A four-day visit to the American Bankers Association’s Agricultural Bankers Conference was a regenerator of mind, body, and spirit. Over 375 bankers and professionals attended the four-day conference in Cincinnati, Ohio, with a lineup of outstanding speakers. This was my 44th consecutive year spanning six decades of speaking at and attending this conference. A major question asked of the speakers was, “Are there any similarities in today's agriculture economy to the 1970s and 1980s, and will we experience a sequel?” Let's examine some of the major variables from both time periods.
Similar to today's economic environment, international markets were an influencing role. There is an old saying that communist countries create economic bubbles. In the 1970s the communist country causing economic issues was the Soviet Union. In recent years, the driver has been China.
Next, inflation is a commonality of both periods. Inflation rates were much higher in the 1970s, which led the Federal Reserve, under Paul Volcker, to increase interest rates to cool inflationary pressures. In recent months, the inflation genie is out of the bottle impacting all economic sectors. Central banks around the world will be walking a tightrope to balance interest rate increases without stalling economic growth. Interest rate increases, even if they are only slight, will feel abrupt because interest rates have been so low and stable for an extended period of time. Even with small increases in interest rates, inflation in agricultural inputs can quickly result in margin compression, similar to previous eras.
Energy cost increases are also common ground of both eras. OPEC, Russia, and other countries are players in energy cost increases and played pivotal roles in both time periods. In the 1970s and 1980s, regional wars resulted in shortages, which contrasts sharply to the green movement which has quickly limited investment in fossil fuels. This sector needs to be closely watched as economic behavior, both in the agriculture sector and the general economy, could quickly create negative economic implications.
Farmland values are the wildcard. Both periods resulted in rapid appreciation far exceeding capitalized rates of return. The difference is demographics. The baby boomer farmers are in a different economic and business life cycle than they were in the 1970s and 1980s. At that time, they were taking over farms and ranches from the Great Depression Era and it resulted in highly leveraged operations with little financial cushion. Fast-forward five decades and this same group of producers is well established with plentiful equity and cash flow, which can buffer a decline in land values.
The bottom line is that this era is probably not a sequel. However, it could be characterized as one with economic challenges by geopolitical forces and bigger farms with razor thin margins which could lead to economic adversity, if not well-managed.
Source: Dr. David Kohl, which is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset.
*** David Kohl will be speaking at the Farm Futures Business Summit about grain marketing. The event is set for Jan. 20-21 in Coralville, Iowa. ***