Different ratios of farm real estate to net cash farm income existed at the beginning of the 1970 and current periods of farm prosperity. During the 5 years preceding 1973, the ratio averaged 11.5. During the 5 years preceding 2006, the ratio averaged 16.8. Despite these different starting values, by the end of the 1970s farm prosperity, the ratio of farm real estate to net cash farm income had reached the current levels of this ratio. It is important to point out that it is not clear why the ratios differed in these two five year periods, but the difference is likely due to several factors.
This set of observations on net cash farm income and farm real estate underscores that both similarities and differences exist between the two most recent periods of U.S. farm prosperity. One of the most important questions going forward is whether the similarities or differences are more important in determining how the current period of farm prosperity will evolve.
In retrospect, the 1970 period of farm prosperity can be characterized broadly as an asset driven period of prosperity, likely initiated by a very brief period of extremely high farm income. The current period of farm prosperity appears to broadly be a period of farm income driven prosperity, with farm real estate values being driven by farm income. In short, this examination suggests that it is more important to watch changes in farm income than farm real estate values as an early warning signal for trouble emerging during the current period of farm prosperity.
The need to pay attention to early warning signals has increased in importance as the current period of farm prosperity approaches the length of the 1970 period of prosperity. This is not a prediction that the current period is going to end soon, but those who fail to pay attention to history are often doomed to repeat it.
Since we do not yet know how the current period of prosperity will play out, all observations are based on partial information. Nevertheless, this article suggests an interesting question: given the stability in the ratio of farm real estate to net cash farm income during the current prosperity, if farm income would decline permanently would farm real estate values decline at the same time or, similar to historical experience, decline with a lagged delay? Answering this question will depend on understanding what underpins the different ratios between farm real estate values and net cash farm income that have been observed historically.
In summary, this examination suggests that there are two important questions that will help drive the evolution of the current period of farm prosperity. Question 1: What is the level of real (deflated) net cash farm income. To state the question somewhat differently, is the long term value of net cash farm income closer to its historical average since 1972 of $78 billion per year or to its average of $88 billion per year since 2006? Question 2: What is the underlying, long term ratio of farm real estate to net cash farm income? To state this question somewhat differently, is the long term value of this ratio closer to its historical average since 1972 of 16.3 or its average of 21.6 since 2005? Before examining these questions, the next farmdoc post in this series will compare and contrast the time paths of farm debt during the 1970 and current period of farm prosperity.
This entry first appeared on the University of Illinois FarmDoc site. View the original post: Comparing Current and 1970 Farm Prosperity: Cash Income and Real Estate.