The following commentary does not necessarily reflect the views of AgWeb or Farm Journal Media. The opinions expressed below are the author's own.
Mike Walsten has covered major business trends in agriculture for more than 40 years.
The lack of inflation is a key difference between the lead up to the 1980s ag recession and the working capital squeeze farmers are feeling now, note Brent Gloy and Divid Widmar. The two ag-economics-professors-turned farmers highlight this key difference in their most recent blog update.
Click here to read the full blog.
But here is the key point -- inflation was out of control in the 1970s. That resulted in misallocation of resources, high-leveraged asset purchases and false market signals. The action to control inflation, a quick cranking up in historic nominal interest rates with little warning, turned those assets upside down and pressured farm borrowers and lenders.
That's not the case now as low inflation resulted in high-equity farmland rather than high-leverage purchases. "While sector level indications suggest that the debt load is manageable," they note, "debts are not repaid at the sector level. Some farms and agribusinesses will undoubtedly be over-levered and experience financial difficulty. Whether this presents serious systematic problems will depend on how many farmers find themselves in this situation," the conclude.
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Lack of inflation,...On what planet are you living? The prices of everything I buy, except gasoline, have been soaring. "Lack of inflation" is parroting the B.S. put out by the "Federal Reserve".
10,000% markup on seed corn, Production cost exceed gross sales. Over production low grain prices. Rationing grocery store food prices. whats next?
I whole-heartedly disagree with this article. Land and machinery have inflated to values never seen before in agriculture.
It's true interest rates are low, but it won't be long and the debt to asset ratios will be rising. Why, because the debt is increasing and the value of the assets will fall over time if the current market prices for grains continue for several more years. In a deflationary environment, the best thing to do is preserve cash (regardless of interest rates), unfortunately many farmers did just the opposite.