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Increased input costs for farmers and rising grocery prices for consumers are just some of the consequences of recent turns in the global commodity markets and rising costs of food processing, transportation and labor.

The Federal Reserve Banks of Minneapolis and Kansas City hosted a virtual forum on Oct. 7 to highlight ag and food inflation and the financial implications that come from it. The event was also meant as an opportunity to hear from industry leaders in the Midwest about how inflationary pressures are affecting supply chains.

Agriculture is more than just an economic driver for the seven-state region covered by the Kansas City Fed, as well as the Midwest states covered by the Ninth District Federal Reserve Bank of Minneapolis, said Nathan Kauffman an economist and vice president of the Kansas City Fed, whose role is to lead banking efforts in regards to research and outreach in agriculture.

The industry also serves as an important foundation to our nation's food supply, said Kauffman.

With farm production costs estimated to be about 25% higher this year than they were in 2020, according to the U.S. Department of Agriculture, and fertilizer costs anticipated to be on average about 50% higher than they were the last year what's causing the surge?

Kauffman said it's a combination of both supply and demand, but there are other factors such as labor shortages and transportation disruptions that have been key drivers of rising costs, he said.

Rising costs and the implications

Kaufmann explained how prices of agricultural products remained low and stable in the years leading up to the COVID-19 pandemic. Prices increased less than a percent from 2016-20, according to USDA data. But with the pandemic came a surge by more than 50% in the last year and a half, he said.

However, the increase in prices across the board has led to a dramatic rebound in the U.S. agricultural economy, said Kauffman, with farm income expected to be one of the highest on record this year.

Supported by higher prices and increased profits, the value of farm real estate throughout the Midwest, just as one example, is more than 25% higher than before the pandemic, he said.

Economic conditions before the pandemic were leading to what Kauffman called gradual increases in financial stress in the ag industry. Many financial institutions are now reporting a sharp turnaround in the strength of their lending portfolios.

It is important to recognize that the U.S. farm economy is in a much stronger position than what it was before the pandemic, when there had been growing concerns about the industry's financial health, he said.

Consumers are feeling inflationary pressure on their grocery budgets, and the same factors driving up agricultural prices have also influenced the price customers pay for food.

Similar to production costs, from 2010 to 2020 food prices increased on average of nearly 2% per year, said Kauffman. Currently, food prices are more than 10% higher than a year ago, and have continued to rise in recent months.

A surge in commodity prices is only partly to blame for that, he said.

Less than 10% of the cost of food is determined by the cost of farm production, said Kauffman.

Costs associated with things like packaging, transportation and energy account for 10%, he explained, while processing accounts for about 17%, and wholesale and retail distribution costs comprise about 26%. Food service accounts for just shy of 30% of the total cost of food, according to Kauffman.

So while agricultural commodity prices are linked to food prices, especially on a global scale and perhaps for some food products in particular changes in ag prices have only a limited effect on the prices consumers pay for food, said Kaufmann.

Even once production costs begin to ease, Kauffman said that food prices may not decrease as quickly.

Given the importance of other factors that also affect the cost of food, he said.

Beth Ford, president and CEO of Land OLakes, shared how inflationary pressures impact the supply chain of the Fortune 200 food production company that is also a 100-year-old farmer-owned cooperative.

We see the whole value chain, from processing, farm level, all the way until retail, said Ford.

Ford urged Congress to move ahead with immigration reform during the Oct. 7 forum, which she said could relieve some of the labor problems putting the squeeze on the cooperative and industry as a whole. She said that labor is the biggest concern for Land O Lakes members and is the issue she hears most about from them.

Ford called on the U.S. Senate to take immediate action to finish work on the Farm Workforce Modernization Act.

Do it this season, she said of the window before midterm elections, after which any reform legislation would have to start over.

The Farm Workforce Modernization Act which would allow some annual permanent visas for agricultural guest workers and would make farm workers now in the country illegally able to be here legally was passed by the House in March 2021 but the bill and negotiations have stalled in the Senate.

We're a couple million workers short, so what will it take? said Ford.

She said what holds up immigration reform is a larger debate around border security, but the focus should instead be on U.S. farmers and ag workers.

I look at it obviously right at the farm level, for labor, and it has been a mainstay of our economy and economic growth, said Ford of U.S. labor You recognize the number of acres that don't get planted or harvested because there is no labor. We have a global food supply challenge, and we need to move past this and get to a pragmatic solution.

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Navigating ag and food inflation includes calls for immigration reform, speakers at Fed presentation say - Agweek