More so than many industries, agriculture is heavily reliant on debt. With often high fixed costs, and growing operating costs, access to capital is critical. That’s why exploding federal deficits primarily in the U.S. but around the world are becoming problematic.
Excessive debt results in slower economic growth, higher inflation and higher cost of capital. Ultimately that means massive increases in taxes, severe spending cuts or both.
Spending cuts are inherently unpopular, while increased taxes tend to slow growth even more. The U.S. is dangerously close to losing its AAA credit status, as countries like Japan and Ireland have done. We aren’t as shaky as countries like Greece and Iceland, or states like California, but as already seen with the government bailouts and handouts, the U.S. is likely to add their debts to our balance sheet to avoid the pain that their defaults would cause in the short term.
Japan is a wonderful case study. Just a few years ago, we were talking about Japan buying our debt, and rivaling us from an economic standpoint. A shrinking and aging population along with mounting debt now makes it questionable whether Japan will continue to be able to finance itself. Debt-per-productive-citizen figures are growing at such a staggering pace that the Japan system is now in doubt.
We hear a lot of talk about a low savings rate, or the debt on a per-citizen basis, and they are humbling numbers, but they don’t include the unfunded liabilities like social security and welfare. If you live in a state like Ohio, you can add nearly $20,000/person by simply adding on unfunded pension obligations.
Politicians are simply incapable of exercising discipline in these areas; the lure of passing the bill onto the next generation is simply too great. America is at a crossroads, and the outcome will be a major driver in determining beef demand limitations for decades to come.