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Today's ag economy: Return of the awful '80s?

Unlike some of his peers, Darryl Simmons survived the 1980s farm crisis. Poor prices and crushing debt drove many producers, even some highly efficient ones, out of business in that difficult decade. "They were tough years," says the semi-retired...

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Troy Becker, Forum News Service

Unlike some of his peers, Darryl Simmons survived the 1980s farm crisis. Poor prices and crushing debt drove many producers, even some highly efficient ones, out of business in that difficult decade.

"They were tough years," says the semi-retired Garrison, N.D., farmer. Although he endured them, "Thinking back on it, maybe we would have been better off getting out early (before the crisis deepened). But we stuck with it, hoping things would get better. And eventually they did. But there were several do-or-die years that were really rough."

Though Simmons no longer farms, he still has close ties to ag, in part through a seasonable job spreading fertilizer for an agronomy company. So, like others in ag, he's heard the talk that the slumping farm economy might be headed for another '80s-style meltdown.

His assessment: "Some things are the same now. But some things are different, too."

The differences outweigh the similarities and make a full-blown repeat of the '80s unlikely, say farmers, bankers, economists and others.

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The big difference is interest rates. Onerous and crushingly high in the 1980s, they're relatively mild now. Farmers and others involved in ag invariably cite lower interest rates as the primary protection against a full-fledged return of the '80s

"There's some kind of rough ride ahead," says Joseph Janzen, a professor of agricultural economics at Montana State University. "But with the low interest rates, maybe we can smooth it out a little more than we would be able to otherwise."

There will be casualties, primarily producers without particularly good financial management skills, however, an ag banker says.

"We have very strong production managers almost across the board," says Nate Franzen, president of the agribusiness division of First Dakota National Bank in Yankton, S.D. "But I still see some weaknesses in financial management."

Whatever the future brings, current economic conditions share worrisome similarities with the '80s. The most prominent things in common:

• Crop prices and farm profits soared, then slumped.

• Land values rose sharply before falling.

• Farm debt and expenses have risen.

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But there are differences, too, in addition to today's lower interest rates. They include:

• Farmers overall are better financial managers.

• Ag bankers are more prudent.

• Technology is much better.

• Farm solvency, though lower than a few years ago, remains high by historical standards.

• The recent ag boom lasted long enough to allow many farmers to build a financial cushion - something that happened to a much smaller extent in the brief 1970s ag boom that preceded the '80s bust.

"Things aren't as desperate now as they were in the 1980s," says Nicholas Sinner, president and CEO of the the Minnesota-South Dakota Equipment Dealers Association. "The interest rates are lower, and fortunately, the farmers had a chance to have some successful years (during the recent ag boom). Some money was put away and some debt was paid down."

Ag equipment dealers face challenges today, but "they can see what they need to do. And they're doing their best to get to that position,' Sinner says.

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Though farmers' wealth rose in the 1970s, their new wealth "was based on inflation (rampant in the 1970s), not on earnings. They didn't have a lot of working capital" with which to ride out tough times in the 1980s, Franzen says.

In contrast, the recent ag boom provided substantial profits, Franzen says.

"Farmers who did a good job of managing their money and being prudent about their purchases through the good years really are positioned well to survive through the storm," he says.

Short history of the 80s

Grain prices soared briefly in the early 1970s. Wheat, for example, shot from an average of about $1.75 per bushel in 1972 to nearly $4 per bushel the following year. Farmers' profits and net worth skyrocketed, too.

Farmers were pleased, some even ecstatic, and many decided to expand. Top voices in agriculture claimed that a new era had arrived and encouraged producers to get bigger. Most famously, Agriculture Secretary Earl Butz advised producers to plant "fence row to fence row.

Many farmers bought land at increasingly expensive prices, as well as large and expensive equipment to handle the extra acres. Bankers were willing, even eager, to lend more money at double-digit interest rates.

Competition for land pushed up land prices even more, and bankers continued to lend money to finance the purchases. From the bankers' perspective, the higher-priced land provided more security for additional credit.

By 1984, U.S. farm debt hit $215 billion, double what it had been in 1978.

But loans with high interest rates could be repaid only if commodity prices and land values remained strong By the early 1980s, commodity prices were falling, in part because a stronger U.S. dollar weakened grain exports. As prices and profitability declined, many farmers couldn't generate enough income to pay their debts and went broke. The bankruptcies led to forced land sales and put even more downward pressure on land prices. Declining land values, in turn, left farmers with less security for their loans, further weakening their financial position.

Conditions were so bad that more than 3 percent of the 2.4 million U.S. farmers quit each year during the 1980s recession, according to an estimate by Iowa State University economics professor Neil Harl, an expert on the period.

The way it is now

Grain prices and farm profitability shot higher in 2008 and remained strong until 2013. Land prices and rental rates rose, too.

