Future Of The Dollar

DR. ANDREW P. GRIFFITH

KNOXVILLE, TENNESSEE 

What is the future of the dollar? The first thoughts to this question have to do with the value of the dollar relative to other currencies. The next thought is if there is a need for the dollar given digital currency. There are sure to be more thoughts, but this article is taking a different direction.

What is the future of the dollar for cattle operations? Cattle prices have increased 30 to 35 percent compared to a year ago and equate to about $400 more dollars per head of revenue than last year. On the selling side, cow-calf producers will experience a rather large increase in gross revenue relative to last year, which likely translates to much higher profits compared to 2023. Given the expected increase in profits, what plans do producers have for those dollars? In other words, what is the future of those dollars? Will those dollars be spent in such a manner that they generate a positive return, or will they be spent in a frivolous manner?

Many in the farming business look to reduce their income tax burden in years when profits are strong. They largely do this by purchasing equipment or other assets. For instance, it is common for folks to purchase a new tractor, truck, or hay equipment when profits are high. This allows those operations to write off a large portion of those profits instead of paying income taxes. In may cases, producers are paying 60 to 80 cents on the dollar due to tax savings.

Despite how great it sounds to reduce income tax and make a purchase, producers commonly make the incorrect purchase. The question to ask is if the purchase will generate a positive return to the operation, which means it is an asset. Otherwise, the purchase is more of a liability than an asset. As an example, how much value is generated to an operation by purchasing a new tractor? Would it have been more valuable to trade in one tractor when purchasing the new tractor? Alternatively, would it have been more valuable to build new fences or other infrastructure on the farm instead of purchasing the new tractor or truck?

These questions are not always easily answered. However, it is easier for a cattle producer to purchase a new truck or tractor than it is to invest in a cattle watering system or cross fencing, because purchasing a new hay baler is easier than the planning and labor required for fencing and water systems. The challenge now is to begin considering how the business can be improved using this year’s expected profits instead of having to make a quick purchase at the end of the year.

Changing gears, margin operators are in a different situation. Anyone purchasing animals for resale will have more dollars invested in cattle this year than last year. Thus, cattle buyers will have to come up with more capital to purchase the same quantity of cattle as one year ago. On top of that, interest expense will be greater due to the higher upfront investment. What does this mean for the future of the dollar for margin operators? The answer is on the opposite end of the spectrum compared to the cow-calf producer. Profits can still be achieved, but they are not likely to be so high that margin operators are looking for ways to dispose of income. When reality sets in, margin operators will likely find the value of their dollar declining due to the additional expense of operating.

It would be nice to say I do not struggle with these same issues in my own farming operation, but hitting the “Easy” button happens to me also. The key to all of this discussion is thinking through where dollars need to be spent today instead of waiting until December and realizing the government is going to request an income tax payment for the year. This requires evaluating how such purchases will improve the operation and what they will return in the form of more dollars, less labor, or some other resource. The one positive regardless of what decisions are made, profits are always preferred to losses. ∆

DR. ANDREW P. GRIFFITH: University of Tennessee