AgDM newsletter article, September 1999
Don Hofstrand, retired extension value added agriculture specialist, email@example.com
Understanding the current downturn in the farm economy can best be done by comparing it to other downturns. In the discussion below I compare the current situation with economic conditions in the 1980s. My objective is not to provide a comparison of economic data or indicators. Rather it is to provide a subjective comparison of the major trends and factors that define and contribute to the two downturns. A summary of the comparison is shown in Table 1.
Currently the CCC loan program guarantees producers about $1.80 for corn and about $5.15 for soybeans. In addition producers receive a fixed payment for corn (35 cents in 1999 – phased-out in 2003). However, current legislation before congress would greatly increase the direct payments to farmers.
Type of downturn
Low profit levels is the economic problem currently facing farmers. Farmers are receiving low returns on the capital and labor they have invested in farming. A similar situation existed in the 1930s and 1950s. However, in addition to low profit levels, the 1980s were characterized by high interest rates, high debt levels, and the inability of farmers to service these debt levels.
Cause of the downturn
The current downturn is caused by low commodity prices. Low prices are the result of excess production resulting from increased production capacity and reduced export demand. In addition to low grain prices, the 1980s were also impacted by rising interest rates against highly leveraged farm assets. The rising interest rates were the result of a restrictive monetary policy by the Federal Reserve in an attempt to bring down the inflation rate.
Severity and duration
The economic downturn in the 1980s was sharp and severe. However, the downturn was relatively short when compared to other downturns (e.g. 1930s). Although the current downturn is less severe, its duration is unknown. If it only lasts for a couple of years, the impact will be moderate (except for hog production). However, if it lasts for three or more years, the impact may be severe.
Because a major cause of the downturn of the 1980s was high interest rates, highly leveraged farmers were affected the most. Those with little debt were affected the least. The low commodity prices of the current downturn affects all farmers equally. However, those with the lowest production costs and highest equity levels will be able to withstand the downturn the best.
Effect on farmland values
The impact of the 1980s downturn on farmland values was severe. Rising interest rates and declining commodity prices led to severe cash-flow shortages for highly leveraged farmers. Efforts to rapidly liquidate land holdings forced land values sharply lower. As land values dropped many farmers became insolvent causing additional problems for themselves and lenders.
The current downturn is not caused by liquidity problems as during the 1980s. Many farmers exiting the business will not be forced to liquidate their land holdings. So land values are not expected to plunge as in the 1980s. However, the longer the current downturn lasts, the more it will influence land values. As potential buyers reduce their expectations of future returns from land, they will adjust downward the price they will pay for land.
Effect on machinery values
The effect on machinery and equipment values is much more immediate than the effect on farmland values. Although people leaving farming may not sell their farmland, they will sell their machinery. This will increase the supply of machinery on the market. While farmers exiting the business will sell their machinery, those remaining will try to postpone machinery purchases as long as possible. Others will try to downsize or not renew machinery leases. The combination of these forces will push the price of used machinery downward.
Land tends to be the residual
claimant of profits from the farm business. If profit levels increase, a substantial
portion of these profits are bid into higher land rental rates. If profit levels
decline, rental rates must also decline to absorb a portion of the squeeze on
profit margins. Although rental rates rise easily, the decline is usually slow
Effect on farmland rental rates
During the 1980s a host of supply management programs were available that could be used to reduce grain supplies and force commodity prices higher. In large part, these programs have been dismantled. Except for the Conservation Reserve Program, these programs are not available for use in the current situation.
During the 1980s, a huge inflow of government payments into the farming sector helped to alleviate the financial stress of many farm businesses. Until recently it appeared as though this influx of cash was not forthcoming for the current downturn. However, in October of 1998 and again in recent weeks Congress has been considering making huge inflows of money into the farming sector. The question facing farmers is how long (how many years) will they do this if the downturn persists.
Effect on agribusiness
Banks and other agricultural lenders will not be as adversely affected as they were in the 1980s. Lenders are in a much stronger position than in the 1980s and large losses from insolvent borrowers will be less common.
Machinery dealers and manufacturers may be impacted severely by the current downturn. After several years of relatively high profits, many farmers have re-tooled their operations. So they can withstand a period of low machinery replacement. If the downturn persists for several years, the negative impact may be substantial.
The effect on input suppliers was severe in the 1980s. If the current downturn persists for several years, the effect will also be severe in the 1990s.
The downturn of the 1980s affected both the farm and non-farm sectors of the economy. People who were either seeking an off-farm job to supplement their farming operation or making a career change by exiting farming found a depressed job market in the non-farm sector. However, with the current situation, the dichotomy of a depressed farm sector and a booming non-farm sector makes finding supplemental income or the transition out of farming easier.
Although leaving the farm and changing careers can be extremely traumatic on individuals, it appears as though the current downturn may take less of a human toll than it did in the 1980s. During the 1980s it was common for farmers to proclaim that they would do everything possible to stay on the farm. However, after years of economic difficulties, many farmers are now ready to leave the farm and seek opportunities elsewhere. The strong non-farm economy helps them make this transition.