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Inflationary Creep

Ranchers' dollars shrink as the costs of borrowing, medical insurance and fuel rise.For ranchers, these should be the best of times. Calf prices are dramatically stronger than a couple of years ago. Americans are chowing down on beef, and they are more than willing to pay for it.But along with the growth of income, ranchers are also feeling the nudge of inflation."Everything is going up," says Carol

Ranchers' dollars shrink as the costs of borrowing, medical insurance and fuel rise.

For ranchers, these should be the best of times. Calf prices are dramatically stronger than a couple of years ago. Americans are chowing down on beef, and they are more than willing to pay for it.

But along with the growth of income, ranchers are also feeling the nudge of inflation.

"Everything is going up," says Carol Hamilton, who runs a cow/calf operation in southwest Wyoming with her husband.

For most Americans, inflation is still a minor problem. The overall rate of inflation as measured by the federal government is still in check despite fast-rising energy prices.

But, ranchers operate in a different economic sphere than most Americans, and they're being hammered by rising prices.

Take the Hamiltons, for instance. Each year, they ship their calves to warm California pastures for the winter. When warm weather returns to Wyoming, they truck the calves back to their ranch, located west of Green River.

"It's so cold here in Wyoming that if we kept them here, they'd burn all their energy just keeping warm," Carol says. "They grow better in California."

But, two factors have forced the Hamiltons to reconsider their system - the cost of trucking and the cost of renting California pasture. Rising oil prices have sent freight rates soaring, and urbanization is devouring agricultural land in California, raising the cost of rent.

Ag Feels Inflation's Bite If the inflation problem were limited to California pasture rents or to the cost of trucking calves, ranchers would be in good shape. In fact, however, inflation is widespread because of circumstances peculiar to agriculture.

For example, most ranchers must buy their own health insurance, and health insurance rates have been rising at 10-15% annually.

Moreover, higher land costs are now showing up in the Midwest, where suburbia is encroaching on agriculture, and in the mountainous West, where ranchers must bid against out-of-state buyers willing to pay inflated prices for the scenic value.

The energy price spike has hurt two ways. It increased the cost of operating trucks and other machinery. And, fertilizer prices are up substantially because natural gas is a prime ingredient in anhydrous ammonia fertilizer.

Borrowing costs are also on the rise. Every time the Federal Reserve Board hikes interest rates, the cost of long and short-term borrowing jumps. Every time interest rates raise just one percentage point, it adds $1.75 billion to the costs of livestock and crop producers, says Dana Hoag, an agricultural economist at Colorado State University.

To get a feel for what's happening, BEEF asked Wyoming rancher Rob Hendry to describe how inflation is impacting his 150,000-acre operation. Here's what he came up with:

- Short-term interest rates have jumped two points in the past few years. He expects the rate on his adjustable long-term debt to rise about one-half of a percentage point the next time it's subject to change.

- Oil and gas costs have jumped from about $17,000 in 1999 to $26,700 for the year 2000. Hendry has budgeted $30,000 for 2001.

- Fertilizer will cost roughly $20,100 for 2001, up from $16,600 in 2000. Hendry fertilizes his grass hay meadows, which produce 1,500-1,800 tons of supplemental feed a year.

- Health insurance costs for the Hendry family of four ran $594/month as of the end of 2000. At the end of 1995, they were $270/month.

"Cattle prices are up enough to compensate for inflation right now," Hendry says. "If prices went back to 80 per pound, it would be very tough because of inflation. You can't do much about inflation. You've got to buy gas, oil and tires. If inflation gets too high, it gets really tough."

Strategies To Cope With Higher Costs The danger of inflation is that it will turn more ranches into high-cost operations with high break-even points. When the cattle cycle turns down, these producers are more likely to fail.

However, there are ways to cope with rising costs. Harlan Hughes, a BEEF contributing editor and operator of Hughes Consulting in Mankato, MN, says ranchers must look for new ways of doing things. For instance, Hughes suggests switching to ranch trucks with higher fuel economy.

"Everybody says they've got to have big trucks to pull fifth-wheel stock trailers. But how many of them do they need? They've got to have one to pull the trailer, but do they need more than one?

"I've parked my big vehicle," says Hughes, a professor emeritus of agricultural economics at North Dakota State University. "I drive smaller vehicles with better gas mileage. To me, when fuel and fertilizer prices go up, it becomes an issue of what you do to use less of them."

Hughes also suggests producers try to find cheaper group health plans to cope with rising medical insurance costs.

"Often, one of the spouses goes off the ranch for work, and the main reason is to get medical insurance," he adds. "That may not be an option in some cases."

Hughes also suggests ranchers seek loans with fixed interest rates to avoid the risks of variable rate mortgages.

"Bankers like to have variable rates, but I don't encourage ranchers to have them. If there's a bout of high inflation, ranchers with variable rates would have real problems."

Hughes says ranchers should look at every aspect of their operations. He recommends that when the relative cost of an input changes, producers must re-evaluate the returns from that input.

"More ranchers are starting to ask me whether they should raise hay," Hughes says. "I say, `What does it cost to raise it? Can you buy it cheaper than you can raise it?' The answer varies by ranch. What was right 10 or 20 years ago may not be right today."

Because times are good, this is the best time to lower costs, says Hughes.

"None of us work as good under pressure," Hughes says. "And, it takes a few years to cut costs. If you wait until the hard times, you're more likely to fail."

One of the dangers of the current energy-related surge in inflation is that it will take hold throughout the economy, producing a much higher inflation rate that could linger for years.

So far, rising energy prices haven't affected the larger economy. If history is a guide, however, continued inflation will eventually lead to more costly union contracts and an overall rise in wages for workers. It also will lead to more costly goods and services and higher rates for energy sources that compete with oil and natural gas, such as coal.

"The potential is there for trucks, equipment and spare parts to go up in price because those industries are heavy energy users," says Dwight Aakre, agricultural economist at North Dakota State University.

Moreover, the U.S. budget surplus could go up in smoke, thanks to inflation.

Inflation raises the cost of financing the national debt. When inflation is low, so are the interest rates the federal government pays on treasury bonds that finance the national debt. When inflation rises, so does the cost of financing the national debt. The more money the government pays out in interest, the less is available for tax breaks.

During the last round of raging inflation in the late 1970s, the national debt was less than $1 trillion. Today, it's more than $5 trillion. If inflation takes off again, the interest tab for federal borrowing will be huge, and all bets for tax relief may be off.