Why Haven’t Inputs Dropped With Interest Rates?

General inflation has cooled off from the high points in recent years, but input costs are not following suit.  Dr. Michael Langemeier, director of Purdue’s Center for Commercial Agriculture, said farm input prices don’t always follow inflation up or down.

“They often rise faster and move more unpredictably," Langemeier said.  "Over the long run, general inflation has averaged about 3.4% per year. That's inflation on consumer items. Farm input prices have increased about 4.1% annually. That gap may seem small, but over time, it has a major impact on cost structure, margins, and break-even prices. But what really matters is that not all inputs behave the same.” 

Some costs, he noted, stick close to rising and falling inflation rates.

“Some costs, like labor and machinery, tend to track closely with general inflation," he continued.  "Those items are also used in other industries, and that makes them more predictable. But others, like fertilizer, fuel, and feed, and I would also add feeder animals, are driven by global markets, energy prices, supply shocks, and other things, and that's where volatility comes in. Here's the surprising part: even when inflation stabilizes, your costs might not. Over the past year, inflation increased about 2.8%, but total farm input costs rose more than 10%.”

That disconnect, Langemeier added, can be significant.  So, what does this mean for U.S. agriculture?

“Three key implications. First, don't rely on inflation headlines alone. Lower inflation does not necessarily mean lower costs, and that emphasizes the importance of looking at cost budgets," Langemeier said.  "Second, watch individual input categories, especially fertilizer and fuel. And third, expect continued volatility in break-even prices, which can directly impact margins and acreage decisions. The bottom line is this: inflation still matters, but it's only part of the story. Understanding which costs track inflation and which are driven by their own market forces is critical in today's environment.”

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