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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.[0] 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.[1] 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.[2]

The consumer price index (CPI) increased 7.1% year-over-year in November, registering the smallest monthly increase since the end of 2021.[3] Gasoline prices dropping significantly provided a reprieve to households, making living expenses more manageable.[4] 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.[5] Excluding volatile food and fuel, core consumer prices have still risen by 0.3% or less over the last three months.[5]

In the fourth quarter, ethanol production was almost back to what it was before the COVID pandemic, averaging 15.5 billion gallons.[6] 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.[7] Following the Biden administration’s statement of their plan to evaluate states’suggestions, the sale of E15 throughout the year has picked up speed.[6]

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.[7] Multi-year lows for the stocks-to-use ratios of corn, soybeans, and wheat were reached in 2022, a result of robust domestic demand.[7]

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%.[5] 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.[8]

Ag retailers posted exceptionally strong revenue and profit growth in 2022, driven by sturdy grain market fundamentals.[6]

0. “What Can Trucking Expect from Inflation and Interest-Rate Numbers? [Analysis]” Heavy Duty Trucking, 24 Jan. 2023, https://www.truckinginfo.com/10190912/what-can-trucking-expect-from-inflation-and-interest-rate-numbers-analysis

1. “Will High Inflation Be a Game Changer for Estate Planning? | New York Law Journal” Law.com, 27 Jan. 2023, https://www.law.com/newyorklawjournal/2023/01/27/will-high-inflation-be-a-game-changer-for-estate-planning/

2. “Market Recovery Hinges on Quick Inflation Drop” The Wall Street Journal, 23 Jan. 2023, https://www.wsj.com/articles/market-recovery-hinges-on-quick-inflation-drop-11674427477

3. “Many Americans believe inflation will get worse in 2023” Fox Business, 25 Jan. 2023, https://www.foxbusiness.com/personal-finance/americans-believe-inflation-worse-in-2023

4. “4 Top Stocks to Benefit as Inflation is on the Wane” Yahoo Life, 27 Jan. 2023, https://www.yahoo.com/lifestyle/4-top-stocks-benefit-inflation-131101819.html

5. “Inflation Is Cooling, Leaving America Asking: What Comes Next?” Moneycontrol, 23 Jan. 2023, https://www.moneycontrol.com/news/business/economy/inflation-is-cooling-leaving-america-asking-what-comes-next-9922021.html

6. “Inflation begins to loosen its grip” Beef Magazine, 20 Jan. 2023, https://www.beefmagazine.com/beef/inflation-begins-loosen-its-grip

7. “CoBank: Inflation is Beginning to Loosen its Grip” Monitor Daily, 23 Jan. 2023, https://www.monitordaily.com/news-posts/cobank-inflation-is-beginning-to-loosen-its-grip/

8. “Will Inflation Go Down Steadily From Here?” Morgan Stanley, 18 Jan. 2023, https://www.morganstanley.com/ideas/will-inflation-go-down-steadily-2023

Forecast Future Price Action
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