Road Warrior

Back to the Future, Part 3: Interest rates now vs. 1980s

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This is the conclusion of a series comparing the 1980s to today’s economic environment based upon a question from a young agricultural lender and discussion amongst professors at the Southeastern Agricultural Lenders School held recently at Clemson University.

There is no doubt that interest rates are a big variable of difference between the 1980s and the current era. In the 1980s, Paul Volcker, the Federal Reserve chairman, increased interest rates to moderate a high rate of inflation. This created a major recession in the U.S. general economy, while creating depression-like conditions in agriculture and rural America. With a very financially leveraged agriculture industry, the higher rates impacted profits but also reduced the incentive for producers to purchase land. Capital flows also moved out of agriculture to the stock market, which was in a long-term strong bull market trend at the time.

Today, if you are less than 50 years of age, double-digit cost of borrowing and rapid increases in rates are aspects that you read about in the farm papers of long ago, but have never experienced first-hand. It is not only today’s low interest rates, but the fact that there has been little movement in rates over almost a half a decade which is interesting. The accommodative Federal Reserve, attempting to stimulate the general economy, has, in turn, stimulated the agriculture and rural economy, putting it on steroids with extreme appreciation in farmland values and a depressed dollar, which has been very beneficial to agricultural export markets. Yes, interest rates are similar in both eras in the sense that they have impacted finances and the profit margins of agricultural producers. The unknown in this era is how rapidly interest rates will increase and, when they do, how it will impact the farmland markets.

In both eras, government policy along with global economics spurred the behaviors behind the economic growth. Ethanol and biofuels of today are similar to the Russian wheat deal back in the 1980s. Also, in both periods there was discussion about a possible food shortage. Popular press in both eras indicated population growth and possible food shortages would be critical issues. Oil prices are a major factor often overlooked. Gasoline and oil shortages of the 1980s have spurred production of the alternative fuels of today. A point to remember is that a spike in oil prices has been an indicator of every recession since 1969. The fact in this era is that the amount and quality of water could replace oil as the key variable in the U.S. and abroad as we journey further into the 21st Century.

Finally, Mother Nature is the wildcard that is consistent with supply and demand imbalances resulting in cyclical booms and busts. This series of articles has contrasted and compared the 1980s to current times. While each has its differences, each era also has broad similarities. Sound financial management on the farm business and working with a good ag lender and advisors will help to ride out both the cyclical booms and busts.

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Dave Kohl is an ag economist specializing in business management and ag finance. He can be reached at sullylab@vt.edu.

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