During a snowy winter day at a lender's conference in the Twin Cities of Minneapolis-Saint Paul, a lender asked a good question to one of the speakers. “What is the cost of keeping working capital and cash when inflation deflates real purchasing power?”
When the inflation rate is between 7 and 10 percent, it can very quickly reduce purchasing power. Whether calculating a rate of return or the reduction of purchasing power, use the Rule of 72 to divide that number into 72. For example, when the inflation rate is 8 percent, it would take nine years to cut the purchasing power in half. The banker had a very valid point. However, there is another angle.
At a recent seminar in the western part of the United States, a producer explained how he was able to opportunistically purchase five years’ worth of diesel fuel when the cost was extremely low a few years ago. He stated that working capital gave him the agility and nimbleness to capitalize on the opportunity. It would take many years of prolonged inflation to equal out this transaction.
Another individual indicated that nimbleness as a result of cash flow and working capital allowed him to capitalize on cash discounts and secure critical inventory and supplies as a result of quick decision-making.
As a defensive option, another producer used working capital and cash to meet debt service payments and maintain a strong risk rating with his lender, which reduces the likelihood of interest rate hikes and the risk of having to liquidate cattle and grain at a less than opportunistic time.
Maintaining working capital and cash should be measured against one's risk tolerance and flexibility. Each situation is different. However, examine possible inflation buster measures to reduce exposure to the reduction of purchasing power.
There is an old saying that if one is swimming in cash and working capital, keep swimming! In today's uncertain economic environment, err on the conservative side. Whether it is a business, household, board of directors, or government, financial liquidity is usually the first point of pressure. When in doubt, stay financially liquid as possible to protect yourself, but also as an opportunity strategy.
EDITOR’S TAKE:
The author makes some great observations and offers sage advice to farmers and ranchers with significant working capital available. The examples provide some insight into how farmers and ranchers think and act when confronted with inflationary pressures.
But this article also gives us some insight into how we can approach the sale or lease of a truck to farmers/ranchers. The author states that being conservative and maintaining working capital is in their best interest – a wise move. So, this allows an opportunity to pitch AgPack® as a means of helping farmers and ranchers get the products they need and want while preserving working capital that can be deployed elsewhere! With the exclusive rebates and discounts offered in AgPack®, they could conceivably keep over $30,000 in their bank account to use for that machinery purchase or buying diesel fuel for the season, etc. You get the picture. And, at the same time, AgPack® can help you protect some of your margins, especially as higher prices, higher interest rates and bigger inventories start to eat into your F&I or gross profits! AgPack® is a big win for all!
