4 Key Differences Between the 1980s Farm Crisis and Now

July 6, 2017 10:32 AM
Markets down

Don’t call it a replay of the 1980s farm crisis, according to Iowa State University agricultural economist Wendong Zhang. That’s because there are a few key differences playing out in the farm economy today compared with three decades ago.

That’s not to say there are some alarming signs currently happening, Zhang says. For instance, current corn prices are roughly half of peak levels from 2013, with weak farm income and worsening credit conditions. But Zhang sees four economic and legal reasons why the current downturn is not likely to slide into a total collapse of agricultural markets.

First, Zhang notes there was a much stronger real income accumulation ahead of the current downturn. Farmers accumulated much more income – especially cash – than they did in the 1910s and 1970s ahead of previous farm crises, he says.

Secondly, historically low interest rates are a significant factor at play, Zhang says.

“Interest rates are still very low compared to the 1980s, and the Federal Reserve is likely to raise the interest rate at a slow pace as opposed to a sudden hike, which makes loan restructuring possible for producers wanting to take advantage of current favorable interest rates,” he says.

Thirdly, regulations on agricultural lending limits were tightened after the 1980s farm crisis. These changes have helped to keep loan delinquency rates lower and more stable.

Finally, crop insurance participation is much more robust. For example, in 1987, just 50 million acres were insured in the federal crop insurance program, Zhang points out. Today, there are more than 25 million insured acres in Iowa alone.

“Despite the deteriorating agricultural financial conditions and continued decline in farm income, the current farm downturn is more likely a liquidity and working capital problem, as opposed to a solvency and balance sheet problem for the entire agricultural sector,” Zhang concludes. “Rather than an abrupt farm crisis, we are likely experiencing a gradual, drawn-out downward adjustment to the historical normal return levels for the agricultural economy.”

Zhang’s findings appeared in the Spring 2017 edition of Iowa State’s “Agricultural Policy Review” newsletter. Click here for additional insights and analysis.

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