While there are similarities, there are also a few key differences to note. Brent Gloy, co-founder of Agricultural Economic Insights, and I recently evaluated the 1980s farm financial crisis and compared it to today’s environment. In doing this, we observed two major differences that are important for agriculture producers to keep in mind.
Inflation
A key feature of the overall U.S. economy during the late 1970s was inflation. During this period, annual rates of inflation in excess of 10 percent were common. In fact, annual inflation exceeded 12 percent in 1974, 1979 and 1980. The impact of high inflation was undesirable for many aspects of the broad economy, but particularly difficult for the farm sector.
One way high rates of inflation negatively impacted the farm economy was reduced purchasing power. Surging commodity prices were an important part of the farm economy expansion during the 1970s as the average U.S. price of corn reached $3.02 in 1974.
Corn prices settled lower for the rest of the 1970s, but again reached $3.11 per bushel in 1980 and $3.21 per bushel in 1983. Even though the average corn price farmers received in 1980 and 1983 was on par with prices during the boom in early 1970, net farm income was considerably lower. Why? Inflation.
When taking inflation into account, real corn prices (or inflation-adjusted corn prices) were quite different across these three time periods. In 2009 dollars, real corn prices in 1974 were more than $13 per bushel. However, the real price in 1980 was just over $8 per bushel, a 38 percent decline in real dollars.
Furthermore, the real price of corn in 1983 was just $6.91 per bushel. Even though producers could sell corn for more than $3 per bushel in 1974, 1980 and 1983, the inflation-adjusted impacts of $3 cash prices were dramatically different over the decade.
High rates of inflation also sent people in search of investments that offered protection from inflation. Farmland was viewed as such an investment. This left many willing to invest in farmland with the expectation of strong inflation-driven valuations increases.
Interest rates
The second key difference between the 1980s and today is interest rates. During the late 1980s, farm-level interest rates were much higher than today’s rates. The Kansas City Federal Bank has reported average interest rates on farm operation loans since the late 1980s, when rates were in excess of 12 percent.
In fact, interest rates on operation loans of 10 percent were quite common throughout the 1990s. Today, rates on such loans have been below 6 percent for several years.
Since the 1980s, interest rates – in agriculture and throughout the U.S. economy broadly – have trended downward. This has been positive for agricultural producers as a result of lower interest expense and as fundamental support to the farmland market.
In fact, the lower interest rate environment of the last several years is often overlooked as a key supporter of the recent agricultural-boom era.
Wrapping it up
The current farm economy has several differences when compared to the 1970s and 80s, with low rates of inflation and interest rates being the most noteworthy. With that said, it’s also worth mentioning that adjustments in the agricultural economy can take years to unfold.
For instance, net farm income started higher in 1972 and hit a low in 1983, an 11-year span. Net farm income did not recover to the long-run average until 1989, or another six years. In total, the process played out over 17 years.
Interest rates recently captured headlines as the Federal Reserve Bank announced plans to increase its benchmark rate by 25 basis points, or 0.25 percent.
While the Fed’s recent action likely isn’t enough to significantly increase the cost for farmers to borrow money, or substantially change support to farmland values, the upward trend is important to monitor, especially given the expectation of additional rate hikes in 2017.
One final thought. Donald Rumsfeld, an American politician and businessman, popularized a framework worth considering:
“As we know, there are known knowns; these are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know.”
In reviewing the economic and financial situation in agriculture today, the “known knowns” are how current conditions compare to historic events. The “known unknowns” are, for example, how commodity prices, inflation and interest rates – to name just a few – will unfold over the next several years.
The “unknown unknowns,” however, are the blind spots of today’s conventional wisdom. The “unknown unknowns,” which could result in positive and negative impacts on the agricultural economy, are the most challenging issues for agricultural producers and lenders to prepare for. 
David Widmar is an agricultural economist specializing in agricultural trends and producer decision-making. He is the co-founder of Agricultural Economic Insights LLC and a researcher in the Center for Commercial Agriculture at Purdue University. Follow David on twitter.
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