the living room. And a lot of that comes in containers. So the supply chain problem is mostly too much stimulus problem combined with a tight labor market. Uh, you know, we were saying while you and I were chatting last month or so, and you said it's hard to find anybody who's got the skills and the experience you need. And I mentioned that it's hard to find anybody even unskilled and inexperienced. It's a tight labor market. And today we're recording this on December 3rd. We just got a weak employment report, 200-some-odd thousand additional people working. We had hoped for like half a million more. So there are people who had jobs in 2019 who are not working today.

Some of them have retired, but many of them are like sitting on a couch playing video games or they're watching, watching, they're taking care of their children because the schools are not open or not open reliably, some fear of COVID but those stimulus payments and the high unemployment insurance benefits discouraged a lot of people. A lot of folks found that being a slacker paid better than being a worker.

Chris

Barron: Yeah. And that, that ties directly into that supply chain issue.

Bill

Conerly: Yeah.

Chris

Barron: From the standpoint of just getting stuff moved out of, you know, it comes in off the ship, but then everything's sitting there and it takes a lot of people to make that system work. And, and to your point, I think, you know, the other thing I heard on a, on a conversation with somebody here a few weeks ago, that, you know, truck drivers show up and, and, you know, do you have people— like in agriculture, we have a lot of products that come in the containers that are, you know, um, what do I want to say, you know, there, there's some toxic chemicals and some things like that, you know. And so you have to have certain qualifications too.

And so to your point of You know, just a warm body is not going to necessarily have the proper credentials with a CDL to pull in and grab, you know, a truckload of chemicals and that kind of stuff and get things moved around to the degree we need to. And so, yeah, I appreciate that. I think this is going to be something we're going to deal with for a while.

Bill

Conerly: Yeah. And, you know, truck drivers, particularly the over-the-road truck drivers who go from, you know, East Coast to the West Coast, they tell an interesting story that has an effect on on all businesses, both agriculture and non-agriculture. The over-the-road truck driver has made a deal to give up time with family and friends to get more money. And increasingly, they don't like the deal. They don't like— and I can't blame people for not wanting to give up time with family and friends. I don't want to, you know, do that. But that's part of the truck driver shortage. And it's— I hear from other industries, the logging people, I'm in Oregon, a lot of loggers. And there are a lot of people who just do not want to get up at 5 AM so that they can be in the forest ready to cut down trees at first light. And they're saying, no, that's not what I want to do.

And for those operators who are having trouble finding people, I think it's worth thinking about, well, gee, what is it about the job that people don't like doing? And is there a workaround for that? Now, sometimes there there isn't, but sometimes, sometimes there is, but it's, it's a way of thinking about the challenge that may help some folks cope with it.

Chris

Barron: Yeah. One of the ways that a lot of our clients that we work with across the middle part of the country is we're pretty heavily mechanized in corn, soybeans, wheat, and the grains. And even the, you know, some of the large dairies we work with and hog operations, we've got a lot of mechanism and, and we can, we can scale that too. You know, if you have a, You know, if you've got a 40-foot planter, you can go to a 60-foot planter. If that's not big enough, you can go to 120-foot planter and, you know, and all of a sudden maybe eliminate a person and get more done. And so those are, those are some things.

But with that said, that, that's a segue into kind of the last thing I want to bug you on here is, um, with your experience in the lending industry— and I failed to introduce you properly at the beginning with all your credentials and, and things, which, which is very vast, and I know you had a lot of experience in the lending industry And as farmers, we went through a number of years here from about '13 through about, I'd say, '19, probably 2019. So it was about a 5, 6 year window in there where there was, you know, we had it— we were all looking at like burn rate, you know. We were just— we were going through cash in, in a lot of operations faster than we could regenerate it, and we were having to look at some debt restructure and some things like that. So my question is We're starting to recover from that.

And we've got some farm operations that actually for the first time in a long time have some excess cash. And they're like, okay, well, now what do I do with this? Do I, you know, do I prepay this, this and this? Or do I, you know, I haven't updated some things as quickly as I wanted to, should I go out and do that, but then I can't get ahold of some of the stuff I want, you know, it's 2023 before that combine will show up or this, planter or whatever. And so any advice or any, anything that we as producers should be thinking about in terms of managing capital and managing, you know, that, that capital intense portion of our business that we have with regard to where to put it, how to manage it?

Bill

Conerly: It's a tough question. And if you're scratching your head, uncertain what to do, it's not because you're stupid, it's because the problem is very, very difficult. Right now, if you're sitting on extra cash, the bank will pay you approximately diddly squat interest on that cash. The— what farmers have done for years and years is they get a little bit ahead and they want to buy stuff, which sometimes is a wise decision, but oftentimes they end up buying additional land at the top of the market rather than at the bottom of the market. I think the most important thing, the advice I'd give is be patient. Eventually, you can earn some, you know, in a couple of years, you'll be able to earn some interest in short-term investments. If mechanization is really right, if it really pencils out, you know, make the commitment, even if you're a year or two away from receiving the equipment.

But, you know, I like, in fact, I've written that I think farmers Farmland long-term is a good inflation hedge. And I've talked about the REITs where a city boy like me can invest in farmland as an inflation hedge. But I get nervous when I hear about, um, people in agriculture having a couple of good years and buying more land. Uh, I feel more comfortable with people buying land when ag has had a couple of bad years. Prices will be a little bit softer then. So I think be patient, sit tight, and don't let the money burn a hole in your pocket is the best advice I can give right now.

