By Tyler Harris and Frank Holdmeyer
The 2012 Iowa Farm Bureau Economic Summit kicked off Monday with a discussion about monetary policy.
Comparing what defines a "nice machine shed" in today's standards and the 1970s, Jason Henderson, vice president of the Omaha branch of the Federal Reserve Bank of Kansas City, jokes, "Today it's about how many big screen TVs you've got – with a plush leather couch."
Henderson was the first speaker at Monday's Iowa Farm Bureau Economic Summit, pointing out differences and similarities in the agricultural economy today and in various agricultural booms in United States history. The factors driving today's boom are a low U.S. dollar value, a strong export economy, and the value of land, he says.
Another thing Henderson points out is similar to previous agricultural booms is the drop in interest rates on farm land, which it shares with the 1910s, 1940s and 1970s. "They go up because it's cheaper to buy land," he says, noting that regardless, today still differs from the 1940s due to the use of borrowed money. "It was a period of deleveraging."
This cycle has come back in full circle today, according to Henderson, who says it is similar to the state of agriculture in 1979 – the healthiest period before the Farm Crisis. He points out the percentage of farmers today with no debt is even higher than it was in 1979, although the percentage of farmers with an average debt to asset ratio above 70 percent is now higher than the same period.
However, Henderson notes there are significant risks ahead, and several things must occur to bring on a new Farm Crisis – specifically what he calls "Black Swan" events. "These are low probability events that have really bad outcomes," he explains, noting this summer's drought as an example. "The first line of defense against "Black Swan" events is working capital," he says.
Other factors that would have to occur include a 21% decrease in crop revenue and a 16% decrease in the values of farm production, as well as a drop in corn to about $3.49, soybeans to $9, and wheat to about $3.96, according to Henderson.
This is where exports have been beneficial, and Henderson says part of the reason for this is a low supply in China, the leading export market for the U.S. Similar to previous booms mentioned, exports doubled between 2006 and 2011.