Repeat of 1980 Farm Crisis Unlikely

Ag industry is in much stronger financial position today.

Published on: Nov 6, 2008

After extremely high commodity prices in the 1970s the bottom dropped out of the market and times became very tough in the 1980s with many farmers losing everything.

The recent situation of unprecedented prices that dropped quickly as bank failures turned the world economic situation ugly has left farmers uncertain about the future. Some say we could be seeing history repeating itself. However ag economists at Purdue University say that while there are similarities, there are major differences now than when the 1980s farm crisis occurred.

Mike Boehlje and Chris Hurt say present economic fundamentals are more favorable and the agriculture industry is in a much stronger financial position that should allow farmers to withstand the economic downturn.

"Agriculture is not immune to the financial slowdown," Boehlje said. "Grain prices declined by almost 50% from June to October 2008. The almost $4 decline in corn prices during a four-month period is unprecedented in both speed and magnitude. Farmers and agribusiness managers are clearly unnerved by this rapid deterioration."

But economic data and history point to a much more severe situation 25 years ago. Boehlje and Hurt have released a paper "The Financial Crisis: Is This a Repeat of the '80s for Agriculture?" that outlines some of the differences.

"One difference is interest rates are much lower this time." Hurt says. "In the '70s we had moderate interest rates, but then we saw them move up in the '80s, with the prime rate above 20% as we started to fight inflation. So we ended up in the '70s with a lot of debt. In fact, as we look back at the amount of debt, for every $100 of assets that farmers had then they had $22 of debt. Today, for every $100 of assets farmers have only $9 of debt."

According to Hurt too many farmers having to much debt quickly brought a recession and with the high interest rates farmers were forced to begin selling land to pay their debts.

"When you force more supply onto the market, it causes the price to drop more sharply than it probably should," Hurt said. "We don't see that happening this time."

The months ahead could be bumpy, but Boehlje and Hurt see a much better situation than what was happening in the 1980s. However they say financial flexibility is very important.

"If these much lower grain prices that we now experience continue, then we're going to have to see cost of production also adjust on the downside," Hurt said. "So the recognition that there can be dramatic changes, both in the crop prices as well as cost, tells us as business managers that we want to be careful about getting caught in making major commitments, either to our cost for next year or to our revenues, because the implications are just enormous."

To read Boehlje and Hurt's paper, "The Financial Crisis: Is This a Repeat of the '80s for Agriculture?" click HERE.