June 1, 2023
People of my vintage have repeatedly asked whether a 1980s type of farm crisis is in the cards. My response has been that there is a low probability because of several primary reasons.
First, the demographics of farm and ranch owners are different with a high percentage of land being debt free.
Second, paper wealth gains in land and other assets have created a financial buffer.
Finally, both agricultural lenders and producers have been more astute in financial and business management practices.
Now, that is the positive. What events converging could create a mini crisis beyond a specific geographic location or enterprise?
In recent years, government payments and paper wealth gains have resulted in a sense of complacency. Often these two variables cover up business mistakes that get exposed in a downturn.
Problems can manifest themselves overnight, placing both the producer and lender on an emotional roller coaster in business decision-making. Complacency definitely exists!
The next condition is emerging rapidly. Lenders are in a credit tightening cycle for all businesses across the board. They are doing this to stay ahead of regulators and to ensure institutional soundness to owners, the board of directors, employees, and stockholders.
Issues concerning this will show up in the ability to obtain financial liquidity such as operating monies to execute operational plans. This occurred very quickly in the 1980s with the pullback of credit for operating needs, resulting in the sale of assets for financial liquidity.
The economic conditions are right for the economic flipper, which happens when prices suddenly drop with inflated costs and high interest rates resulting in low or negative margins. The question becomes, what is the duration and the intensity of the economic flip? The farm crisis during the 1980s had multiple years of an economic flip which was both a financial and emotional toll on the agriculture industry.
Appetite for farm assets
Going forward, what will be the demand for land? Higher interest rates have reduced the “TINA” effect on land values. TINA is an acronym for “there is no alternative.” Investments in land now have competition with certificates of deposit (CDs), treasuries, and people's attitudes on returns, particularly with a possible recession in the economic environment. This could result in creating an imbalance in supply and demand for these assets, leveling off the inflation rate, or possibly seeing a decrease in land values.
The macroeconomic view is always lurking to sway the bottom-line balance. Weather, trade, geopolitics, and consumer and social shifts can quickly change the economic landscape, similar to the early and mid-1980s. The key here is to determine how to manage your business and align to minimize the negative impact.
While many readers may think that “Dr. Doom and Gloom” wrote this article, the point is to provide the conditions that may manifest into a mini-1980s.
However, with an opportunistic view these conditions could be a false alarm!
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