Higher interest rates could be in the cards as the Federal Reserve considers options to deal with the highest inflation in the U.S. in 30 years.
In fact, inflation combined with economic stagnation — known as “stagflation” — likely will continue. However, the current situation is much different than the last major period of stagflation in the 1970s, according to Jason Henderson, senior associate dean and director of Extension at Purdue University.
Henderson, who previously served as vice president and Omaha branch executive for the Federal Reserve Bank of Kansas City, discussed the situation during the Agricultural Bankers Conference in Cincinnati hosted by the American Bankers Association.
“I don’t think it’s 1970s stagflation. It’s a different demand scenario, different demographics,” Henderson said. “Demographics will drive slower growth. But, the key is how do we spur productivity?”
In the 1970s, the coming of age of the baby-boom generation added about 2-3 million more people into the working age classification. But, the last three years, the amount of people in the working age classification has declined as boomers retire and fewer young people enter the workforce.
With a limited workforce, Henderson looks for U.S. gross domestic product to rise slowly, in the 1.7 to 2% range.
“Inflation is just too much money chasing too few goods,” with both supply constraints (cost-push) and increased competition (demand-pull) occurring, he said. “Supply constraints can be remedied, but demand inflation tends to be persistent.”
“There’s a lot of money flowing into the U.S (to the tune of $15 trillion in foreign investments) and we wonder why stock prices are historically high and asset values are rising,” he continued. “What will be the target of monetary and fiscal policy?”
Henderson believes the Federal Reserve will slowly raise interest rates and trim its balance sheet, which jumped from $4.5 trillion in treasury purchases from 2016-18 to $8 trillion.
If realized, higher interest rates could pressure farmland values, but likely not to the point of a major decline.
“We’ve seen a surge in farmland values,” Henderson said. “Farmland is expensive, but priced reasonably given where interest rates are.”
U.S. farmers generally benefitted from the low interest rate environment and initially from the wave of inflation, which pushed commodity prices higher.
“Initially it’s good for farmers, until input costs go up,” the economist noted. “And, this is what we’re seeing today. Input costs are surging.”
Ag producer sentiment in the Purdue/CME Group ag economy barometer subsequently weakened in October for the third month in a row as farmers deal with the prospect of tighter margins ahead.
“I think in 2022 there’ll be some profit opportunities, but it might not be as bountiful as 2021,” said Henderson, who looks for commodity prices to remain fairly strong.
Looking ahead, agriculture has the opportunity and challenge of serving two different markets — bulk commodities and growing demand for value-added, specialty foods.
“We’ve got to figure out how to meet consumers’ needs of the future,” he said. “We’ve got to think about diversifying our markets. We’ve been talking about it a long time.”
As for ag bankers, Henderson said they should work with farmer customers to determine their market focus of the future and incorporate new technology into their businesses while managing risk in a potential rising interest rate environment.