THERE is little evidence that the US ag economy is about to nose-dive into a 1980s-style farm crisis, despite an unparalleled collapse in cash grain prices this summer and fall, US experts say.
Despite some superficial similarities between current conditions and those of a quarter-century ago - such as bank failures, high farmland prices and a sharp U-turn in grain markets, which has seen cash corn prices drop almost 50 per cent since June - Purdue University economists Mike Boehlje and Chris Hurt say farmers should not fear a return to the tough times of the 1980s, because the agricultural industry is in a far better financial position now.
"One difference is interest rates are much lower this time," Hurt said, with the prime interest rate at 1 per cent, compared to more than 20 per cent in the 80s.
Once commodity markets fell in the early 1980's recession quickly set in, because too many farmers held too much debt.
"In fact, as we look back at the amount of debt, for every US$100 of assets that farmers had then, they had US$22 of debt. Today, for every US$100 of assets farmers have only US$9 of debt," he added. "High interest rates led to enormous debt servicing. It was very costly, with falling prices of corn, soybeans and wheat."
Another difference between then and now is the way land was purchased.
"In the previous period we looked at, a number of farmland purchases were 100 per cent debt financed, because the lender was willing to take a collateral security interest in property currently owned by the farmer - property that had significantly appreciated in value over the previous 3-5 years," Boehlje said.
"When income and debt servicing problems surfaced, lenders demanded payment or foreclosed on the property, because of borrower defaults and the dramatic downturn in asset values began."
Although farmland prices have also reached new record highs in recent years, there has not been the type of debt-financed investing that helped build the speculative bubble in ag real estate values seen in the late '70s and very early '80s.
"Farmers are financing mostly with their own equity capital," Hurt said.
By Gary Wulf; Dow Jones Newswires
