Corn+Soybean Digest

Managing for Deflation and Inflation

The worldwide economy is deleveraging, creating a deflationary environment. In this type of environment, cash is king – even if it returns little in a money market or savings account. This is because cash can purchase more as asset values decrease. Examples are sprouting up everywhere, including housing, real estate and vehicles, as businesses and consumers unload inventory.

While this describes the current economic environment, stimulus packages in the U.S. and globally may result in the opposite scenario, that is, an inflationary economy. This may be particularly true if the government opens up its money printing presses, increasing the money supply, which makes federal debt cheaper as the result of inflation. This is freshly minted currency chasing scarce goods, which could result in hyperinflation.

Both scenarios present challenges to managing a business and to social order in society. How does one prepare for each environment?

  • First, keep your debt level modest and well within your ability to pay it back given a wide range of economic scenarios.
  • Second, maintain financial flexibility with strong reserves of working capital. In either environment, businesses must control overhead and fixed cost commitments. Budgeting and planning will be critical, requiring big-league management strategy, but more importantly, execution.
  • Finally, diversify your strategies for marketing products, purchasing inputs and managing interest rates to remain flexible in uncertain times.

Yes, in inflationary times businesses and consumers could experience double-digit interest rates for a period of time. As they say on the Weather Channel, it could happen tomorrow.

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 [email protected].

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