US: Farm Prices

Wed Aug 30 14:00:00 CDT 2017

The Department of Agriculture releases at the end of the month the index of prices received by farmers for the current month. Prices received represent sales from producers to first buyers. They include all grades and qualities. For most items, the current month's preliminary price represents a 3-5 day period around the 15th of the month. However, previous month's prices (revised) cover the entire month. The index is not adjusted for seasonal variation. It includes crop prices and livestock & product prices. Farm prices are monitored by analysts to give early warnings of inflation or deflationary pressures in the economy.

Farm prices are a leading indicator of food price changes in the producer and consumer price indices. There is not a one-to-one correlation, but general trends move in tandem. Inflation is a general increase in the prices of goods and services. The relationship between inflation and interest rates is the key to understanding how data like farm prices can influence the markets (and your investments.)

If someone borrows $100 dollars from you today and promises to repay it in one year with interest, how much interest should you charge? The answer depends largely on inflation, because you know that the $100 won't be able to buy the same amount of goods and services a year from now, as it does today. If the CPI shows that prices are rising about 2% a year, then you need to charge 2% interest just to recoup your purchasing power at the end of the year. You might want to add in a few more percentage points for default risk and the opportunity cost, but the key variable in what interest rate you charge is the rate of inflation.

That basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bonds and T-bills. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates accordingly. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking the trends in inflation (including farm prices), whether high or low, rising or falling, investors can anticipate how different types of investments will perform.