Editorial: Inflation pressure not a surprise

There’s not much doubt that we’re into inflationary times with recently reported annual inflation of 4.4 per cent.

That means additional risk for farmers to manage along with the supply chain challenges currently roiling the world and the usual headwinds that come with running a farm.

The latest indicator that there’s inflation beyond what many of us have known in our adult lives is that the Canadian Dairy Commission has approved the largest increases in payments to dairy farmers in decades.

The CDC sets prices for milk and milk products across the country based on a cost of production formula.

The CDC doesn’t necessarily follow larger dairy market forces, but the changes in input costs incurred by farmers. That’s why when dairy product prices are rising in other parts of the world, they often aren’t in Canada. However, when there are large input cost changes, the CDC will increase the payments to dairy farmers.

I usually see the CDC pricing as a trailing measure. The costs have to add up enough for dairy farmers to report them on a CDC survey. Costs have been increasing for livestock farmers for a while – crop prices have been strong for a while now and business people are having to pay more for labour when they can find it.

Farm Credit Canada’s lead economist J.P. Gervais reported recently that dairy retail price inflation has lagged other grocery items significantly since 2010.

None of this should be particularly surprising. There were signs that inflation could become an issue. We’ve been spoiled with low interest rates for too long (spoiled unless you are a retiree trying to make money on your savings).

There are many reasons why the cost of labour is up. There’s no doubt that some of the pandemic supports encouraged people to stay home instead of finding work, but the lack of labour is an issue that’s been predicted for many years and it’s about demographics. 

As baby boomers retire, there isn’t the broad demographic coming up to replace them, especially those who are willing to work for lower wage, harder physical labour jobs. As people move out of rural communities, there are fewer to work on farms.

There are other pressures that were building on inflation before the pandemic that were supercharged by the upending of the economy during lockdowns.

Property prices is one area. They have been escalating for years and according to the Canadian Real Estate Association, in late October prices in Ontario were up by 25 per cent year over year. That eventually has to break through into the rest of the economy, when the price of an item that is the largest purchase most people make jumps 25 per cent in a year.

Property isn’t part of the basket of products that determines the Consumer Price Index, a major indicator of inflation, but over time property has an inflationary effect on the overall economy.

Fuel costs that have doubled since the summer of 2020 when oil prices hit rock bottom are also causing upward pressure on inflation.

What does it mean on the farm?

The biggest financial risk on a farm is usually debt. If you borrow $500,000 on a five-year term, amortized over 15 years at a 2.5 per cent interest rate, the monthly payment is $3,300 per month. At five per cent that’s $3,940 per month, an increase of about 15 per cent. Mortgages amortized over longer periods are an even larger issue.

We’ve become conditioned to low interest rates. I’ve only paid declining rates for the 20 years I’ve had mortgages. That’s likely to change and why I locked in a rate seven months ago.

Crop prices have been strong for a couple of years now, without a whole lot of indicators that they will trend down anytime soon. Here’s hoping they don’t because a double hit of inflation and supply chain issues are moving most farm input costs up.

Risk management is going to become more critical as inputs and labour are becoming unpredictable. There are lots of resources out there to learn how to manage farm-related risk and it might be time to take a refresher.

I don’t believe we’re going back to the 1980s with rapid inflation around products and high interest rates. There are extraordinary supply and demand factors in the economy and those will eventually ease off. Central banks are ready to raise rates to slow inflation. But for a while, we’re going to feel increasing costs, especially among volatile inputs on the farm.