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Inflation’s impact on dairy at 40-year high

Inflation has taken off and dairy is not immune. On the retail front, dairy prices are up over 16% when compared to the same time last year. That compares to an 11% spike for the entire food and beverage category and 8% when looking at the general cost of living.

“All of you, no doubt, are feeling the effects of inflation in your personal and professional lives,” shared Tom Halverson, president and CEO of CoBank. The banking leader then went on to share three pieces of personal perspective on inflation.

1. Don’t doubt the Fed’s determination.

“The Federal Open Market Committee has raised interest rates five times so far this year, by more than 300 basis points,” Halverson shared on October 25. Less than two weeks later, the Federal Reserve raised interest rates a sixth time. “If you look at a chart of the Federal Funds Rate, it already looks like a hockey stick, and the Fed will very likely hike rates again in November,” he continued at the annual gathering of the National Dairy Research and Promotion Board, the United Dairy Industry Association, and the National Milk Producers Federation.

“If you read Chairman Powell’s public comments, he has made it crystal clear that he is bound and determined to get inflation under control. Yes, the Fed was caught off guard by inflation and was slow to act. But now their gloves are off,” he said, noting that the Fed has a statutory obligation to deliver price stability in our economy. That’s defined as inflation in the area of 2% per year. “They are going to do what they need to do to get there — even if it means pushing the U.S. economy into a recession.”

2. Inflation may be harder to tame this time around.

“Usually, inflation occurs when an economy overheats and there is too much demand chasing too little supply of goods and services. The central bank, therefore, raises interest rates to slow down growth and bring supply and demand back into balance,” said Halverson. “This time, however, some of the main causes of inflation are simply outside of the Fed’s influence,” he continued, citing the Russian invasion of Ukraine and China’s COVID-19 lockdown policies. “So, we need to prepare for the fact that inflation may persist for longer even in the face of the Fed’s aggressive actions.”

3. We are all in uncharted territory.

“The last time that inflation was a significant problem for Americans was in the early 1980s — over 40 years ago. What does this mean?” he asked the audience of over 750 gathered at the meeting.

“It means there is virtually no one running a business today who has experience operating in an inflationary environment,” he said, noting this assessment was true of him as well. “Each of us is going to be learning as we go here — exercising muscles and business disciplines that we haven’t needed to use before.

“Dependable access to liquidity, which always matters, will be more important than ever,” said Halverson. “In addition, there is going to be a much higher premium on risk management, and much more importance placed on panoramic vision and the ability to see around corners.

“We will need to remain hypervigilant — not only about our own businesses but about our most important suppliers, vendors, and customers. As Warren Buffett has famously said, ‘When the tide goes out, you discover who’s been swimming naked.’ Just make sure that it’s not you . . . nor any of your most important counterparties or vendors,” added Halverson.

Corey Geiger

November 11, 2022



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