Inflation by definition has to be one of the most confusing words in the American dictionary.

According to our government, inflation is under control. The Feds' favorite inflation gauge is the “core personal consumption price index,” which has been rising at a modest rate of approximately 1.5% per year in recent months. It includes items such as durable goods and services, but doesn't include food and energy. I suppose if you throw out all the items going up in an index you can come up with most any answer to inflation you want.

In my opinion, we're not only headed toward more inflation, but we have been in the grips of significant inflation for the last four years. Inflation needs to be analyzed in a secular format and not by an index emphasizing only a few items such as durable goods, service costs and labor.

In a competitive worldwide environment, all of those items are going to be under pressure. But for those of us in agriculture and even non-agricultural real estate, one would have to be living in some of the most remote areas of the U.S. to be oblivious to the current high inflation rates. For example:

  1. Farmland prices have exploded. While some states may show modest farmland inflation rates, states like Illinois have areas where farmland has inflated 40% or more in just the last two years.

  2. California home prices are up 30% in the last year.

  3. Housing prices in prime vacation areas such as Florida, Arizona and Colorado have experienced similar sharp price increases.

  4. On the farm input side, inflation has kept pace with the price of real estate. Fertilizer, seed, natural gas — pick almost any item you want that farmers buy and prices are up substantially.

Selective Analysis

As farmers, it's best that we ignore the government's reporting methods for inflation. We all know that a 1.5% inflation rate in agriculture is far from reality over the past few years.

What concerns me is the volatility that lies ahead in agricultural commodity prices as well as input prices, real estate prices and every factor we have to deal with in running an agricultural business.

Some of the factors that can lead to significant inflation over the next few years include:

  • The U.S. trade deficit is out of control. It's hard to buy anything at Wal-Mart that isn't made in China.

  • The U.S. continues to run excessively large fiscal deficits. The way almost any capitalistic economy solves deficit problems is to print more money.

  • The dollar remains weak and oil prices remain high.

You may think, by looking at the list above, that the U.S. economy is in severe financial straits. That is hardly the case. Why? Foreign money continues to pour into the U.S. bond market — not because of superior returns, but because the U.S. has the largest and the most liquid bond market in the world. We are still the safest economy with the most stable government. Returns don't always dictate where money flows in the world.

Volatile Times Ahead

That said, I'm not concerned about the demise of the U.S. economy or that we are about to loose our economic and political strength around the world. But these are flashing lights indicating some very volatile economic times ahead.

Sooner or later interest rates will have to increase in order to cool “real” inflation.

What Does It All Mean?

As agriculture producers, there are several issues that need to be factored into your management decision-making process. My list would include:

  1. Extreme volatility ahead. Volatility will occur not only in commodity prices, but also expect volatility with all of your input prices, particularly those related to energy prices.

  2. Continue shift to hard assets. Many large investment firms are now advising clients to have at least part of their portfolio in hard assets that may include farmland but also include commodities. Overall this should help support asset values but will also increase the volatility of asset values.

  3. Sooner or later interest rates are going to move higher. While we may go through a period similar to the 1970s when interest rates crept up slowly, within a few years that will still lead to higher inflation and, ultimately, to interest rates well above current levels.

  4. Continued separation of wealth — both in agriculture and non-agriculture. Let's face it. If you're not already in the “game” the entry fee is getting out of control. While upsetting in many ways, agriculture and non-agriculture both will continue to move into the world of the “haves” and “have-nots.” Asset control will be the key.

Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.