I have seen the farm economy go through three major crises since I started farming in 1968. The first was the drought of the middle 1970ís. This event affected some parts of the country more than others. For those of us in the Western Corn Belt, the years from 1974-1977 were times of very low production. Conservative management was the way to survive.
The middle 1980ís brought the financial crisis caused by high interest rates and declining asset values. Production was good, but prices were too low for income to service debt. Farmers unable to stay current were forced to sell assets at distressed prices.
The present financial squeeze is a cash flow problem. Asset values have held together so far. However, low prices for products and the high cost of inputs is making financial management difficult. Small mistakes in buying and selling have a big influence on profits when margins are thin.
Why do we go through these kinds of situations every so often? Will this kind of financial cycle continue? What can a farmer or agricultural lender do to offset the effects of difficult business conditions?
All businesses experience cycles. In January of 1998, I wrote a column entitled ĒIs it Time to RetireĒ? My theory was that a farmer should always retire after a good year because there are seldom two good years in succession. At that time, I had experienced two consecutive years of very good profits. My conclusion was that I could not retire from farming because I am too old to change jobs and too young to quit working.
The financial stress that is now being experienced by the farming community is more than a normal year to year cycle. Each of the three major crises in my farming career developed over several years based on prior economic conditions.
In the 1970ís, strong export demand coupled with a major drought in the Western Corn Belt caused commodity prices to leap to a plateau that far exceeded anything in history. For farmers who had good crops, the experience was a dream come true. One farmer I know bought a new line of machinery every two years, took two extended vacations every year, and still could not spend all of the money. For those of us with four years of poor yields, inflation in input costs made the squeeze nearly intolerable.
When the government took steps to wring inflation out of the economy in the 1980ís, farmers who had built in high fixed costs were the first victims. Land prices based on the cash flow of the previous decade became a financial drag when interest rates went to double digits and crop prices sank. Farmers in the areas affected by the 1970ís drought did better than those who prospered at that time.
In some cases, farmers spent money on expensive assets that did not increase cash flow. In other cases, they were encouraged borrow based on the inflated value of their land. It took several years of restructuring and the liquidation of assets at deflated values before the financial situation improved in 1988.
It appeared that most people in agriculture learned the hard lessons taught by the tough times of the 1980ís. Profitability returned to production agriculture. Then prices for many of the major commodities reached historic levels and stayed very high for two or more years. After an extended period of very good profits, inefficiencies began to be built into many agricultural businesses.
Profits again were plowed back into land costs. At the same time, the government recognized that there was less need for subsidies. The farm program was completely rewritten. Unfortunately, this all happened just before the fading Asian economy caused a reduction in export demand. Without the tools to reduce production, commodity prices collapsed. Now we are back in a crisis.
While surviving the three events described, I have learned a few things about crisis management. I suggest that the individuals who survive and thrive in these situations are most conservative when conditions are good and least conservative when times are bad. This is a commodity trading rule that applies as well to the rest of farm management. It is also contrary to human nature.
We all have a tendency to think that current conditions will last
forever. If prices are good, we spend what we earn. If prices are bad,
we are depressed and sure than finances will never improve. This
is as true for farm lenders, agribusinesses and politicians as it is for
those who work the land.