Inflation and Interest Rates in the Agribusiness Marketplace

Author: Dr. Brady Brewer, Assistant Professor

Financial goals have been gaining increased visibility throughout all aspects of the agribusiness value chain for some time now. While our world is full of tight margins and dynamic marketplaces, this importance will only continue to climb, also making it increasingly important for non-financial managers to understand how their decisions impact their company’s bottom line moving forward.

There are many financial topics we could cover, but let’s focus on two current “hot button” issues in the finance world revolving around inflation and interest rates.

Likely the most direct impact inflation is having is increasing input prices, which puts a squeeze on companies’ margins if they are not able to raise their output price. Certainly, this is a key worry for many businesses during times of rising inflation. Beyond margins, inflation impacts many other key metrics we use to measure financial performance as asset prices rapidly increase along with overall revenues as prices increase. Thus, it may be hard to tell if a ratio is deviating from trend due to business performance factors, if this is a result of inflation, or both. Additionally, inflation erodes purchasing power and raises the cost of debt.

Speaking of cost of debt, the Federal Reserve has signaled interest rates will increase in the future as a response to rising inflation. This will increase the cost of debt for many businesses, as well as place downward pressure on asset prices. Understanding your cost of debt and the market value of assets’ sensitivity to interest rates is important for budgeting, capital expenditure planning and cash flow analysis.