I think the Kansas City Federal Reserve is one of my favorite sites to get good farm information. In a recent issue of the Main Street Economist Agricultural and Rural Analysis, they had an article entitled "Is This Farm Boom Different?" The article recapped the two primary farm booms of the 20th century.
In the 1910s, World War I ushered in the first farm boom. In the second half of that decade, U.S. farm exports rose dramatically to meet war-time demand for food and most agricultural prices doubled. Simultaneously, very low real interest rates allowed farmers to invest rapidly into capital improvements. Between 1900 and 1919, farm real estate prices rose more than 70%.
The century's second boom occured in the 1970s when farmland prices soared again. With President Nixon's trips to Russia and China, world demand for our farm products increased dramatically. Even the recession in mid-decade only slowed the rapid rise in farm prices.
The end of both booms were due to two primary factors:
- A rapid drop in world demand, and
- An increase in interest rates
Today's boom is very similar. World demand for our farm goods has increased dramatically, especially from China. Interest rates are the lowest they have been since at least the 1960s. Real US farm income has increased dramatically with 2011 being the first year that farm net income was in excess of $100 billion.
Despite these two similarities, farm capital investment presents a striking difference from the last two booms. In those booms, farmers took aggressive advantage of low interest rates and expanded their farm operations rapidly with more debt. In contrast to these past farm booms, non-real-estate investments in agriculture have not soared to the highs of previous farm booms. In addition, farmers have not used much debt to fuel their capital improvements.
During the 1970s, annual farm capital expenditures surged 71%, as farmers tripled their capital spending on tractors, farm buildings and land improvements. Even in 1919, farmers more than tripled their spending on tractors and farm buildings as compared to the pre-WWI high.
This debt accumulation in both decades was a critical factor in the bust that happened in the succeeding decade.
As long as farmers continue to avoid the use of massive debt to fund their capital investment, this boom may continue and although we know their will be a correction, it may end up not being a bust. We shall see.
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