Chris

Barron: The other, the other spot that I think a lot of people look at is debt reduction, you know. And so we sit here with a lot of, a lot of farms in the last couple of years that have restructured debt, stretched some of that stuff out to where, you know, it's very tempting to, you know, if all of a sudden you got a few hundred thousand dollars there and you could chip away at a loan to make you feel better when you look at the balance sheet and look at the liabilities and assets and make that decision.

But probably, maybe we need to be careful on how aggressive we get on debt repayment too, if we've got already that interest rate locked in at a really good rate, because you just said, you know, and that's why I said I was gonna come back to this interest rate, this thing that you said, you know, if your short-term money on line of credit, 2 years, 3 years down the road, If you're patient with that cash, like you said, and you don't let it burn a hole in your pocket and you hang on to some of it, operating on your own cash in 2 or 3 years might not be too bad of a deal either. What do you think about that?

Bill

Conerly: Yeah. Yeah. That does make sense. And there was one of the fancy management consulting firms did a study a while back of global corporations and when did they acquire other companies, do mergers and acquisitions. And the best ones used recessions to do their acquisitions. In the boom years, what they did was they improved their financial condition. Uh, they became less leveraged and, uh, got themselves looking better, uh, to their bankers. The recession came, they survived, and they started buying up weak competitors. And then they would go to their banker and say, uh, I'm ready for a loan now. And the bank looks at the financials and say, well, you're solid financially and nobody else wants to borrow money from us because, you know, it's a recession. Right. So there's good opportunity there. But in the interim, I can understand how it would feel uncomfortable.

So you've got a long-term loan and I'm just making up a number, let's say at 3% interest, and you've got cash that you could use. To pay that loan down, and it's earning 0.1% interest. And it's like, why should I be paying interest when I'm not earning any interest on this cash? But what you're really doing is buying flexibility.

Chris

Barron: Mm-hmm.

Bill

Conerly: You're buying the ability to make different decisions in the future. And I can't tell anybody whether it's a good deal, but I think it can be a good deal. So consider the range of possibilities that you might have for that money.

Chris

Barron: Yeah. And I always, as I always tell our clients, you know, it's, it's an individual decision because that, that scenario that we just discussed, it could go one way in one operation and completely different in another one, depending on their short-term goals, their long-term goals and all that as well, too.

Bill

Conerly: Yeah. And, you know, some people sleep better at night not having debt. And if that's your case, pay down the debt. But if you're not worrying about sleeping at night, it's maybe good to keep that long-term debt.

Chris

Barron: The other thing, like I always tell my kids too, when they go to buy something, I always ask the proverbial question and they just roll their eyes at me, but it's like, okay, did you just buy an asset or did you buy a liability? And so, are they paying off a, you know, a vacation house, or are they paying off a farm? You know, there's two different things there to consider too. And that's where that individual scenario comes in, I think. So, anything else that we need to wrap up with regard to, you know, again, we're really super excited to have you at the Executive Business Conference in Phoenix. I think the weather is going to be pretty nice there. No matter what the weather is, it'll be way nicer than the middle of the country here. And, and Yeah, we've got Paul Niefer.

He's going to be talking on tax planning and some of the policy related to that, some decision-making on the tax side of things. And Joe Vaklovic will be there talking on grain markets and some of that stuff. And I can't wait to see the two of you guys sit down and have a drink and have a conversation and see what each of you think on, on both sides of that table. And Damian Mason, who wrote the book Do Business Better, He's a funny guy. He's a pretty sharp guy on business. So interested in having you hook up with him. And then Jim Wiesmeyer out of D.C. when we were talking policy and stuff, that policy direct correlation to all the economic things we're dealing with. So, and then Steve Johnson from Iowa State, formerly Iowa State University, on risk management. So, and then Shay and I. So we can't wait to have you there. I'm excited to have the networking.

We've got 12 currently, right, as of right now, this recording, we've got 12 states represented that are going to be at the conference. So, super excited and really appreciate, Bill, you participating in this and being here to kind of give us a preview and talk a little bit about, about the economy as it is today.

Bill

Conerly: And, you know, and, and Chris, you'll be encouraging people to send in the, the questions and the issues that they want to see addressed.

Chris

Barron: Exactly. You know, if any of you out there have questions that you want to make sure that, you know, that Bill has in advance so he can kind of build that into the, into the presentation, that would be powerful and helpful, I think. And then also bring your questions, and we'll see if we can stump you, Bill, if that's all right.

Bill

Conerly: I don't know anything about golf, I'll tell you that right at the get-go. But one of the things that I'm looking forward to is learning a lot from the people at the conference. Because, you know, the week before, I'll be speaking to electrical distributors. And I was speaking to bankers yesterday and manufacturers a couple of weeks before. And every group helps me learn a little bit more about the economy. So I'll share with the ag people what I have learned as best practices in other parts of the economy. And then I'm hoping to take away the best practices for the best farmers in America.

Chris

Barron: Yeah, and, and you're going to be with the best farmers in America, I guarantee. They're, they're a phenomenal group. Um, I love those guys. It's awesome to, to work with them, and, uh, can't wait to, um, have you guys all meet and, and network. It's going to be powerful. And thanks a lot, Bill. Appreciate your time today too.

Bill

Conerly: Great. See you in Phoenix.

Chris

Barron: Yeah, we'll see you in Phoenix. And, and same to everybody else, you know, if this is something that you have not looked at yet, please Go on to the Ag View Solutions website, click onto the, the button there for the Executive Business Conference, and all of the information is there about the conference. And, and if you're not registered, it's a great time to get registered now, and we will see everybody there. And thanks again. We'll catch you next time on the Ag View Pitch.