Farm Credit Administration 1 8/1/2017

Economics Report

Farm Credit Administration 

Office of Regulatory Policy 

Agricultural and Economic Policy Team

August 1, 2017

Summary

The current downturn in the farm 

economy has some similarities to the 

crisis that occurred in the 1980s. But

there are also important differences. 

These differences make it highly 

unlikely that the current downturn 

will evolve into a crisis of the 

magnitude experienced in the 1980s.

Prior to both periods, commodity 

prices, farm incomes, and farmland 

values boomed in response to a 

sharp increase in the demand for 

farm commodities. The boom periods 

were then followed by substantial 

declines in prices, incomes, and 

farmland values. The adjustments in 

the current downturn have been less 

extreme thus far than in the 1980s.

Several factors suggest a more 

modest correction this time around. 

For one, the interest rate 

environments are vastly different. In 

the 1980s, interest rates were 

extraordinarily high; today rates are 

very low. And oil prices soared in 

1979/80, but they are relatively low 

today. Also, in the 1980s, we had two 

recessions compared to the long, 

slow expansion we are experiencing 

today. Today ethanol absorbs over a 

third of the U.S. corn crop compared 

to a very small amount in the 1980s. 

Finally, farm real estate mortgage 

underwriting has been far more 

conservative during the recent runup in farmland values, providing 

lenders and farmers with more of an 

equity cushion. Risks remain, but the 

System appears to be well positioned 

to face more stress.

Author

Stephen Gabriel, Chief Economist 

(703) 883 - 4056

Why we are not facing another 

1980s-style farm sector crisis

Net farm income in 2017 is forecast by USDA to decline for a fourth 

consecutive year. Global supplies of many grains and oilseeds are 

burdensome, leading to low prices. Farm debt continues to climb while 

Midwestern farmland values continue to decline. These conditions are 

leading many observers to ask whether agriculture is heading for a crisis 

akin to the crisis experienced in the 1980s. 

Although today’s conditions display some similarities to the crisis of the 

1980s, there are also many important differences. See Appendix A. Indeed,

it is possible that financial conditions in the farm economy may deteriorate 

further, but it is unlikely that we will see conditions deteriorate to anything 

remotely resembling the 1980s crisis. 

The Golden 1970s

The crisis was preceded by what might be considered the golden era of the 

1970s. Farm exports surged in the 1970s due to, among other reasons, a 

weak dollar, unexpected demand from the Soviet Union (the Russian wheat 

deal), and a shortage of fishmeal, which is a protein supplement for animal 

feed, due to a poor Peruvian anchovy catch. Grain and soybean prices 

soared as a result. Livestock prices also jumped as production sagged 

because cattle ranchers were retaining heifers to expand their herds and 

hog herds were contracting due to low prices in 1971. As a result, farm 

income surged, reaching a peak in 1973.

Inflation was raging in the 1970s, exceeding 6 percent in most years. The 

inflation rate (based on the CPI for all urban consumers) hit 11 percent in 

1979 and 13 percent in 1980. Consequently, real interest rates were very 

low, even negative at times. During this time investing in farmland was 

considered a good hedge against inflation so farmland values soared. The 

-2

0

2

4

6

8

10

12

14

16

Source: U.S. Bureau of Labor Statistics

Consumer Price Index for All Urban Consumers: All Items, Percent Change from Year Ago, Annual

Figure 1. Inflation exceeded 13 Percent in 1980; it's under

2 percent today
Farm Credit Administration 2 8/1/2017

value of Iowa cropland increased more than 3-fold between 1972 and 1981. Farm debt also swelled as high incomes 

and low real interest rates encouraged borrowing.

A confluence of adverse factors hammered the farm sector in the 1980s

Taming inflation led to soaring 

interest rates

The Federal Reserve, led by Board 

Chairman Paul Volcker, took steps in 1979 

to snuff out the “Great Inflation” that had 

been raging for much of the decade. The 

resulting tight monetary policy caused 

interest rates to climb to historic heights. 

The bank prime rate averaged 19 percent 

in 1981 and exceeded 20 percent on 

several occasions in 1980 and 1981. The 

10-year Treasury bond yield averaged 14 

percent in 1981. These interest rates 

wielded a crushing blow to the many 

farmers who had taken on debt to finance 

farmland purchases and other expenses. 

