The Farm Credit Administration (FCA) board received a report from the agency’s chief economist on the similarities and differences between the farm crisis of the 1980s and the current economic downturn in the farm economy at its monthly meeting July 13.
According to Chief Economist Stephen Gabriel, many observers are asking if the current downturn is a prelude to a 1980s-style crisis.
“The likelihood of this is very low,” he said. “A confluence of adverse factors led to the crisis that occurred in the 1980s. It would take a similar combination of adverse developments to precipitate another crisis in the farm economy.”
These two periods are indeed similar in some respects, said Gabriel. Both downturns were preceded by a “demand shock” that pushed up grain and soybean prices and, consequently, farm incomes. In each case, farmland values and farm debt rose quickly before the downturn. And in each case, grain prices and farm incomes fell sharply after the downturn. But there are also some important differences, Gabriel said.
“Interest rates were very high in the 1980s, exacerbating the debt burden of many farmers. Today’s interest rates are historically low. And though short-term rates are rising, they are likely to rise slowly,” he said. The price of oil is another major difference, according to his report.
In 1979 and 1980, the price surged, while today it is declining. Also, the general economy is in better shape today than it was in the 1980s.
The country experienced two recessions during the 1980s’ crisis whereas today we’re in an “extended, if lackluster, economic expansion,” Gabriel said.
Finally, real estate mortgage underwriting appears to have been “far more conservative during the most recent run-up in farmland prices” than it was during the 1980s.
“Nevertheless, conditions in the agricultural economy could deteriorate further if grain and soybean prices remain at low levels, or if interest rates rise quicker than expected,” Gabriel said.
Economic shocks, such as disruptions in international trade, could also weaken the agricultural economy.
“Fortunately, the Farm Credit System is well positioned to manage additional stress,” he said. The System is well capitalized, and its credit quality is good. What’s more, the Farm Credit Administration, which regulates the System, now has enforcement authorities it did not have during the crisis of the 1980s.