By David Widmar and Brent Gloy
One of the most common questions we have been hearing on our speaking trips goes something like this: “So is this just a replay of the 1970’s farm boom and subsequent bust in the 1980’s?” While nobody can say for sure, we feel fairly confident in saying that while today’s farm financial conditions clearly have some similarities to the 1980’s it is also quite different in many respects. That does not mean that this downturn won’t end poorly, just that several of the drivers and factors that led to the previous boom and bust are quite different than those at play today.
As part of another project David and I recently wrote a report that compares the situation of the 1970’s and 1980’s to today. You can download that full report here. Given the interest in the topic we thought it would be worthwhile to summarize some of our findings in this post.
At the end of the 1980’s farm bust, Kenneth L. Peoples, David Freshwater, Eric Thor, Paul Prentice, and Gregory Hanson wrote an outstanding book titled Anatomy of and Agricultural Credit Crisis. The authors did an outstanding job of summarizing the conditions that led to the crisis and how the crisis unfolded. While out of print, the book is currently available through many online bookstores and we believe it provides the most thorough and detailed overview of that situation. We used the framework that it presented to complete our comparison between today and the previous boom/bust. Below is the concluding section of our paper:
While the current situation and the previous boom and bust have some similarities there are also many important differences. Today, it does not appear likely that the current situation will evolve into anything as destabilizing as the farm crisis of the 1980s. However, it is important to remember that economic adjustments can follow a long process. For instance, net farm income started higher in 1972 and crashed in 1983. This was an 11 year process. Net farm income did not recover to the long run average until 1989 or another 6 years. In other words, the process played out over 17 years!
Today’s agricultural sector has experienced a decade of generally strong to very strong incomes. The sector appears to be in much better shape than it was leading up to the previous bust. However, it is important to provide some caution on the situation. The farm sector is in relatively strong financial shape, although the farm level indicators identified in this paper are all showing warning signs. If the previous boom and bust are any indication, the most difficult factors for the sector to adjust to would be a rapid change in interest rates, inflation rates, and/or exchange rates. These factors are largely outside the control and influence of the sector, but large shifts in these variables would likely cause significant problems. These threats linger in today’s environment and could still deal a dangerous blow to the agricultural economy moving forward.
In reflecting on historic and current conditions, a single line from Kenneth Peoples’s forward for the Anatomy of an American Agricultural Credit Crisis bears repeating. The purpose of commissioning the book was to publish“… an account of what actually took place during this trying time for agriculture and why the conventional wisdom of the day fell short.” It is important to recognize that conventional wisdom may again fall short.
Another way of considering this is outlined in framework popularized by Donald Rumsfeld:
“As we know, there are known knowns; these are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns- the ones we don’t know we don’t know.”
– Donald Rumsfeld
In reviewing the economic and financial situation in agriculture today, the “known knowns” are how current conditions compare to historic events. The “known unknowns” are, for example, the magnitude and impacts of concentrated farm debt and how general economic conditions – such as inflation, interest rates, and exchange rates – will unfold over the next several years. The “unknown unknowns,” however, are the blind spots of today’s conventional wisdom. The “unknown unknowns,” which could result in positive and negative impacts on the agricultural economy, are the most challenging issues for agricultural producers and lenders to prepare for. As the agricultural economy moves forward it appears that it is in a vulnerable, but considerably better position than that immediately preceding the farm financial crisis of the 1980s.
Photo Source: Flickr/Mike KohlBauer