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Column: 'The biggest problem we now face is inflation'

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A new year and the same old stuff. Each Jan. 1, I think it is going to be different this time, new this time. Guess what, I am always wrong. It might as well be Nov. 1 or Dec. 1. Nothing has changed except the page of the calendar. Same old stuff, same old problems. The biggest problem we now face is inflation. 

I have pretty much left politics out of this column but sometimes it needs to be addressed. We can’t be Switzerland all the time.

Our problem is inflation. Inflation has several causes, supply chains being one of them, but a big component is energy.

Energy touches pretty much everything. We use energy to make our goods. We use energy to transport our goods. We use energy in the composition of our goods. We use energy just sitting around watching TV. Even the cost of gasoline has gone up 50% over last year.

As I write, crude oil trades at a seven-year high. Our energy policy is a shambles. It does not have to be this way. You see, we are going to go into battle against inflation this year. I am sure that you have seen it in the grocery store and at the gas pump. Food and fuel have been two of the biggest movers as far as price rises. But with gas up 50% over last year, and the price of oil approaching $100 a barrel, things have gotten out of hand.

The battle that we are going to wage is the Federal Reserve fighting this inflation with interest rate rises. Interest rates will slow down inflation. Interest rates will also slow down the economy. The leaders of the country are hoping that the inflation goes away faster than the economy slows down. That is it.

This inflation issue is the new Afghanistan issue. We know we must get out of it; it is the operational aspects which count the most. Can we quell inflation without hurting everything else? By raising rates, we may slow down the economy — but if it doesn’t stop the rise in oil prices, we could see an economic slowdown with higher energy prices and higher inflation.

We are facing some tough times. And I am afraid to say that this energy inflation is a self-inflicted wound. We cancelled the Keystone pipeline. That hurt. That also sent a message to our energy sector that there would be no real help. The industry is on its own. Fossil fuels will not be supported with wind and solar taking a front seat going forward.

We don’t have a shortage, we just have underinvestment. We have a whole industry that is mothballed because it thinks that it doesn’t have the backing of the government because the government has pretty much put all its eggs in the "Green New Deal" basket.

Now I am trying to connect the dots and get you to see the collateral damage that we will do in combating our self-inflicted wound and to see what the damage will be. By raising rates to combat inflation, there will be some casualties elsewhere.

Raising rates is like using a blunt edged sword in a surgery. There is no way to pinpoint energy prices by raising rates. Higher interest rates will affect the stock market and your 401(k). Raising rates will make getting a mortgage more expensive. Raising rates will affect the value of real estate as some will not be able to afford the house that they originally wanted. I hear you say that it "would only be a small interest rate rise." I hear you, but this difference is not to be viewed in the actual rate rise itself but in the percentage rise in your borrowing costs. When your borrowing costs are "X" with rates at these low levels and you double the interest rate loan from, say 1% to 2%, your borrowing costs just went up by 100%. That is the key. Yes, I know that rates are low, but it is your borrowing costs that matter. If they double, they double. It doesn’t matter how low the rate is.

I am trying to connect the fact that a lot of people will be affected by raising rates to try and fight a self-inflicted wound. I guess we are going to have wait and see how things shake out but the year of 2022 is shaping up to be a volatile one.

Now nobody needs to tell the agricultural community about inflation. Just look at the prices of inputs this year. The year 2021 was different. We had good/decent prices on the board and the inputs hadn’t begun to rise like things have for the 2022 season. With the inputs as high as they are, we are going to have to see high selling prices to justify those inputs. All farmers have loans too. Whether it be for machinery or outbuildings or whatever, those borrowing costs could go up. So, everything is going up. I like to play a game at work and name something that has gone down in price over the last 18 months – I’ll wait.

Whether you are a farmer or a rancher, 2022 is going to be a volatile exercise. Not only will the ag community have to deal with everything else the investment community has to deal with, those in the ag sector will also have to deal with Mother Nature. I am sure you have heard me go on and on about agricultural traders having to deal with Mother Nature when everyone else does not. Interest rate traders must deal with everything that affects interest rates. Equity traders deal with everything that affects equities, but agricultural traders must deal with both of those things but also the weather. That is what makes the ag trader a nimbler trader. That is what makes the Ag trader a better trader. Nobody needs to tell the Ag community that weather is difficult predict and even more difficult to mitigate the risks. I have a lot of respect for the Ag community and the way that they conduct their business whether you are a broker, trader, rancher or producer.

We are all in this together and hopefully this year is not as bumpy as it is starting out to be.

Scott Shellady serves as markets anchor for RFD-TV and appears regularly on CNBC, Bloomberg, CNN and Fox Business News. His early years were on a farm in Jo Daviess County. He later worked on the floor of the Chicago Board of Trade before teaching finance at DePaul University.


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