“Capitalism is basically built upon debt. If we eliminate debt, we will not grow,” says Vincent Amanor-Boadu, a Kansas State University agricultural economist.
He's referring to the potential return from the staggering sum the federal government is pumping into the nation's anemic economy.
“Personally, I don't think debt is the problem, it's the debt-to-asset ratio we need to watch,” says Amanor-Boadu. In the case of federal stimulus dollars, he explains dollars spent on improvements to infrastructure could add positively to the nation's debt-to-asset ratio.
At ranch level, current low interest and inflation rates make this an opportune time for some to take on additional debt in the name of business enhancement. If you figure inflation is going up and are positioned to do so, borrowing money now means paying off the loan with dollars that are worth less.
As always, though, David Anderson, Texas A&M University Extension agricultural economist, emphasizes, “You've still got to be able to pay the debt with cash flow from the investment.”
Determining such opportunities means possessing more than passing familiarity with standard financial yardsticks and how your own business measures up. One source for such information is the “Farm and Ranch Stress Test” from Damona Doye, Oklahoma State University Extension agricultural economist (download it at: http://pods.dasnr.okstate.edu/docushare/dsweb/Get/Document-1821/F-237web.pdf).
Besides offering straightforward definitions and implications of measures for liquidity, solvency, profitability and repayment capacity, the publication includes green-light to red-light levels of risk for each.
The end may be in sight.
As for the debt levied by the nation's economic stimulus, Amanor-Boadu says, “We can't say they goofed because we don't know yet.”
It's too early in the game to understand the impact and consequences (see “Waiting For Traction” on page 14). If recent economic news is any indication, however, the nation and the world are on the cusp of finding out.
“We continue to expect economic activity to bottom out, then to turn up later this year,” Ben Bernanke, Federal Reserve Chairman, told Congress in early May.
By that date, signs of economic stabilization were beginning to surface. For instance, preliminary reports for first-quarter Gross Domestic Product were 6.1% below the previous quarter's 6.3% decline. But Anderson points out that about half of that decline was due to reduced inventories, a sign that American businesses are slogging through the backlog.
Likewise, home prices measured by the S&P/Case-Shiller index were still plummeting. But April was the first time in 16 months that the index didn't drop to a new record low.
The core Consumer Price Index (CPI) also inched up from 1.2% in the fourth quarter of last year to 1.4% in the first quarter of 2009. Throw energy and food prices into the equation and the CPI decreased 1.0% in the first quarter, compared to a 3.9% decrease in the fourth quarter.
Even cattle markets look poised for a boost in coming months. According to analysts at the Livestock Marketing Information Center, “In the Southern Plains, yearling steer (700-800 lbs.) prices may gain seasonally into late July or early August before getting some pressure from increased numbers of long-yearlings coming to market (calves weaned in late 2008 and on summer grass this year).
“If a normal U.S. corn crop develops in 2009, steer calf prices (500-600 lbs.) in the Southern Plains are forecast to average above a year ago this fall quarter by $8-14/cwt. … Of course, last fall is our most recent reminder of how outside shocks can impact cattle prices.”
Whenever the economy does turn, Anderson stresses the U.S. has history on its side. “All of the things that created our dynamic growth before this are still here. A bet on the U.S. is still a better bet than on any other country in the world.”