Real interest rates were also record high 

during the early to mid-1980s, making 

borrowing unattractive.

Today interest rates are at historically low levels. In response to the Great Recession of 2008 and 2009, the Federal 

Reserve implemented a very accommodative monetary policy with the goal of reducing both short- and long-term 

interest rates. Though interest rates are now on the rise, their increases are expected to be measured. These low 

interest rates have been very supportive of the farm economy, helping to prevent farmland values from falling too 

quickly and keeping interest expenses in check.

Oil prices spiked in 1979 and 1980

The price of oil increased 167 percent from 

1978 to 1980. The principal cause of the 

rise in oil prices was political turmoil in 

Iran, which ultimately led to the revolution 

that overthrew the Shah of Iran in 1979. 

The beginning of the war between Iran and 

Iraq in 1980 was another contributing 

factor. High oil prices provided substantial 

headwinds for the U.S. economy during the 

early 1980s. They also led to higher 

production expenses for farmers by driving 

up fuel and fertilizer prices.

Today oil prices have been falling because 

of a glut of global supply and the 

successful use of advanced hydraulic 

fracturing and horizontal drilling in the United States. Since 2013 the price of oil has come down over 50 percent. In 

fact, after adjusting for inflation, the price of oil is lower today than in the early 1980s.

0

2

4

6

8

10

12

14

16

18

20

10-Year Treasury Constant Maturity Rate

Bank Prime Loan Rate

Source: Federal Reserve

Percent, Annual

Figure 2. Interest rates were very high in 1981; they are historically 

low now

0

20

40

60

80

100

120

Source: Federal Reserve Bank of St. Louis

Real Spot Crude Oil Price: West Texas Intermediate (WTI), 2009 Dollars per Barrel, Annual

Figure 3. The oil price jumped in 1979/80; the price is 

down sharply today
Farm Credit Administration 3 8/1/2017

Two recessions in the 1980s sapped demand and destroyed jobs

The U.S. economy could not withstand the 

forces that were pitted against it in the 

early 1980s. Tight monetary policy, high 

interest rates, and a spike in oil prices sent

the economy into a recession that lasted 

from January 1980 to July 1980. Then a 

year later, the economy stumbled again, 

entering another recession in July 1981. 

This recession lasted 16 months, ending in

November 1982. The unemployment rate 

peaked at 10.8 percent in November and 

December 1982, the highest unemployment 

rate recorded in the post-World War II 

period.

As the principal engine of global economic 

growth, the U.S. recessions caused growth 

in the rest of the world to falter as well. 

World GDP growth slowed substantially in 

1980, 1981, and 1982. This would have an 

adverse impact on global demand for U.S. agricultural exports.

Today, the U.S. economy is in the third-longest expansion in the post-World War II period. Although the expansion has 

been lackluster, it has been consistent and has contributed to somewhat steady growth for the world economy.

A strengthening dollar in the 1980s 

made U.S. exports less competitive

The U.S. dollar strengthened significantly 

during the 1980s, making U.S. agricultural 

and other exports less attractive to foreign 

buyers. The high real interest rates in the 

United States during the early 1980s 

attracted a large amount of foreign capital, 

boosting the value of the dollar. From 

September 1980 to March 1985 the real 

trade-weighted U.S. dollar index increased 

about 46 percent. 

The dollar also strengthened significantly in 

the more recent period, with the real tradeweighted U.S. dollar index rising 22 percent 

from July 2014 to December 2016. However,

the dollar has been weakening throughout 

the first half of 2017, dropping about 7

percent during that time.

0

20

40

60

80

100

120

140

Real Trade Weighted U.S. Dollar Index: Broad, Index Mar 1973=100, Monthly

Figure 5. Dollar strenthened in the early 1980s; also 

strengthened in recent years

Source: Board of Governors of the Federal Reserve System

-10

-5

0

5

10

15

20

Source: Bureau of Economic Analysis

Real Gross Domestic Product, Percent Change from Preceding Period, Quarterly

Figure 4. U.S. recessions in 1980 and 1981/82; now, we're in the

3rd longest post WWII expansion
Farm Credit Administration 4 8/1/2017

U.S. Agricultural exports were hit hard in the early 1980s

A strengthening dollar, combined with weak 

world economic growth, caused corn, 

soybeans, and wheat exports to drop 

sharply after a decade of considerable 

growth. Also, U.S. price supports were 

above world prices, which reduced export 

competitiveness. Corn exports declined 49 

percent from 1980 to 1985; soybean 

exports fell 36 percent from 1981 to 1984; 

and wheat exports were down 49 percent 

between 1981 and 1985.

