Floods of memories from the ag depression of the 1980s
The recent death of former Fed Chairman Paul Volcker brought back a flood of memories from the ag depression of the 1980s.
It was life changing to have lived through something like that. I started farming in 1973 when we were in the throes of an inflation cycle. Prices were rising and asset values were climbing in an ever-faster velocity of money.
Farmland became seen as a haven of protection from inflation. Cash was devaluing relative to assets so debt was making money or at the least, gave the illusion of profitability. Credit was easy and if you bought something today, chances are that it not only did not depreciate, but the next time you valued assets for the balance sheet it may have increased in value.
Debt was used to leverage control of inflating assets. It started slow and then over time picked up in velocity. Farmer’s net worth rose as the values of things on their asset side of their balance sheet inflated. It got so overdone that farmers would order new tractors whether they needed them or not. There was a waiting list of orders for new tractors at dealerships and farmers would add their names to the list because if they did need one, otherwise they may not be able to get it. It took months for the tractor to come in. The price of tractors would increase while the farmer waited so when he took delivery, he paid the order price, so technically buying the tractor months before “made him money”. That helped sales too.
Farmers bought into the inflation mode adding debt, bidding up farmland and riding the wave of inflation. Net worth’s would rise, not so much on the basis of operational profitability but from pure asset appreciation. As noted, credit was easy. The Land Bank, as they were called then, now called the Farm Credit System, borrowed up to 90 percent of appraised value on farmland and frankly the appraisal was so good that it may have been 100 percemt.
No one was worried because farmland values were only going up. Farmers would leverage equity from appreciating assets to justify more debt to acquire more assets expecting them to appreciate too. It became a classic bubble. That was before we knew what a credit bubble was. Since then we have gotten to see a tech bubble and sub-prime housing bubble and we are working on one today with a bubble in federal debt.
This ag recession is very different from the ag depression of the 1980s because it has a footing in real equity not the phony kind.
The ag sector de-leveraged during the last boom years. They paid off debt. The Farm Credit System and farm banks stuck with tight credit. They set limits on how much of farm values that they would finance both in percentage (55 percent) and in total dollars per acre. Someone paying $10,000/acre for farmland can borrow roughly $5,500/acre so have to have the cash or equity from somewhere else for the balance, giving them a good equity base.
This equity base is what is limiting this ag recession to one of profit starvation rather than an asset deflation.
Farmland prices peaked here in 1980 at $4,000/acre. One farm in mind was sold on contract. When the inflation cycle imploded, the farm was given up. Farmers rushed to put assets on the market to escape debt which had become crushing at a peak of 21 percent interest. Nothing financed with 21 percent interest was profitable so farms that had been purchased to take advantage of asset inflation were dumped back on the market as borrowers and lenders sought solvency. A lot of farm banks and their lenders did not escape the collapse.
Farmland values here fell to $800/acre which was an 80 percent devaluation before the dust settled. The asset side of balance sheets collapsed while the debt side was inflated by soaring interest rates. That darn well took care of inflation which was the objective of the Volcker Fed. Each farmer who lived through this has his own personal story of what he experienced. I will save mine for another day but I will say that what was the worst thing to ever happen to me, also turned out to be the best. You must adapt to overcome and that is a lesson for farmers struggling with this ag recession today.
Net worth, equity, is what is buffering the severity of the current ag recession. There is no profit and therefore working capital is drained. Refinancing, restructuring short to long term debt, is being made possible by high equity levels. The 1980’s saw a down spiral of asset values as land and equipment was liquidated adding supply to markets that were crushed under the weight. That has been limited this time, so far. We have seen tractors and farms sell to reduce debt but it is not at any kind of crisis level yet.
There was no good safety net in place at the time of the ag depression of the 1980s. They did not have crop revenue insurance. My take was that the farm financial safety net that was developed was done so to help stabilize the farm banks being threatened by the insolvency of their farm borrowers. Were it not for crop insurance subsidies, ARC payments, MFP payments and other payments now reportedly equaling 42 percent of farm income in 2019, this would be a full-blown ag depression instead of an uncomfortable recession. Most everyone would be in trouble.
2020 is an election year and I expect an ag sector economic recovery.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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