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Chip's Chore Time

RSS By: Chip Flory, Pro Farmer

Chore time for me isn't what it used to be when I was growing up on our eastern Iowa farm. In fact... I don't even have horse chores to do any more!

Is an auto bailout a bailout for food demand?

Nov 19, 2008
Chip Flory


Chore time for me isn't what it used to be when I was growing up on our eastern Iowa farm, but taking care of two horses in the morning before I head in for work gives me a little time to think about the day ahead. Each morning, stop at this spot to get a feeling for the "tone of the day" - and some attitude about agriculture and the markets.

I was thinking…

... about the latest round of bailouts being "debated" in Congress. You know what it's about... the "Detroit Three" -- GM, Ford and Chrysler.

This one is a "heady" issue. For every argument for a "bridge loan" for the automakers, there's a solid argument against the bailout plan. And then there's the size of the bailout package. At $25 billion, is it really "big enough" to make much of a difference in the long-term survivability of the industry? Or will one, two or all three of the carmakers be back in a year (or less) looking for more help?

Major arguments for the bailout.

Jobs. This is the big one. The estimates of how many jobs might be lost if the auto industry goes through a complete restructuring ranges from 3 million to 5 million. No... that's not how many are employed by the Detroit Three... but when you take into consideration all the jobs at the carmakers, plus the parts suppliers, plus the dealerships, etc... it gets easier to see how there are 3 to 5 million jobs tied to the auto industry.

Tie to agriculture: Jobs mean income and income means consumer purchases of goods. And in this economy, much of today's disposable consumer income goes to the purchase of gas and food. With unemployment already above "comfort levels," any additional job losses (which will happen) could be a negative for domestic demand -- especially for high-quality beef cuts and pork.

It is a good product. I don't care which "flavor" of car or truck you drive, the quality of that vehicle is very likely much higher than the previous vehicle you owned. U.S. carmaker critics continue to cry about the lack of progress in improving the average gas mileage of the U.S. "fleet" of cars, but the fact of the matter is GM has caught up with foreign carmakers and has more cars rated at 30 miles per gallon and higher than any carmaker in the world. And Ford and Chrysler are also catching up to the foreign carmakers -- and in some classes are leading the way. That means the new mileage technology at these companies will "filter down" through all models in the not-so-distant future. In fact, improved quality is one of the problems the U.S. car industry is facing. It used to be the "old car" started to fall apart around 100,000 miles. Now, cars last longer, reducing new-car demand.

Their situation isn't completely their fault. One thing U.S. agriculture has always fought for is "freer and fairer" global trade. Well... the U.S. auto industry seems to have been forgotten in this battle. One example: South Korean carmakers sold 700,000-plus cars in the U.S. last year; all U.S. carmakers sold about 7,000 cars in South Korea last year. And, the only way U.S. carmakers got to that level is because they are making U.S. cars in S. Korea because S. Korea wouldn't allow import of 100%-made U.S. cars. After all... S. Korea says they've got to protect their industry.

Another thing to consider: This really does feel (to me, at least) like a "fix" to a short-term problem. That problem is the credit crunch. While it's not impossible to get a loan for a new car, terms are more restrictive. When the crunch hit, new car sales absolutely fell off a cliff. Yes, these carmakers have divisions that supply a lot of car loans, but the credit crunch is making consumers very adverse to borrowing. That's not a bad thing -- for a while. But, the country runs on credit -- and so does the U.S. auto industry. Very few people can walk into a dealership and write a check for a new or used car. Until credit frees up, car sales will remain low and the carmakers won't have the revenue to cover immediate costs. This proposed "bridge loan" or "bailout" -- what ever you want to call it -- should be designed to get carmakers through this period of tight credit and slow car sales.

National defense. I know... some of you will call this a stretch, but I don't think it is. U.S. car factories have been unbelievably valuable to the U.S. defense effort in the past. And while I'm not predicting the need for these factories to be used to build war-use vehicles in the future, it would be nice to know we've got that capability!

Major arguments (in my opinion) against the bailout.

Model that doesn't work. The part of the model that doesn't work isn't the actual car making. Like I said, quality and gas mileage is continuously improving. What isn't working is the labor. Ford says they've got their costs down to equal that of the foreign car makers... Chrysler and GM are still apparently working on that. What's costing all U.S. carmakers big dollars are the so-called "legacy costs." Those are the benefits being paid to retired workers. I'm not saying that's a bad deal for the workers and I won't turn this into a debate for or against unions, I'm just saying U.S. carmakers should have managed those costs better... either at the time these retirement packages were negotiated, or over the life of the financial commitment.

Bankruptcy may be a better option. This one is hard to argue against... as long as we're talking about Chapter 11 and not Chapter 7. However, either kind of bankruptcy will undoubtedly reduce those "legacy costs," meaning the union's negotiated retirement packages will very likely be reworked. So, while Chapter 11 would very likely keep factories in operation, there are a whole bunch of retired auto workers that will be tightening their belts. And there are a whole bunch of creditors down the line that will also be tightening their belts... likely to the point of declaring bankruptcy themselves. If bankruptcy of one of the Detroit Three causes more bankruptcy down the supply chain, the other two of the Detroit Three won't be getting the supplies they need. That means the bankruptcy of one of the Three would likely result in the bankruptcy of all three. That's where "systemic risk" enters the equation. The U.S. would obviously survive if we lose one major car maker... and the U.S. would survive the loss of all three U.S. carmakers, but it would be devastating.

So... I'll admit... I'm leaning toward the bailout for automakers. And the reason is very simple -- I'm thinking about demand for the products you grow. Yes, people still eat if they don't have a job... they find a way. And if that way is through the nutrition title of the farm bill (food stamps), that's fine (for a while). But that just increases the funds required to support the farm bill and -- no matter how many times we shout it from the mountain top -- the public believes 100% of farm bill funding "goes to farmers." If you are a Pro Farmer Member, you know we believe "it's all about the jobs" in turning the U.S. economy around. If this bailout saves jobs, it saves demand for the products you grow.

And, finally, could the U.S. taxpayer make money on the bailout? I know... I probably shouldn't be calling this a "bailout" if there's a way the U.S. taxpayer could make money on the deal. But, a bridge loan would be paid back -- with interest. And interest on $25 billion adds up pretty fast. If one, or more, of the Big Three can't pay back their portion of the $25 billion, then it's time for Chapter 11.

So what do you think? Am I way off base on this or am I on the right track? Believe me... I'm open to the fact that "off base" and "right track" are both possibilities!!

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COMMENTS (6 Comments)

How about a $5000.00 tax credit to anyone who buys a new vehicle that gets 30 MPG or better from any one of the big three.

3:33 PM Nov 19th
How about a $5000.00 tax credit to anyone who buys a new vehicle that gets 30 MPG or better from any one of the big three.
3:31 PM Nov 19th
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