Meat exports were also affected by the 

adverse economic environment. Exports of 

broilers fell 43 percent from 1981 to 1984,

while pork exports declined 72 percent from 

1981 to 1986. Beef exports, however, 

continued to rise during this period.

Exports have held up reasonably well in the past few years. Soybean exports have been strong thanks to China’s 

seemingly insatiable demand for the oilseed. Both corn and soybean exports benefited from a drop in production in 

South America in 2016. Wheat exports have been facing pressure from large global supplies and declining U.S. 

production.

Meat exports have performed well in 2016 and 2017. However, disease issues have been occasionally disruptive in 

recent years. In 2013 and 2014 the U.S. hog industry was hit by the porcine epidemic diarrhea virus (PEDv). And the 

turkey and chicken layer sectors were seriously affected by the avian flu in 2015. Even though the broiler sector was 

not affected by the virus, a number of markets were closed to U.S. broiler exports.

Real net cash income declined sharply in the 1970s and remained depressed in the early 1980s

Real net cash income surged in the early seventies, rising 83 percent from 1971 to 1973 and then proceeded to 

decline 52 percent over an eight-year 

period, hitting bottom in 1981. Real net cash 

income remained depressed for the next 

three years, below the 30-year average 

(1980 – 2010).

The late 2000s boom was precipitated by 

two major developments.

The first was the creation of the renewable 

fuel standard (RFS) program, which was 

authorized under the Energy Policy Act of 

2005 and expanded under the Energy 

Independence and Security Act of 2007. As 

a result of this program, the percentage of 

the U.S. corn crop being utilized by the 

ethanol industry for use as a feedstock has 

increased dramatically. And the second 

major development was the rapid growth of 

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Corn Exports Soybean Exports Wheat Exports

Source: USDA, FAS

Thousand Metric Tons

Figure 6. Exports were down sharply from 1981-86; exports are 

doing well in recent years

0

20

40

60

80

100

120

140

160 Real net cash income

1980 - 2010 Average

Source: USDA

Billion 2009 Dollars

Figure 7. Real net cash income sunk below the long-term average 

in the early 1980s; it is currently approaching the long-term average
Farm Credit Administration 5 8/1/2017

soybean exports to China for use as feed as their livestock industry expanded to feed a growing middle class.

Real net cash income peaked in 2012 due to drought-induced record high grain and soybean prices. Crop prices then 

began a four-year slide due to large supplies 

globally and an end to the rapid growth in 

corn use by the ethanol industry due to the 

10 percent “blend wall.”

Real net cash income increased 73 percent 

over three years (2009 to 2012) and 

declined 36 percent over four years (2012 to 

2016). While we can’t predict if real net cash 

income will decline further, it currently 

remains above the thirty-year average 

(1980 – 2010).

Midwest farmland values 

plummeted in the 1980s

Midwest farmland values responded to the 

depressed farm incomes and sky-high 

interest rates by declining dramatically. For 

example, the value of cropland in Iowa fell 61 percent from 1981 to 1987, according to USDA data. Another factor 

contributing to the deteriorating farmland prices was the high incidence of forced farmland sales by highly leveraged 

farmers. The low real interest rates that existed during the run-up in farmland prices in the 1970s encouraged the 

excessive use of financial leverage to acquire farmland. When real interest rates rose and land values began to sink, 

any equity the leveraged farmer had in his or her land disappeared. Many of these farmers were forced to sell their 

land as bankruptcy loomed.

Today, Midwest farmland markets are also in correction mode. However, the current correction appears to be more like 

a soft landing than the crash that occurred 

in the 1980s. The USDA data indicate that 

the value of Iowa cropland peaked in 2014 

and has dropped about 9 percent as of June

2016. Other surveys point to larger declines. 

Nevertheless, the adjustments seem to be 

measured, and nonfarm investors have 

maintained interest in farmland as an 

investment class. Two factors have helped 

farmland to maintain its value. First, the 

current low interest rate environment has 

kept capitalization rates low. Second, 

conservative underwriting has kept loan-tovalue ratios comfortable. Consequently, 

there is little evidence that stress sales have 

had much impact on farmland prices.

