Recent surveys suggest that inflation is expected to rise in 2025, following a year of relatively lower inflation in 2024. While not perfectly correlated, agricultural input prices are often affected by changes in general inflation. From 1973 to 2024, the average annual increase in the implicit price deflator for personal consumption expenditures (a common inflation measure) was 3.4%, while the USDA agricultural price index for production items saw a slightly higher increase of 3.8%. Although these indices show some correlation (0.61), they are not perfectly aligned. This discrepancy can be attributed to the distinct supply and demand dynamics specific to each input in agriculture versus other sectors.
Inflation is defined as the decline in purchasing power of a currency, often measured by the rise in prices of a set basket of goods, such as the consumer price index or implicit price deflators. Inflation can be caused by three mechanisms: demand-pull inflation (caused by increased demand exceeding supply), cost-push inflation (driven by rising production costs), and built-in inflation (a result of expectations of future price increases). The last few years have seen a mixture of these inflation types, with both demand and cost factors playing a role. For agriculture, the relationship between general inflation and farm input prices is influenced not only by inflationary pressures but also by specific factors tied to each input’s supply and demand.
Historical data from 1973 to 2024 reveal that some agricultural inputs are more closely linked to inflation than others. While agricultural production items, on average, saw a 3.8% annual increase, other inputs such as labor (4.4%) and machinery (5.3%) experienced much higher rates of change. In contrast, feed prices showed no significant correlation with general inflation. This suggests that inputs like labor and machinery tend to follow inflation trends more closely than items such as feed, fertilizer, and fuels, whose prices are more influenced by their own market dynamics.
Looking at historical trends, agricultural input prices have been more volatile than general inflation. While inflation exceeded 10% in 1980, agricultural input prices were above 10% in five years, and exceeded 15% in 2008 and 2022. The variability of input prices, measured by the coefficient of variation, was 84% higher than that of general inflation. This variability reflects the impact of both external economic factors and specific sectoral forces that affect agricultural production inputs.
Recent trends from 2024 show that inflation, measured by the implicit price deflator, was much lower than in the previous years, reflecting a slowdown in overall price increases. For example, agricultural production item prices increased by 6.0% in 2024, driven by factors beyond the common inputs like feed, seed, fertilizer, and fuels. However, compared to the inflation rate of 2.3% for the period from March 2024 to March 2025, most input prices remained below the rate of general inflation, suggesting a temporary easing in input price pressures.
The year 2024 saw notable price reductions in certain inputs. For example, the price of anhydrous ammonia decreased by 23.1%, and prices for feed, potash, and diesel also declined. These reductions were significant compared to the general inflation rate, reflecting shifts in supply and demand for specific agricultural inputs. On the other hand, the price of labor, while influenced by inflationary trends, did not see as dramatic fluctuations as other inputs, indicating a more stable pricing environment in the labor market.
The results from recent data suggest that while inflation is expected to remain somewhat subdued in 2024, input prices are beginning to stabilize, with some even decreasing. This trend may continue, but consumer and producer surveys indicate that inflation is expected to rise again in the near future. If these predictions hold true, it could lead to higher breakeven prices for crops in 2025, reversing the price declines seen in 2024.
In conclusion, while farm input prices are generally influenced by broader inflationary trends, the relationship is complex and varies by input. The correlation between general inflation and agricultural input prices is not perfect, with some inputs like labor and machinery following inflation more closely than others. As inflation expectations rise for 2025, it is likely that farm input prices may see further adjustments, influencing crop production costs and breakeven price calculations.
