If history repeats itself, we might ask, “Are we witnessing a farm decline similar to what we saw in the 1980s?”
The short answer to that question is no. The current agriculture climate is a challenge, but comparing it to the 1980s farm crisis would be a mistake. Let’s take a walk back through history for a refresher.
The 1980s farm crisis was born out of the early 1970s grain boom.
By 1973, real farm income had reached a record high of $92.1 billion (nationally), nearly double what it was just three years earlier. Exports of U.S. agriculture products grew dramatically in the 1970s as rising incomes and liquidity in developing nations created strong demand.
In 1970, exports contributed only $6.7 billion or 11 percent of the grain produced in the U.S. By 1979, this number had jumped to $31.9 billion and was more than 22 percent of the grain raised in the U.S. that year.
Things were going so well for the American farmer that even Robert Bergland, U.S. ag secretary at the time, commented in 1980 that, “The era of chronic overproduction… is over.”
The equation that followed was simple:
• Higher grain prices + more available credit = much higher land prices.
The boom eventually went bust, in perhaps one of the most difficult periods in the history of American agriculture. In 1981, there was only one ag bank failure among the 10 bank failures in the U.S.; by 1985, things had become so difficult that the 62 ag bank failures that year accounted for more than half of the bank failures in the U.S.
It may be unbelievable to read this today, but the prime rate averaged 15.3 percent in 1980. Higher interest rates almost automatically drove land prices down by the inherently lower value of the earnings that the land produced. If an investor could receive 13 percent on a CD in the bank, why consider purchasing farm land?
Also, export demand fell precipitously as the U.S. dollar strengthened considerably. In 1981, U.S. ag exports totaled $44 billion and then fell dramatically to $26 billion in 1986.
Land values increased every single year from 1970 through 1981, but gross income per acre actually had several year-to-year decreases. Astonishingly, when land prices finally peaked in 1981, returns on investment for corn and soybeans were only one-third of what they had been in 1973. Land was a lagging in terms of decline but eventually succumbed to the industry downturn.
Without question, the greatest assailant on the agriculture sector in the mid-1980s farm crisis, was the skyrocketing interest rate situation that devastated cash flows, credit availability and asset values. By comparison, today’s prime rate has been stalled at or below 4 percent for the better part of a decade.
Clearly, interest rates are much more favorable for the farm sector today than in the crisis of the 1980s. This is the single greatest and most important difference between the two environments.
Another key distinction to understand when comparing the 1980s to the current environment is the recent trends and current expectations regarding inflation.
The consumer price index (CPI) took off in the early 1970s and the Federal Reserve struggled mightily to tame the beast of rampant inflation. Its only real tool to effectively combat inflation turned out to be much higher interest rates. Today’s CPI is completely dissimilar when compared to that of the 1970s and the early 1980s. As long as inflation remains subdued, rates may moderately increase, but will be nothing like the rates seen in the 1980s.
The recent ag economy has shown signs of stress including much lower grain prices, declining values for land and equipment, and modestly increasing interest rates. Lower net farm income, oversupply, and rising rates are akin to both the current environment and the 1980s. On the other hand, significant differences can be pointed to:
- A current prime rate of 4 percent is very manageable.
- Aggregate farm debt in terms of overall leverage is significantly less than it was on the cusp of the last big down turn.
- Federal crop insurance and other support programs have been bolstered over the past 35 years and provide meaningful support.
These similarities should cause all of us involved in agriculture to carefully make decisions and double our efforts in working together to ensure satisfactory outcomes. It is important to remember the history of our industry so we can all try to maneuver the current times and pave a way forward. By really understanding the similarities and differences of the 1980’s farm crisis to the challenges we are facing today, we can better prepare, understand and plan for the road ahead.
Lance Albin is senior vice president, agribusiness commercial lending officer at UMB Bank.