Farm debt grew rapidly during the 

1970s

Low real interest rates and high incomes provided incentives for farmers to acquire farmland and other farm assets 

with high levels of debt financing during the 1970s. Indeed, rapidly rising farmland values during that period led to 

 -

 1,000

 2,000

 3,000

 4,000

 5,000

 6,000

 7,000

 8,000

 9,000

 10,000

Value of Iowa Cropland

Value of Iowa Cropland (inflation-adjusted, 2009 $)

Source: USDA, NASS

Dollars/acre

Figure 8. The average price of Iowa cropland dropped 61 percent 

from 1981 to 1987

0

50

100

150

200

250

300

350

400

450

Total Farm sector debt

Real estate Debt

Nonreal estate Debt

Source: USDA, ERS

Billion dollars

Figure 9. Low real interest rates and high incomes led to rapidly 

growing debt in the 1970s
Farm Credit Administration 6 8/1/2017

underwriting that was more collateral based than repayment based. During the 1970s, total farm debt grew at an 

average annual rate of about 12 percent.

Farm debt also grew steadily during the most recent boom period. However, debt grew at a much more subdued rate. 

Between 2005 and 2012, total farm debt grew at an average annual rate of about 5 percent, less than half the rate of 

growth in the 1970s. Also, when adjusted for inflation, total U.S. farm debt at December 31, 2016, was still less than 

it was at its previous peak in 1981.

Measures of the debt burden soared in the early 1980s

The farm sector’s debt-to-asset ratio spiked during the early 1980s, rising from 16.2 percent in 1980 to 22.2 percent 

in 1985, the year the value of total farm sector assets reached its low point. The ratio then declined on trend for the 

next 21 years, reaching 11.3 percent in 2006.

The debt service ratio began rising — from 21 percent in 1973, the peak farm income year, to 33 percent in 1979, and

eventually to 46 percent in 1983. The debt burden was truly crushing in 1983. Interest rates were high, farm debt 

was near its peak, and farm income was depressed. It couldn’t get much worse.

Today, these measures of the debt burden are also deteriorating. And they warrant close monitoring. However, the 

degree of the burden is far less than what was experienced in 1985. USDA’s forecast debt-to-asset ratio for 2017 is 

13.9 percent. It’s likely that the farm sector’s debt-to-asset ratio will continue to rise slowly as asset values continue 

to adjust to the new economic environment. However, slower debt growth and the eventual stabilization of asset 

values will likely result in a debt-to-asset ratio significantly lower than the 1980s peak. 

The debt service ratio is also rising. It has increased from 20 percent in 2012, when net cash income was near its 

peak and interest rates were extremely low, to 28 percent in 2017. However, it isn’t likely to reach the debt service

ratio of 1983. Barring an adverse supply/demand development or an international trade debacle that pushes U.S. 

commodity prices to very low levels, farm income is not likely to fall much further. Stabilized farm income, combined 

with slowly rising interest rates and slower debt growth, should keep the debt service ratio in check.

Today’s farm safety net is broader but not as deep as in the 1980s 

Another comparison between the farm crisis of the 1980s and the current situation is the farm safety net’s ability to 

mitigate farm-level stress and its effect on agriculture more generally. Today’s farm programs and enhanced crop 

insurance cover more acreage and commodities, but price protection afforded to farm program crops is generally less 

Figure 10. Measures of the debt burden soared in the early 1980s

16.2%

22.2%

11.3%

13.9%

0%

5%

10%

15%

20%

25%

Debt-to-Asset Ratio

Source: USDA, ERS

21%

33%

46%

20%

28%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

(Interest + Principal)/Value of Production

Source: USDA, ERS

Debt Service Ratio
Farm Credit Administration 7 8/1/2017

than it was in the 1980s. This policy shift has created a crop sector that is arguably more competitive and resilient, 

although producers with high costs or debt remain at risk.

Conditions could deteriorate further

The farm economy could experience further deterioration without reliving the 1980s. Indeed, there are plenty of risks 

that bear watching. 

Continued low grain and soybean prices could weigh on the grain/soybean segment of the farm economy. Eroding 

working capital and reduced borrowing capacity could adversely affect farmers’ liquidity and financial resiliency, 

resulting in credit quality problems and the possibility of more forced sales of assets. Farmers who are unable or 

unwilling to make the operational adjustments necessary to shore up their cash flows may be forced to liquidate.

