Farm Financial Conditions: Is it the 80’s All Over Again?

Ag Economic Insights

By David Widmar and Brent Gloy

One of the most common questions we have been hearing on our speaking trips goes something like this:  “So is this just a replay of the 1970’s farm boom and subsequent bust in the 1980’s?”   While nobody can say for sure, we feel fairly confident in saying that while today’s farm financial conditions clearly have some similarities to the 1980’s it is also quite different in many respects.  That does not mean that this downturn won’t end poorly, just that several of the drivers and factors that led to the previous boom and bust are quite different than those at play today. Continue reading

Inflation: One Big Difference Between Today and the 70’s and 80’s

Inflation

by Brent Gloy

As the farm sector lurches through a painful economic slowdown, many are leery of another farm financial crisis. While a full discussion of the differences and similarities of these periods would require a significant amount of discussion and analysis, we thought that it would be useful to examine one key area in which the current situation differs significantly from the 1970’s farm boom and 1980’s bust. Continue reading

Getting Real with Rates

Interest rates

By Brent Gloy and David Widmar

The overall low interest rates in the U.S. economy have resulted in low farm level interest rates.  Today’s rates are among the lowest seen in many decades.  This has reduced the cost of borrowing funds to operate farms as well as to finance capital investments such as equipment and real estate.

We frequently talk about the nominal level of interest rates but we thought it would be useful to look at the real rate of interest, or the price of credit after subtracting inflation.  It is important to consider the impact of inflation when evaluating interest rates because debt is paid back with dollars impacted by inflation.  For instance, if a farmer were to borrow money at 5% and the rate of inflation were 2%, the real rate earned by a lender (and paid by the farmer) would be 3%.  In other words, the real rate of interest is a measure of the effective cost of borrowing money.  Continue reading