The lack of inflation is a key difference between the lead up to the 1980s ag recession and the working capital squeeze farmers are feeling now, note Brent Gloy and Divid Widmar. The two ag-economics-professors-turned farmers highlight this key difference in their most recent blog update.
Click here to read the full blog.
But here is the key point -- inflation was out of control in the 1970s. That resulted in misallocation of resources, high-leveraged asset purchases and false market signals. The action to control inflation, a quick cranking up in historic nominal interest rates with little warning, turned those assets upside down and pressured farm borrowers and lenders.
That's not the case now as low inflation resulted in high-equity farmland rather than high-leverage purchases. "While sector level indications suggest that the debt load is manageable," they note, "debts are not repaid at the sector level. Some farms and agribusinesses will undoubtedly be over-levered and experience financial difficulty. Whether this presents serious systematic problems will depend on how many farmers find themselves in this situation," the conclude.
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