INFLATION, CASH FLOWS, AND GROWTH: SOME IMPLICATIONS FOR THE FARM FIRM

As farm sector prices continue to increase at consequences of inflation. The suggestions arerates higher than any since World War II, at- that lenders (1) institute variable interest ratestention is being given to the cause of the price for long-term loans and (2) adopt increasingincreases and their structural impacts on the rather than constant loan repayment schedulesfarming sector. Land, a major component of that more nearly match borrowers' incomefarm assets, has been the focus of many streams with their loan repayments. Supportstudies examining the effects of inflation. for these two recommendations is deduced inMelichar showed current increases in land our study.prices to be consistent with productivity gains.Lee and Rask illustrated that even though cur- INFLATION AND FIRM LIQUIDITYrent levels of land prices may be justified, firms may have negative cash flows, especially Prng Nondepreciatig Durablesif loans are repaid on level repayment plans. Suppose a decision maker can acquire anCurrent inflationary conditions led Robison to asset that is expected to return a net dollarconclude that though current land prices may amount R for n periods, after which it can bebe justified, the benefits and costs are unequal- resold at its original purchase price. If the dis-ly distributed and that, increasingly, persons count rate for time is r (the rate required bywho in earlier years made land purchases are savers to postpone consumption plus an inter-more able to afford to purchase more, thereby mediation fee charged by lenders), the maxi-accelerating the trend toward fewer and larger. mum price the decision maker can pay is V, anfarms. amount just equal to the present value of theWe demonstrate additional implications of net return plus the discounted sale value of theinflation for farm firms. Using present value asset. This relationship between the purchasetechniques, we show that even accurately price V and the returns from the asset can beanticipated inflation creates liquidity or cash expressed asflow problems for farm firms as capital gainsincrease in relation to cash returns; moreover, (1) V = R(l+r)- + ... + R(l+r)-n + V(l+r)n.the higher the rate of inflation, the more severethe liquidity or cash flow problem of the firm. One can find a more convenient expressionWe also demonstrate that, to the extent for V by replacing the geometrically weightedlenders establish borrowing limits based on income with the net present value of anincome, lending limits will be more restrictive annuity. Making this substitution and solvingwith a higher rate of inflation. Hence, the for V gives'firm's real equity growth rate will be reduceddespite profitable investment opportunities. (2) V = R/r.Meanwhile, borrowers who obtained loanswhen inflation was underanticipated benefit If the decision maker's maximum bid price Vfrom inflation-their real debts decrease while exceeds the maximum bid price of all othertheir net cash flows and equity increases with potential buyers, and equals or exceeds theincreases in inflation. value of the asset to the owner, V becomes theWe concludewith two suggestions that may sale or market price of the asset. Assume thehelp alleviate the undesirable and disparate latter is the case-that V represents the most