Repeat of the '80s unlikely for agriculture
There's a question nagging at farmers and ranchers as the global economy struggles to pull out of a tailspin. After last spring's optimism faded into a nearly 50 percent drop in grain prices from July to October, it's a question that seems natural enough: Are we really headed for a return to the tough times farmers and ranchers faced in the 1980s?
The short answer is "no," according to farm financial and economic experts, and less debt is a big reason. By the end of the '70s, farmers owed, on average, $22 for every $100 in assets. Today, that ratio is more like $9 debt for $100 worth of assets. Additionally, a steep climb in interest rates in the '80s--up into the 18 percent to 20 percent stratosphere--led to mountainous debt servicing.
"In the mid-70s, interest rates were low and stable," explains Doug Hofbauer, president and CEO of Frontier Farm Credit, in Manhattan, Kan. "Land values were inflating faster than interest costs and, therefore, encouraged increased debt--much of it at variable rates. The real triggering event for the '80s occurred in October of 1979 when the newly appointed Federal Reserve Chairman, Paul Volcker, attacked 'stagflation,' the stagnant growth and high inflation of the '70s. Instead of controlled and artificially low interest rates, rates were set above the cost of inflation which was running about 13.5 percent at the time versus today's plus or minus 2 percent. The cost of debt and other factors triggered the farm recession and the drop in land values.
"That's not the situation we're in today. Interest rates are not high and farmers are much more sophisticated in terms of using debt correctly. In general, production agriculture, as an industry, is in a much stronger position than it was in the '80s."
That doesn't mean everything is coming up roses for farmers, Hofbauer cautions, pointing out that troubles in the general economy have a negative impact on demand for farm products. Additionally, high-priced inputs and volatile markets represent a major challenge for farmers and ranchers.
"Today's situation, with extremely rapid price moves, means that farmers have to be very good at managing risk and that begins with the tried-and-true basics of knowing cost of production and knowing your break-evens on a per acre basis. In our current environment, swinging for the fences isn't always the best approach--taking profits when they are available is a more financially sound strategy."
Kansas State University agricultural economist Terry Kastens agrees that today's farm financial scenario looks much different from those rough days of the 1980s.
"In agriculture, I think we're in a good position to weather the storm," he says. "We have fairly strong balance sheets; the community banks and Farm Credit System, which provide most of the credit for agriculture, did not get caught up in the foolishness that the big urban banks did, and I think there is a healthy sense of caution on the part of farmers.
"Much of it is a timing difference. We're not coming out of an inflationary period and we're not highly leveraged. Inflation, in itself, isn't a bad thing for agriculture. The problem comes when we break the back of inflation. We could see an inflationary period as a result of massive deficit spending, but that potential problem is down the road. Right now, we are not even remotely in the same position we faced in the '80s."
Kastens cautions that agriculture is not a one-size-fits-all industry. The livestock sector, he points out, is facing belt-tightening times and lacks some of the risk management tools available to crop producers such as crop insurance. The impact of a general recession on land prices, he adds, can vary according to location and situation.
"I don't think we're going to see much of a change in land values for commercial agriculture acres," the K-State economist suggests. "There may be areas where agriculture participates in the nastiness somewhat, particularly near urban areas, because they are affected by non-agricultural influences. It can get a little fuzzy when the land-credit situation more closely resembles consumer lending because servicing that debt depends heavily on off-farm income. That income is now more vulnerable. Basically, the more a farmer looks like a regular consumer or lifestyle farmer, the more problematic it becomes."
Hofbauer gives today's farmers and ranchers high marks for having more finely-honed management skills.
"Farmers are more disciplined in their approach to business today," he asserts. "They understand that their job goes well beyond driving a tractor; they are business managers. Good farmers know their expenses and how to control them. They're willing to sit down and put together a business plan with multiple 'what if' scenarios. They have a road map that gives them direction if certain factors come into play.
"Producers today are also much more likely to surround themselves with good expertise. They seek advice and strive for an unbiased view of their business. It's a challenging industry but I believe most farmers are up to meeting those challenges."
Agricultural producers are keenly aware of the problems and the potential posed by a rocky macro-economy. It's clear, however, that they're not facing a replay of those bleak days of the 1980s and even more clear that they are better prepared to handle the economic cards they are dealt.