Farm Price Index (FPI)

What Is the Farm Price Index (FPI)?

The term Farm Price Index (FPI) refers to an economic indicator produced by the United States Department of Agriculture's (USDA) National Agricultural Statistics Service (NASS). The purpose of the FPI is to monitor the prices received by farmers for the sale of crops and livestock, feed price ratios, and parity prices. The index is commonly referred to in the industry as the Agriculture Price Index. Data is released at the end of every month.

Understanding the Farm Price Index (FPI)

The Farm Price Index is widely seen as an important lagging indicator in the economy. This indicator helps investors and analysts understand the overall health of the economy as well as the current state of the business cycle. As mentioned above, the index measures price movements for crops, livestock, and livestock-related products. Data is released by the USDA-NASS at the end of every month at 3:00 p.m.

Market participants without a direct stake in the agricultural sector normally monitor the FPI because it provides additional insight into the level of inflation or deflation. 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 occurs in other industry sectors.

The FPI can be an important metric in informing decisions of whether to invest in an expanded production capacity for companies within the agricultural sector. For instance, if the FPI shows signs that agricultural sales are set to decline, companies may respond by delaying or canceling new capital expenditures (CapEx). If the index 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.

Special Considerations

As with most markets, agricultural prices are subject to natural forces and swings in the economy. People don't stop eating during tough times, but they generally make choices about what they consume, how often they eat, and when. Favorable conditions, such as trade deals, can also lead to higher prices for domestic farmers.

For instance, prices dropped significantly during the 2007–2008 financial crisis. Consumers were forced to shift their focus during the economic crisis, choosing low-end alternatives versus high-end meat choices, and cutting back restaurant spending. Like other parts of the economy, prices largely rebounded after the global economy started to recover. For example, in 2010, the prices received by farmers hovered around 78, which rose to roughly 115 by the middle of 2014.

The impact of the global COVID-19 pandemic, combined with bad weather, also led to a short-term drop in prices. The index dropped from roughly 93 in March 2020 to 85 in April 2020. It wasn't until November 2020 that the index rebounded, reaching above the 90-mark.

Farm Price Index (FPI) vs. Other Price Indexes

Other economic are frequently used by market participants in addition to the Farm Price Index. These include the Producer Price Index (PPI) and the Consumer Price Index (CPI). These indexes provide a fairly informative snapshot of the overall health of the economy when examined together. As such, they are closely watched by economists and investors. Let's take a look at these indexes individually.

Producer Price Index (PPI)

This index is maintained by the Bureau of Labor Statistics (BLS). It measures the average change in prices paid to domestic producers for their products and services. In short, it represents price movements from the seller's point of view. According to the BLS, it is the primary resource for price changes in the United States. The index covers a variety of sectors, including retail, manufacturing, food, construction, and agriculture, and covers nearly every industry in the United States.

The PPI is among the oldest economic indicators in the country. It was introduced as the Wholesale Price Index (WPI) in March 1891 as part of a Senate resolution. The name was changed to the PPI in 1978.

Data is normally released in the middle of every month at 8:30 a.m.

Consumer Price Index (CPI)

While the PPI tracks prices paid by consumers to domestic goods-producing industries, the CPI reflects changes to a representative basket of consumer goods and services that are intended to reflect the overall level of consumer prices throughout the economy as a whole. This basket of goods contains price movements for items such as transportation, health care, and food. In short, this represents price movements from the point of view of the consumer.

Data from the CPI is used to assess and determine the cost of living and is commonly used as a metric that helps determine the health of the economy.

Like the PPI, this dataset is also released by the BLS in the middle of every month at 8:30 a.m.

Real-World Example of the Farm Price Index (FPI)

The FPI is an index whose value is set in relation to the reference year of 2011. As of November 2020, the FPI was reported at roughly 92, meaning agricultural prices at that time were roughly 8% lower than they were in 2011. This is an increase from the same period in the previous year. The index was reported at about 89 in November 2019.