By Rep. Paul Anderson
After several years of record-high grain prices, the ag economy has done an about-face. Crop prices have plummeted, while those of livestock have soared to new highs. These cycles have long been a part of dealing with commodities, and farmers and others who work with them have come to expect wide swings in prices. When the market is allowed to work freely, the basics of supply and demand determine how high or low prices will go. And old adage says that the cure for high prices is high prices, themselves. In other words, when the price of a certain commodity goes high enough, that stimulates an increase in production which increases the supply and eventually lowers the price again.
What’s particularly bothersome about this current swing in prices is that input costs haven’t come down yet. As corn was making its way to $7 a bushel, the cost of everything needed to produce that crop also went up. Land prices escalated, seed costs shot up to $100 or more per acre, and fertilizer and chemical prices also increased. I use the cost of diesel fuel as an example. Years ago, when corn was relatively cheap, one could buy it for around $1 per bushel. About that same time, diesel fuel was priced around 30 cents per gallon, meaning you could buy roughly three gallons of fuel with one bushel of corn. Today, corn is back under $3 per bushel, but diesel fuel is priced around $3.50, so it takes more than one bushel of corn to purchase one gallon of fuel.
Eventually, these prices need to come back in line because it’s difficult, if not impossible, to show a profit from raising crops when using current prices. That’s a concern for ag lenders as they work with producers lining up next year’s input loans. If an operation can’t project a profit for the coming year, what happens? Does a farmer dip into his equity just so he can go out and plant a crop again? Is the loan even made? Hopefully, things straighten out in time, and farmers at least have a chance to get a return on their investment next year.
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A news item on the radio shortly after Minnesota’s minimum wage was increased Aug. 1 caught my ear, and was surprising, to say the least. The news story contained a reaction by Gov. Dayton to a restaurant adding a fee to customers’ bills to cover the increased cost of doing business because of the minimum wage going up. The governor basically said he was disappointed that the restaurant was passing along that cost to its customers. My thought was, doesn’t a business pass along all of its costs? A business needs to cover all its expenses, and it does that by charging its customers a certain price when buying its goods or services. And, hopefully, there’s a little left over so the business can turn a profit.
I think what made this situation different was that the restaurant added a line at the bottom of the bill that added a certain amount to the bill to cover the increase in wages. That draws attention to the fact that, yes, an increase in wages will naturally make the cost of doing business go up. The business can do one of two things; it can increase the prices they charge to cover that cost, or it can cut expenses -- either one works. Businesses are deciding how they will handle this additional cost.
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