Agriculture Remains Better Positioned for FutureMon, 16 May 2016 16:13:42 CDT
There are a few agricultural producers still active who remember the 1980s and the difficult times that persisted throughout much of the decade. For those unfamiliar with the stress many producers experienced during that time, a reflection back provides a comparison and may provide insight into what to expect for the next few years.
Although the 1970s provided wheat farmers and cattle producers with some very high prices, they were hardly noticed because inflation spiraled into double digits. In 1973, the gasoline price doubled from 25 cents per gallon to 50 cents per gallon. Lines formed at gas stations with drivers only being able to purchase fuel based on even or odd days corresponding with the last number of their vehicle tag. Farm inputs rapidly increased with tractors and machinery leading the way. The recipe for success was to buy as much as one could today because it would be worth more tomorrow and could be paid back with cheaper dollars. Many producers started leveraging their balance sheets in an effort to control as many assets as possible. For much of the 1970s, the inflation rate was higher than the interest rate. Inflation finally peaked in 1980 at 14.5 percent; interest rates peaked in 1981 at 17.5 percent. When the 1980s began, the average debt-to-asset ratio of all producers was estimated by the United States Department of Agriculture (USDA) to be above 40 percent. Banks had obligated themselves with interest rates on certificates of deposit above 15 percent. As interest rates stayed elevated and the inflation rate declined to 3.5 percent by the late 1980s, the perfect storm resulted in 357 bank failures in 1985 and more than 300,000 farm bankruptcies in 1989. Winding down double digit inflation was not a pretty sight.
Fast forward roughly 35 years to today when enterprise budgets and cash flow projections offer little to nonexistent profits. Is production agriculture destined for a repeat of the 1980s? Although the next few years will not be easy for many producers, especially compared to last few years of record profits enjoyed by all sectors of agriculture at various times, in general producers are in much better financial condition today. The USDA estimates that at the beginning of 2016, the average debt-to-asset ratio of producers is 13.2 percent, a considerably stronger position than the average producer in 1980 who owed more than 40 percent on their assets. Although the average is 13.2 percent, each producer should know their individual debt-to-asset ratio. The USDA estimates if land values decline by 18 percent, the average producer's debt-to-asset ratio would only increase to 16.1 percent. Interest rates are also much lower today than at the beginning of the 1980s. Today, the federal funds rate is less than .5 percent compared to 17.5 percent in 1981. Inflation today is 2 percent or less, much lower than the 14.5 percent that prevailed in 1980. Banks are in much stronger shape today with interest rates on certificates of deposits at 2 to 3 percent or less, with interest rates on most savings accounts well below .5 percent.
However, there are some strong head winds ahead for production agriculture. Today, many agricultural sectors depend on exports. Many of the countries that are destinations for America's agricultural products are experiencing slow growth, which translates to lower demand. In addition, with many of the world's major economies struggling, they look to the U.S. for investment. This, in part, creates a stronger U.S. dollar making its agricultural products more expensive. Many of the major U.S.-produced grains and oil seeds currently have large inventories in storage. The U.S. beef herd is expanding at a rapid rate. Production of milk and other meat proteins are also increasing. Not many enterprises project a profit given current commodity prices.
Although the future may appear dismal, the agriculture industry is much better positioned to weather the next few years compared to in the 1980s because of producers' financial conditions, lower prices for selected inputs and lower inflation. For those who have particularly strong financial positions, it may be the best time for expansion they have had in several years.
Source - Dan Childs, Samuel Roberts Noble Foundation
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