Ag Economy Entering Deja Vu-Light Version of 1980s, Economist Says
OMAHA, Nebraska -- If U.S. farmers haven’t experienced it yet, they might be near the point of tougher negotiations when trying to secure an operating loan.
A former Federal Reserve Bank economist and current head of Purdue University’s Extension forecast a tough farm loan renewal season and a worsening trade and interest rate environment for agriculture at the National Agricultural Bankers Conference in Omaha Tuesday.
High interest rates and trade disruptions shape farm downturns, said Jason Henderson, associate dean and director of Purdue Extension. Although interest rates remain low, they’re headed up. And the U.S. is losing $11 billion in exports of ag products due to ongoing trade disputes with Canada, China, and Mexico, he said.
Henderson sees similarities between today’s struggling farm economy and past farm crisis. The 1920s and 1930s farm bust followed higher interest rates to fight inflation after World War I and the Smoot-Hawley Tariffs of 1930 that triggered a global trade war. The farm credit crisis of the 1980s was fueled by record-high interest rates and Russian trade boycotts.
“I should have titled this presentation ‘Déjà Vu,’” Henderson joked. He expects a tough loan renewal season for some farmers this winter. When he asked lenders in the audience if they foresee difficult loan discussions, a few cautiously raised their hands partway.
“I think there are some opportunities going forward, but they’re going to be in different places than we’ve experienced in the past, and we have to think about different markets,” he said.
“Will the U.S. going forward with these trade disputes…be the supplier of first or last choice? That’s the risk,” he said.
He cited reports of the European Union increasing its efforts to sell to China.
“What will the U.S. do to remain the supplier of first choice going forward?”
Agricultural interests have to get their message about all of this across to others, he said.
“The people who are formulating trade policy in this nation don’t understand agriculture,” he said.
The International Monetary Fund expects U.S. gross domestic product to grow at a rate of 2.5% in 2019, he said, a decline from this year. Trade disputes will trim 0.2% off of that growth.
Henderson doesn’t expect anything like the 18% to 20% interest rates that led to the 1980s crisis. Instead, he sees interest rates rising to 7% or 7.5% over the next two years.
Nor does he expect farmland prices to crash. Rising interest rates may help soften land prices, but Henderson expects farms in the top quartile of profitability to buy out land sold by those with losses. In the 1980s, that didn’t happen until very late in the downturn.
Henderson said he also looks for a return to the 1990s, when some farmers sought higher income by selling value-added products.