Wednesday, February 24, 2010

Inflated worries...

Several separate pieces of information coalesced in my sinus-packed head today about a nearly inchoate fear I feel running through much of the farm economy.

Inflation is coming! Alas, Babylon!

I'm not the only only one who seems to be hearing this either. John Roach, whose newsletter I find to be one of the calmer voices in the ag marketing advice arena, offered this comment yesterday morning.
During our recent seminars we encouraged farmers to sell more of their 2010 crops than normal and pieces of distant years’ crops. Farmers’ largest concern voiced about making sales, was their worry about inflation.

Quite frankly we think farmers are too worried about inflation. The greater worry should be over production driving crop prices down not inflation driving inputs up. How many times in your history of farming has inflation been the reason profits have turned to losses on the farm? For many it has really happened only once…..in 2008.

We believe the bigger concern about profits on the farm should be, “I worry that strong profitability and a positive grain outlook has brought increasing amounts of capital to agricultural production around the world.” Capital investments are increasing acreage in South America and increasing yields in the former Soviet Union countries. We are headed toward surplus supplies as fast as Mother Nature will allow. Every farmer in the world is working as hard as he or she can spending more money than ever to create those surpluses.

We am not trying to get anybody to rush out and sell everything. Quite the contrary, our thought is spacing out sales over the spring Sell Signals will be the right approach this spring as it has been for the vast majority of the past 30 years. But, too many farmers are telling me they are afraid to make 2010 sales let alone anything beyond because they are so worried about inflation.
In fact, we often hear warnings about excess liquidity due to all the government stimulus flooding the markets for everything and driving prices skyward. And we keep hearing them, and have for years now - good times and bad.

So where is it?
From the BLS report on the Consumer Price Index this morning:
On On a seasonally adjusted basis, the January Consumer Price Index for All Urban Consumers (CPI-U) rose 0.2 percent ...


The index for all items less food and energy fell 0.1 percent in January. This decline was largely the result of decreases in the indexes for shelter, new vehicles, and airline fares.
Owners' equivalent rent (OER) declined 0.1% in January, and is declining at about a 1% annualized rate. OER has declined for five consecutive months (a record) and is important because it is the largest component of CPI.


Based on reports of falling rents - and a near record high apartment vacancy rate, OER will probably decline for some time, keeping core CPI low and possibly negative this year. Also - falling rents will push up the price-to-rent ratio, and put additional pressure on house prices.[More - apologies for total excerpt]

Even more dramatically:


[Source]

Some evidence exists to support a credible position that deflation remains a significant threat.

I have written frequently about the odds of both, and usually favor inflation, but maybe the better expenditure of time would be to actually try to envision what inflation might look like, regardless of how/when it arrives.

Suppose the CPI is announced at 5%.  Does this mean everything we buy is 5% higher?  I think that is the flaw in our expectations - we are fooled by overall numbers, when inflation occurs in different goods and services at different rates.

So given how the CPI is calculated, YOUR inflation rate could be another number altogether.  For instance, for Jan and I, several CPI components don't affect us much:
  • housing costs (mortgage paid off)
  • higher education (kids through college)
  • food (only the two of us, big garden)
  • transportation (I drive a 4 yr old Vibe, for Pete's sake)
and so on.  On the whole those who consume less see less inflation - duh. [Notable flaw in this argument: medical care costs, especially drugs - for four more years, anyway]

So even if the did revisit '70s type inflation, it may not be as bad for us as many younger families, for example. But we would and will, I believe, see asset inflation - like farmland and machinery.

In fact, I think what is happening is folks are captivated by One Big Thing they remember from Econ 101, best expressed by Milton Friedman's phrase "too much money chasing too few goods".  Only we don't have too few goods and services and could easily come up with more by importing or hiring a few laid off workers or utilizing slack capacity.

[Source]

Even more important is all those billion of "excess" liquidity aren't showing up in the money supply.

[Source]

In fact, this money is piling up in banks with skittish leadership too afraid to lend even as loan demand weakens.
[Same source]

As more banks fail, and bank officials grow more nervous about new regulation and reserve requirements, I don't see that wealth leaving their vaults very soon.  In fact, agriculture may be one of the few sectors with "decent" access to funds for borrowing.

But my current overriding reason for discounting the chance of inflation that could inflict serious damage on my finances is everybody is talking about it and has likely already shifted markets to make it less likely.  When more folks adopt a blase attitude about the outlook for inflation - then we'll have the pieces in place for its emergence.

3 comments:

Anonymous said...

John, I don't understand your call for asset inflation when everything else you reported persuaded against it. On the other hand, we've had asset inflation for the past 25 years so more would be nothing new.

John Phipps said...

anon:

I discussed the difference between consumer and asset inflation here:
http://johnwphipps.blogspot.com/2009/10/inequality-and-land-values.html

rswanson said...

I appreciate your inclusion of John Roach's comments in your post. I have followed him for a number of years. He tends to be a fundamantalist which I as a farmer have to be as well, since my primary focus is production. As a side benefit he, like you, throws in a little philosophy to keep everyone realistic and on track.