November 6, 2008
Repeat of 1980s for agriculture unlikely, economists sayWEST LAFAYETTE, Ind. - A farm economy that's swung from unparalleled optimism to uncertainty in a matter of months might resurrect fears of a crisis similar to one that occurred two decades ago.
While people may be seeing similarities, there is more to the story than meets the eye, said two Purdue University agricultural economists.
Although commodity prices are cascading in response to the global financial crisis, farmers should not expect a return to the tough times of the 1980s, said Mike Boehlje and Chris Hurt.
Comparing then to now, the economists said the agriculture industry is in a much stronger financial position today. Present economic fundamentals also are more favorable, indicating farmers are likely to withstand the economic downturn, they said.
Boehlje and Hurt make their case in "The Financial Crisis: Is This a Repeat of the '80s for Agriculture?" The paper can be read on the Purdue Extension Financial Crisis Information Web page at http://www.agecon.purdue.edu/news/financial_crisis.asp.
High grain prices placed farm incomes on a record-setting pace earlier this year. That all changed, as bank failures threw world economies into a tailspin.
"Agriculture is not immune to the financial slowdown," Boehlje said. "Grain prices declined by almost 50 percent from June to October 2008. The almost $4 decline in corn prices during a four-month period is unprecedented in both speed and magnitude. Farmers and agribusiness managers are clearly unnerved by this rapid deterioration."
Like today, the agriculture industry enjoyed a prosperous period in the 1970s before the bottom fell out in the 1980s, Hurt said. Economic data and history point to a much more severe period 20 years ago, however.
"We're in a much different situation in agriculture today than we were in the 1970s boom and then massive bust in the 1980s," Hurt said. "One difference is interest rates are much lower this time. In the '70s we had moderate interest rates, but then we saw them move up in the '80s, with the prime rate above 20 percent as we started to fight inflation.
"So we ended up in the '70s with a lot of debt. In fact, as we look back at the amount of debt, for every $100 of assets that farmers had then they had $22 of debt. Today, for every $100 of assets farmers have only $9 of debt."
Recession quickly set in during the '80s because too many farmers had too much debt, Hurt said.
"High interest rates led to enormous debt servicing. It was very costly with falling prices of corn, soybeans and wheat," he said.
To pay their debts, farmers began selling land.
"When you force more supply onto the market, it causes the price to drop more sharply than it probably should," Hurt said. "We don't see that happening this time."
Farm incomes also have been higher in recent years than in the years leading up to the '80s recession, Boehlje said. In 2000 dollars, United States net farm income averaged $51.8 billion per year between 1976 and 1979.
"In contrast, real net farm income has averaged about $63 billion a year for the past five years," he said. "These recent strong incomes were earned primarily by grain and crop farmers, while livestock producers had much lower incomes and even significant losses during much of 2007 and the first half of 2008."
Another difference between then and now is the way land was purchased.
"In the previous period we looked at, a number of farmland purchases were 100 percent debt financed, because the lender was willing to take a collateral security interest in property currently owned by the farmer - property that had significantly appreciated in value over the previous three to five years," Boehlje said. "When income and debt servicing problems surfaced, lenders demanded payment or foreclosed on the property because of borrower defaults, and the dramatic downturn in asset values began."
Conversely, land values have risen sharply in recent years but there has not been the years of inflationary investing that helped build the speculative bubble in land values in the late '70s and very early '80s, Boehlje said.
"Farmers are financing mostly with their own equity capital," Hurt said.
The months to come could be bumpy for agriculture, and farmers will need to be financially flexible, the economists said.
"If these much lower grain prices that we now experience continue, then we're going to have to see cost of production also adjust on the downside," Hurt said. "So the recognition that there can be dramatic changes, both in the crop prices as well as cost, tells us as business managers that we want to be careful about getting caught in making major commitments, either to our cost for next year or to our revenues, because the implications are just enormous."
Writer: Steve Leer, (765) 494-8415, firstname.lastname@example.org
Sources: Mike Boehlje, (765) 494-4222, email@example.com
Chris Hurt, (765) 494-4273, firstname.lastname@example.org
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