By Lance AlbinIf history repeats itself, we might ask: “Are we witnessing a farm decline similar to what we saw in the 1980s?” The short answer: no. The current agriculture climate is a challenge, but comparing it to the 1980s farm crisis would be a mistake.
The 1980s farm crisis was born out of the early 1970’s grain boom. Demand for nearly all grains took off in the early ’70s as several international crops failed and geopolitical conditions made U.S. grain much more valuable. 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 accounted for only $6.7 billion, or 11 percent, of the grain produced in the U.S. By 1979, U.S. producers exported $31.9 billion—more than 22 percent of the total grown in the U.S. that year. Things were going so well for the American farmer that even Robert Bergland, U.S. secretary of agriculture 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 for today’s younger readers, 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 farmland?
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 laggard 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 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 we cannot expect anything 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. But beyond today’s lower rates, other factors indicate that we’re not seeing a repeat of the ’80s, including significantly lower farm debt in terms of overall leverage and much stronger federal crop insurance and price support programs.
No financial crisis repeats exactly like another one, of course—but the fundamentals of today suggest that we’re far from another 1980s-style ag banking collapse.
Lance Albin is SVP and agribusiness commercial lending officer at UMB Bank, based in Kansas City, Mo.