As I was coming down on the elevator of the hotel where I was attending a meeting last week, one of the passengers looked at me and said, “You’re the forecast guy.”
He kind of took me off guard, and I said, “I do some work in the that area.”
Then he asked, “Is this slowdown all about commodity prices?” A 15 minute discussion ensued in the hotel lobby and he alluded to his boss having said how the current situation looked a lot like the ag crisis of the early 1980s.
As he was talking, a couple of things occurred to me. First, ag industry veterans continue to view the farm crisis of the 1980s as their major frame of reference. Second, very few ag industry newcomers have any frame of reference when it comes to a business downturn, let alone what happened 35 years ago. Many of them weren’t even born when that farm crisis took place.
For ag industry veterans, the thought of returning to those days are scary because they remember what they endured. For the young people who have joined the industry in the last decade, it’s even scarier because they have no idea what to expect.
Another fellow who got involved in the conversation said what ag veterans already know: “Agriculture has always been cyclical.” I added, “It’s easy to forget that when you’re coming off 4 or 5 strong years.”
It’s also easy to forget that most of our younger employees have never experienced a “down” cycle.
Yes, commodity crop prices are down from the levels we saw a few years ago, Yes, net farm income is expected to decline from previous record highs. At the same time, U.S. farm debt-to-asset ratio is forecast to reach 10.9% in 2015, up from 10.7% last year. In 1985, this ratio was at nearly 23%, which means farmers were highly leveraged because so many had purchased a lot of land on speculation at inflated prices.
In his book, The U.S. Farm Financial Crisis of the 1980s, Barry J. Barnett said that by the late 1970s “Land prices were so high that in many cases producers could no longer pay for agricultural land with the returns from agricultural production on that land.” Between 1970 and 1980, the amount of farm mortgage debt outstanding in the U.S. grew by 59%. Overall farm land values fell by 30% between 1981 and 1987.
So, as commodity prices declined, inflation and interest rates began to climb. The inflation rate in 1980 reached 13.5% and interest rates approached 19%. Today, the current year-over-year core inflation rate is about 1.6% and the prime interest rate is less than 4%.
Barnett also points out that net farm income in 1983 dropped to $12.2 billion, “the lowest figure on record since USDA began collecting farm income data in 1910.” In 2015, farm net income is expected to decline to $73.6 billion from $105 billion in 2014, which is still among the 5 best years U.S. farmers have ever seen.
Between 1985-88, government payments directly to farmers accounted for 31% of total net farm income. I don’t see anything like this happening anytime soon. According to USDA data, that’s because farmers are in relatively strong financial position heading into 2015.
It easy to forget that one of the biggest impacts of the farm crisis of the ‘80s was that a lot of farm kids decided not to go into farming. Only in recent years have we been able to finally get more young people interested in agriculture as a career. Let’s not let that pool of young talent slip away from us again.