International Debt Challenges’ Impact on Decision Making

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One of the strategies that our business is moving toward is more web and videocasts. Last year, with the great assistance of my business partners, we conducted over 30 of these virtual productions. It sure beats traveling on bankrupt airlines loaded with beer-breathed infrequent fliers. I apologize; my last trip was bad. In a recent webcast conducted by the Canadian Farm Business Management Council to participants in the U.S. and Canada, an intriguing question was asked:

In light of the current international debt challenges are there any similarities between today and the 1930s? What strategies would be wise for individuals and farm businesses?

Yes, there are similarities, and, of course, differences. Both the 1930s and the current economic times are coming off periods of speculative growth of debt in the personal and public sectors. In the 1930s, North American and global economics were transitioning from an agrarian society to a manufacturing economy. The recent bubble was the evolution from a manufacturing-based economy to an information- and service-based economy. Political leadership in both eras was struggling to define a course, with lack of clear vision of global trade interactions.

The international debt situation is a real dilemma for developed countries. The debt-to-GDP ratio averages 78% for developed countries, while 35% is the average for the emerging nations. The international debt is placing many large banks in North America and internationally in a potentially difficult situation. With the interconnectedness of economics, banking and counterparty risk, a domino effect could occur, resulting in a freeze or tightening of the debt similar to the recent crisis. Watch for downgrades of countries’ financial ratings, as well as large international money center banks, which could ripple across the globe in the economic and financial sectors.

What should farm and ranch businesses do? Get your balance sheet in order, build equity through earnings and have a strong liquidity position. Within the liquidity, build strong cash reserves at least up to a point of covering your two biggest years of losses or two months of expenses. Building cash and liquidity were a key in the 1930s and this is still a good proactive strategy given the global economic climate.

 

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.

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