Economics 101.5

To indicate that I have a degree in economics, or a degree in anything for that matter, would be a complete untruth. However, like many of us, I think about the economy. I have given it more thought lately than I would like.

For the past 5-7 years, the U.S. ag-aviation economy has followed the agricultural economy and continues to be on the upswing. With 40 years in this business, I have seen ag-aircraft dealers struggling during bad times to sell an overwhelming inventory. Now, I see them struggling, in a sense, to schedule a delivery within a reasonable time frame. The annual production of ag aircraft has nearly doubled during these years. This is a direct reflection of the good times ag-aviation is experiencing.

There are other indicators of these good times for most ag-operators worldwide. Looking back at prices charged per acre, they are up today. Operators are investing in better equipment. They are even operating in a different way than in the past, having more cash flow.

With my homegrown degree in economics, I attribute these improvements in ag-aviation mostly to a significant increase in commodity prices and the introduction of relatively new chemical applications, like glyphosate for burn-down and Headline for fungicide applications on soybeans, corn and wheat. Both of these practices improve the bottom line for growers and that in turn helps the aerial applicator; but you already knew all this, no revelation here.

My observation is this - now may be the time to incur debt service, meaning taking out a loan. My philosophy is do not finance anything that depreciates as fast as you can pay it off, or nearly as fast. Ideally, debt should be reserved for appreciating items. Until recently, that would have been real estate. At times, it could have been aircraft. There are two very good reasons for this viewpoint; one is the increase in equity grows from loan reduction through payments and value increase in the collateral. The second reason is these type of loans can be long term, with relatively low fixed interest rates that can be paid off early without penalty; key elements to borrowing.

Today’s economic environment leads me to believe we are in the last days of low interest rates. As interest rates start to climb, my belief is inflation will increase. We already live under a false CPI issued by the government. It would be hard to convince anyone who buys groceries, gas, clothes or dines out that the CPI is less than 2%. For me, that’s an outright lie. Really, it is more of a manipulation.

What does all this ultimately mean to the ag-operator? It means that you should be buying a new ag-aircraft, or updating your equipment, especially high-end equipment like nurse trucks, GPS systems, hangars, etc. Why? Because if you can secure a low interest rate for an extended period, ten years or more, without penalty for early payoff, that note payment is going to be significantly easier to make after a few years of double digit inflation. Do you remember your first house payment, for those of us that had one 30 years ago. My power bill, today, is more than that house payment was back then.

So, by initiating this type of debt service for a purchase at today’s prices, you are working the economy to your favor from two fronts. The cost of money is relatively cheap and will be fixed during times when low interest rates are no longer available. As inflation drives up the price of equipment, yours will follow in value.

The hidden villain is waiting. If you believe you are going to be in this business for another five years, when the time comes, new equipment costs and borrowing could be dramatically unacceptable, if not more.

My take on the economy could also be applied to your personal life. House prices are at their lowest, and may go lower, but in the short term seem to be stable and in some cases going up. And, you can almost buy a new vehicle interest free. If structured right, a percentage of the interest you do pay is offset by a tax write-off.

This is my way of bracing for what I believe is about to come in the future for the economy; high interest and inflation rates. Prepare now with fixed interest rate loans on high-ticket items, long term enough for this pending economic collapse to pass.

The caveat to all this is cash flow. If your business cannot sustain the cash flow (payments) requirements, then this could be a very bad thing, going into more debt. However, there are good reasons to believe the agricultural economy will hold fast during these projected times. People will continue to eat and there are more people every day, seven billion plus.

When the Argentine economy and its peso collapsed in 1999, agriculture was the pillar of what was left of it. It will be interesting to see if the same holds true for the rest of the world, particularly America, should our economy and the dollar collapse in the near future.

Disclaimer: The advice you get in this editorial is worth exactly what you paid for it, nothing.

Until next month,
keep turning...