Now, commodity prices have fallen again and show no signs of rallying anytime soon. Nationwide, 2016 farm receipts are projected to decline 7.8 percent this year, says the U.S. Department of Agriculture's Economic Research Service.

As farmers take in less money, their ability to repay debt is weakened. Farm solvency, as measured by debt-to-asset and debt-to-equity ratios, will fall this year for the fourth straight year, the Economic Research Service predicts.

In another repeat of the 1980s, land prices and rental rates have begun to fall, though it's too early to say how far and how fast.

Another difference in then and now: In the 1980s, most land purchases were financed with loans carrying high interest rates. Farmers who bought land in the recent ag boom generally used a combination of cash and loans.

Interest rate primer

Here's an example of how interest rates affect farmers:

The so-called prime rate, a widely followed rate determined by the rates charged by 30 big banks across the country, stands at 3.5 percent today. In 1981, it hit a record 18.87 percent. For a farmer who borrows $100,000 to be repaid over 20 years; that means:

• A monthly payment of $1,620.99 at 19 percent.

• A monthly payment of $579.96 at 3.5 percent.

That's a savings of more than $1,000 every month for 20 years.

Simmons, the retired North Dakota farmer, says he distinctly remembers one loan on which he paid 18 percent. "It's pretty hard when interest rates get that high," he says

Like others involved in ag, he notes that farms generally need much bigger operating loans today and that modern farm equipment is far more expensive, which increases borrowing costs even at modest interest rates.

Keep higher operating loans and equipment costs in perspective, however, Janzen says.

"Yes, farms are bigger and have more debt," Janzen says. "But we need to think about it (debt) relative to the value of their assets," which also is much higher.

Even with the declines in recent years, farm solvency remains far stronger than it was in the 1980s, the Economic Research Service says.

Other differences

Ag officials generally agree that, though it's impossible to quantify, farmers overall today are better financial managers then they were in the '80s.

One reason is that today's bigger farms usually have more employees, which can allow employees of an individual farm to focus on a particular area such as marketing or accounting. That greater specialization can lead to better financial management, says Janzen, who notes that bigger farms sometimes enlist the services of off-farm financial professionals, as well.

It's also true that ag bankers overall are better at their job than they were in the 1980s, Franzen says.

"Ag lenders were not sophisticated enough (in the 1980s). They didn't do a good enough of gathering information and staying on top of things," he says.

Ag lenders now realize the importance of cashflow, something that didn't receive enough attention in the 1980s, he says.

Today's improved technology is another difference, one that gives farmers today an advantage over their 1980s counterparts, says Aaron Krauter, director of the North Dakota Farm Service Agency.

Better tillage practices, which help to mitigate limited rainfall, are among the tools that modern farmers can utilize, he says.

Krauter has personal experience with the 1980s ag bust. In 1987 he left a good job - corporate operations manager for Best Products in Richmond, Va., directing operations analysts in 220 retail stores nationwide - to return to the family farm in Regent, N.D.

Krauter recalls a mixed reaction from coworkers: some said they wished they could do the same, while others thought he was making a major mistake.

Changes ahead

Farmers who weren't prudent financially through the boom years aren't necessarily doomed, Franzen says.

"They can still work their way through it (with) heightened attention to details," he says.

He encourages all farmers to look closely at their operating budget - monthly, not just once a year.

Family living expenses might be another area in which ag producers need to make changes. Franzen says.

Many, if not most, farm families spent more on themselves during the boom years, and that spending will need to come down, he and others say.

That's easier said than done. "Once you get used to a certain standard of living, it's hard to go back. Some families will struggle with it," Franzen says.

He stresses that "ag still has a lot of opportunities, a lot of great potential. We realize cycles come and go. It's really important that producers manage hard" through current difficulties to remain in business unless better times return.

Difficult economic conditions could be an opportunity for some producers, particularly ones who were prudent during the good years, many in ag say.

The thinking is, some aggressive operators who borrowed money to buy land at high prices, are under pressure from lenders to reduce debt. So, those operators could sell at least some of that land at lower prices to prudent farmers who declined to buy it earlier at higher prices.

The struggling ag economy, not matter how bad it gets, won't receive as much public attention as the 1980s bust, says Joe Neaton, a Watertown, Minn., farmer and president of the state National Farmers Organization.

"There just aren't as many farmers as there used to be," he says.

Low interest rates should reduce the pain this time around, but some farmers will suffer nonetheless, he says.

"If something bad happens to somebody else, it's a recession. If it happens to you, it's a depression," Neaton says.

Simmons says uncooperative weather ravaged crops several years in the 1980s, worsening already difficult finances. Inevitably, weather will continue to affect how farmers fare financially, which complicates predictions about what the future holds

"I don't think it will get that bad again," he says. "But we just can't be sure."

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