What Is the Farm Price Index (FPI)?
The purpose of the FPI is to monitor the prices received by farmers for the sale of crops and livestock. It is commonly referred to as the Agriculture Price Index.
- The FPI is a measure of prices paid to companies in the agricultural sector.
- It is seen as a key economic indicator alongside the Producer Price Index (PPI) and the Consumer Price Index (CPI).
- Although the FPI declined sharply during the 2007–2008 financial crisis, it has shown signs of recovery in subsequent years.
Understanding the Farm Price Index (FPI)
For companies within the agricultural sector, the FPI can be an important metric in informing decisions of whether to invest in expanded production capacity. If the FPI shows signs that agricultural sales are set to decline, then companies may response to delaying or even cancelling new capital expenditures (CapEx). If on the other hand the FPI shows signs of recovery, such as in the years following a recession, then companies may interpret this as an opportunity to make new investments in the sector.
Market participants without a direct stake in the agricultural sector will nonetheless monitor the FPI, because it can provide additional insight into the level of inflation or deflation in the economy. If agricultural prices show a rising pattern without a corresponding increase in production levels, this may reflect that inflation is on the rise. On the other hand, falling agricultural prices could indicate deflation—particularly if the same phenomenon is occurring in other industry sectors.
In addition to the FPI, other economic indicators that are frequently used by market participants include the Producer Price Index (PPI) and the Consumer Price Index (CPI). Whereas the PPI tracks prices paid to domestic goods-producing industries, the CPI reflects changes to a representative basket of consumer goods and services that is intended to reflect the overall level of consumer prices throughout the economy as a whole.
Taken together, the FPI, PPI, and CPI can provide a fairly informative snapshot of the overall health of the economy. As such, they are closely watched by economists and investors.
Real World Example of the FPI
The FPI is an index whose value is set in relation to a reference year of 2011. As of Nov. 2019, the FPI was reported at roughly 85, meaning agricultural prices at that time were roughly 15% lower than they were in 2011.
As has been the case in most markets, agricultural prices suffered significantly during the 2007–2008 financial crisis, but have largely recovered in the years since. For example, in 2010, the prices received by farmers hovered around 78, which rose to roughly 115 by the middle of 2014.