U.S. agriculture is heavily dependent on export markets. Exports account for anywhere from 20 percent to 70 percent 

of production for many commodities. A trade war or international hostilities that disrupt the flow of agricultural 

products to export markets would have serious adverse consequences for American agriculture and farm incomes.

The United States is in the midst of the third-longest post-World War II economic expansion. Sooner or later, we will 

experience another recession. Because the United States is the largest economy in the world, a recession here usually 

affects the growth of the global economy. This poses a risk for global demand for U.S. agricultural exports. A serious 

global economic downturn could lead to reduced exports and lower commodity prices and farm incomes. A U.S. 

recession would also likely lead to higher unemployment rates, making it more difficult for farm families to find offfarm sources of employment.

U.S. interest rates are at very low levels, but they are rising. If interest rates increase faster and climb higher than 

expected, they could have an adverse effect on exchange rates, farmland capitalization rates, interest costs, economic 

growth, and ultimately farm incomes.

The Farm Credit System is well positioned to deal with more stress in its portfolio

If economic conditions in the farm economy 

worsen, the Farm Credit System would 

experience some difficulties, but it would

enter this period of adversity from a position 

of strength. 

Generally, the System’s real estate 

mortgage underwriting during the recent 

run-up in farmland prices was conservative. 

Institutions implemented lending caps and 

other measures to ensure that enough cash 

was provided up front to result in 

comfortable loan-to-value ratios. 

Although the System’s credit quality is 

expected to deteriorate over the next 

several quarters because of the current 

stress in the grain sector, it is currently very 

good. For example, nonaccrual loans as a 

percentage of total loans was just 0.64 percent at year-end 2016, up from 0.56 percent a year earlier. This compares 

with 2 percent in 2009 at the end of the Great Recession and 12 percent in 1986, reflecting the fallout from the 1980s 

crisis.

The Farm Credit System is in a much stronger capital position, both in terms of quantity and quality. At year-end 2016 

the System’s capital-to-total-assets ratio stood at 16.4 percent. This compares with just 7.2 percent in 1990 and 10.5 

12.13%

2.04%

0.56%

0.64%

0%

2%

4%

6%

8%

10%

12%

14%

Source: FCS Annual Information Statements

Nonaccrual Loans as a % of total loans outstanding, December 31

Figure 11. Farm Credit System nonaccruals are at very low levels
Farm Credit Administration 8 8/1/2017

percent in 1985. Earned surplus, which is the highest quality capital, accounted for only about 26 percent of total 

capital in 1986, whereas it accounts for more than 82 percent today.

The System and other lenders have far more sophisticated risk management systems in place today. Widespread use 

of the Internet and advanced communications and data management systems enable today’s lenders to monitor credit 

risk and other developments more effectively.

Finally, in the wake of the 1980s crisis, Congress improved the System’s safety and soundness by making the Farm 

Credit Administration an arm’s length regulator with specific enforcement authorities. The stronger oversight protects 

the System from practices that could jeopardize its ability to fulfill its mission. The result ultimately is a stronger and 

safer farm economy.

Conclusion

The likelihood of the current economic downturn evolving into a 1980s-style crisis is very low because of numerous 

differences in the economic environment and various institutional factors.

Conditions in agriculture could get worse than they are today, and there are numerous risks that warrant monitoring.

However, the Farm Credit System is well positioned to handle additional stress.

Similarities Differences

Then Now

● Preceded by a demand shock ● Interest rates Very high Very low, but rising

● Prices and Incomes rose sharply ● Inflation Very high Very low

● Value of the dollar strengthened ● Oil prices Surged Declining

● Farmland values rose rapidly ● Recessions Two recessions Long, slow expansion

● Strong growth in farm debt ● Exports Declined Holding up

● Prices and incomes declined sharply ● Demand from biofuels Low demand Substantial demand

● Farmland values declined ● Farmland values Declined sharply Controlled correction

● Farm programs support farm income ● Crop insurance Limited use Widespread use

● Farm Safety Net Narrower/Deeper Broader/Shallower

● Farm program payments' Larger share Smaller share

 share of farm revenue

● Underwriting Collateral lending Conservative 

● FCS regulator Not arm's length Arm's length

Appendix A. Today's situation is similar to the 1980s, but there are important differences