Inflation Risks and Rising Rates: How It Impacts Ag Retailers
The U.S. Federal Reserve has taken aggressive steps to combat inflation by raising interest rates. On Dec. 14, 2022, the Fed raised the federal funds rate to a targeted range of 4.25% to 4.5%, the highest level in 15 years. This rate spike sent stocks and bonds higher in January as investors bet that the Fed may pause and even reverse its interest-rate increases.
The consumer price index (CPI) increased 7.1% year-over-year in November, registering the smallest monthly increase since the end of 2021. Gasoline prices dropping significantly provided a reprieve to households, making living expenses more manageable. For the past six months, inflation has decreased on an annual basis, reaching 6.5% after a high of approximately 9% in the summertime, partially due to the decrease in gasoline prices. Excluding volatile food and fuel, core consumer prices have still risen by 0.3% or less over the last three months.
In the fourth quarter, ethanol production was almost back to what it was before the COVID pandemic, averaging 15.5 billion gallons. The average profit margin per gallon was $0.27 in the first nine months of 2022, which is higher than the long-term historical average of $0.25 to $0.30. Following the Biden administration’s statement of their plan to evaluate states’suggestions, the sale of E15 throughout the year has picked up speed.
In the fourth quarter of 2022, grain markets had to contend with a number of difficulties, such as the conflict in Ukraine, economic downturns in China and Europe, and increases in interest rates in the US and other industrialized countries. Multi-year lows for the stocks-to-use ratios of corn, soybeans, and wheat were reached in 2022, a result of robust domestic demand.
These risks to inflation, along with many investors’ failure to acknowledge them, means core inflation is unlikely to decline in a straight line through year-end toward the Fed’s target of 2%. Rather, the decline is more likely to stall out mid-year, with inflation staying closer to 4%, a development that could keep rates higher for longer and markets possibly stuck in a volatile waiting game.
Ag retailers posted exceptionally strong revenue and profit growth in 2022, driven by sturdy grain market fundamentals.
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