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The cost of moneyEveryone who has borrowed money and is current on their payments is being approached to refinance. The smartest apparently have already done so and will again if rates drop enough to pencil out. If there is one single factor that has affected agriculture in my 40 years of awareness, it is the real cost of money. When it's low, we look for ways to buy land and machinery and when it's high, we hope we can survive until the interest rate turns lower. Betting on next year's return by borrowing at this year's capital cost should be simple, but it is usually three parts emotion to one part numbers. The wildest swing in interest rates came in the late 1970s at the end of the greatest period of prosperity and growth for agriculture in the 20th century. The stated problem was "inflation" and the scourge of rising prices on our society. In that decade, farmers were investing in medium and long-term assets at the current dollar value level but paying them off with cheaper dollars in the years ahead. This was stated most graphically to me by a Brazilian farmer who was explaining their inflationary economy: "I bought a combine with a three-year payback. The first year, it was very hard to come up with enough money to meet the obligation, but in the second year (with inflation) I was able to meet my obligation more easily. In the third year, I paid it off with the money I had in my pocket!" That scenario caused everyone in agriculture to bid more for everything they bought and run prices to levels unknown in living memory. But in 1979, it all changed. The inflationary spiral was causing too much pain to many who had influence on government. The Federal Reserve, with support from Presidents Jimmy Carter and Ronald Reagan, fired interest rates up and shot inflation down. The decade of the 1980s was payback time for agriculture, in more ways than one. Farmers thought they were doing just fine on their balance sheets following the very prosperous decade, but banks and other credit institutions began attending farm sales and recording the value of land and used equipment. They reduced the value of all agricultural assets and that caused debt to be much higher, to the point that many were informed that they were bankrupt on paper. Now farmers had to fight their way through a period where the price for their production was lower but the interest rates were as high at 21 percent on variable rate loans. With a balance sheet that was teetering on the edge of insolvency, the emotional reaction was the strongest I've ever seen. It brought out the worst in just about everyone. Proud people who had never missed a payment were trying every tactic to keep from losing their farms. Many took jobs to keep food on the table, while every dollar of the farming operation went into servicing the debt. The credit industry also suffered and caused much suffering for its customers. Institutions that had advertised themselves as "rock solid" were crumbling, and many small banks just closed the doors. Farmers shot themselves, and in some cases, shot their bankers. It was the second black blizzard of the century; the first was caused by drought and dust, but this one was caused by the swirl of a reversal in economic policy. It took until 1988 to come out of the darkness, and some refugees lived out the remainder of their lives with great sadness and animosity. Interest rates finally aligned with income, and a new generation took over from their elders. Economics is a less exact science than we were taught in college. We were told that we could never have low interest rates and low inflation. Today, however, we have both and are not sure what to do about it. The cause seems to be the washout in the housing industry, which has been as painful to homeowners as the 1980s were to farmers. Like that decade, the lending industry is again showing cracks that the government has thrown a TARP over. What to do? What to do? Is this the time we'll look back on as the ideal entry point for great investment? Or is this just a flat spot before another plunge in the value of assets and decrease in demand for output? It should be an economic decision point, but again, it is emotional. Risk and reward always run together, but today the mindset of the potential borrower is clearly negative. Believe it or not, this is what makes our economy work. We have to experience periods of economic growth and endure the inevitable times of uncertainty and loss. Guess right, stay ahead of the trend and accumulate wealth. Do the opposite and wind up living in a camper with nothing left but the memories. Although the situation may at times appear hopeless, none of these economic swings should define us as people. In the words of Dr. Val Farmer, clinical psychologist and counselor of farmers in difficult financial straits: "Your net worth and your self-worth should be independent from each other." Now, how many months will it take to pay off the refinancing fee? Editor's Note: Ken Root is an independent agricultural journalist. He was named the 2009 Farm Broadcaster of the Year and was the 2008 winner of the Oscar in Agriculture. He is an Oklahoma native and an experienced print, radio and television journalist. He has spent the last five years as Lead Farm Broadcaster at WHO Radio in¬ Des Moines, Iowa. He and his wife Gail have two adult children and two grandchildren.
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