Production is Vanity, Profit is Sanity
Placed in the ChCh Press – Tuesday 13 February 2018
OPINION: Around the world, some societies are starting to feel that the current generation is not as well off as their parents.
Life expectancy in the United States has improved from 47 years in 1900 to 80 years and 78,000 Americans are more than 100-years-old.
A more unwanted trend from the US is that its recessions impact about the world. From 1900 to 1940 the US was in recession 48 per cent of the time and from 1940 to 1980 15 per cent of the time. Since 1980, this has reduced to 12 per cent of the time The financial effect, though, may be getting much more severe with each downturn.
When you strike something that moves the herd of people in a certain direction, you need to keep watching and learning but probably keeping still yourself.
Borrowers have had a marvellous 10 year period for historically low interest rates and savers have been slaughtered. You would have to work on this balancing somewhat over the next three or so years.
This writer has now seen about seven economic farm cycles. My advice is to take pictures at the top of your cycle, be patient at the bottom and be wary of the most expensive four words ever articulated – 'this time it is different'.
A speculator starts off with a small amount of money hoping to make a lot quickly. The investor starts off with a lot of money and hopes to make a little bit more but slowly and farming is certainly in this second group.
The average US household now spends 12-13 per cent of their household budget on food and the EU would be similar. The top 10 per cent of household income in both countries would, perhaps, only spend 8 per cent. That group may still represent a combined 65 million people and is the group that NZ needs to focus on and market to.
The first $250,000 of an individual's deposit in the US banking system is guaranteed by the Fed and government - a carryover from 1929.
I inherited $18,000 from my mother and $25,000 from my father in 1978. Using a compound inflation rate of, about 3 per cent, that would represent about $150,000 today. This $150,000 is probably quite close to what the average New Zealand child may presently inherit from their own parents. There is one big difference though - my inheritance was in my 30s whereas today's children are more likely to get theirs in their 60s.
A cashless society has been talked about for years but the old saying, "Production is vanity, profit is sanity but cash is reality" still has a place - most of the liquidations in this world of ours are about lack of cash. The second largest construction firm in the UK has just gone into liquidation with about 43,000 employees.
Keep a tight grip on what you can control yourself. Don't start believing your own propaganda and don't follow the herd. Fear and greed rule many people's lives - keep yourself above this. Don't delegate major problems inside your business - deal with them early on and follow through to a conclusion - don't let brutal facts float about in 'no mans' land. There is nothing wrong with selling things early - the more important issue is what you are going to do with the early sale proceeds.
The US Federal Reserve increased interest rates three times last year and has promised another three for this year. This will probably have an impact on their share market which is at an all-time high and their country's long term growth prospects. The effect on New Zealand could be an increase in our interest rates as New Zealanders are not saving enough and our banking system needs some capital funds from America. Our central bank has been gradually reducing this requirement but a ripple in America on this issue will be more of a wave here.
The world has felt more financial volatility in the last 20 years than probably almost any other period. Agriculture struggles to cope with volatility because of its low-ish profits. Apart from sound, sustainable, bankable profits, volatility demands that a plan B is required on some issues - not only on farms but also in Wellington.
There's nothing like a good round table discussion with the right people, plenty of water and a good chairperson to solve a difficult farming topic. This will always produce something useful even if it is a decision not to proceed. These think tank brain storming sessions can be crucial in some situations - make sure there are one or two lateral thinkers present, someone is keeping key minutes/notes and there is a clear concise agenda.
If there is a loss, learn the lessons and move on. That's so easy to say but so crucial when you are operating a business involving millions of dollars. Remember that rewards are not only in monetary terms and a healthy family has much value. On average, about one third of your life is spent in bed so develop the ability to think things through and this should make the other 16 hours much more productive.
Worry is interest paid on trouble before it is due - share your worry with people who can help. Worry can be like compound interest but develop the ability not to sweat the small stuff. Is your farm your servant or your master? Not many farmers could say servant - when you are working 56 hours a week or more the answer is clear and so is the total hourly income rate. Doing nothing is still a decision - but sometimes it is a good decision.
There are, I feel, three types of borrowers. There's firstly, the 'hedge' borrowers who can finance their borrowings for capital and the interest out of their own income. Then there are the 'speculative' borrowers who can finance the interest on their borrowing but need to roll over the principal. Lastly, there are the 'Ponzi' borrowers who can't afford the interest or the capital - only the rising value of the asset makes their investment viable. These Ponzi borrowers often survive for a while because of people's perspectives and fear and greed. In the end, they are goosed as are the people who lent to them.
Just remember 100 years ago, nobody retired - they died before they could afford to retire.
Pita Alexander is an accountancy and agribusiness director at Alexanders.