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Agriculture's Boom-Bust Cycles: Is This Time Different?

2011; Taylor & Francis; Volume: 96; Issue: 4 Linguagem: Inglês

1532-4168

Jason Henderson, Brent A. Gloy, Michael Boehlje,

Agricultural Economics and Policy

U.S. agriculture is notorious for its boom and bust cycles. During the past 100 years, shifts in U.S. agricultural export activity triggered fluctuations in agricultural profits. Soaring wartime food demand during the 1910s and 1940s boosted U.S. agricultural exports and farm prosperity. A spike in U.S. agricultural exports during the 1970s sparked another surge in U.S. farm incomes. At the same time, low interest rates quickly translated rising incomes into booming farmland values, especially during the 1910s and 1970s when farmers used debt to finance their investments. These golden eras of a booming farm economy, however, quickly faded as economic and financial market conditions changed.Today, U.S. agriculture is in the midst of another farm boom. Farm incomes are swelling due to record high exports and strong biofuels demand. Simultaneously, with historically low interest rates, farmland values have soared to record highs. While current conditions echo the rhythms of the past, farmers have hesitated to accumulate debt in financing new investments, raising the possibility that this time could be different.This article explores the foundations of U.S. agriculture's boombust cycles. Similar to past farm cycles, robust export activity is fueling record high agricultural commodity prices, rising profits, and booming farmland prices. Despite this similarity, one subtle difference remains. To date, farmers appear to have limited the debt and leverage in their farm enterprises. Only time will tell if this is enough for agriculture to break free from the patterns of past boom-bust cycles. Section I compares and contrasts past fluctuations in farm exports, prices, and profits. Section II investigates the relationship between debt, leverage, and farmland values. Section III explores the factors that may shape agriculture's future prosperity.I. AGRICULTURE EXPORT, PRICE, AND PROFIT CYCLESIn the 20th century, agricultural fortunes followed a series of 30 year cycles. During the 1910s and 1940s, U.S. farm prosperity rose as two world wars cut global food production while boosting U.S. food exports. During the 1970s, surging exports triggered record high agricultural commodity prices and farm profits. Today, biofuels production and robust export activity to emerging nations, particularly China, have fueled another rise in agricultural prices and profits.Agriculture's first cycle: 1910s to 1930sWorld War I ushered in U.S. agriculture's first golden era of the 20th century (Paarlberg and Paarlberg). By the late 1910s, robust export demand during the war sent agricultural commodity prices and farm incomes climbing. During the second half of the 1910s, real U.S. exports rose sharply to satisfy wartime demand for food.1 By the end of the war in 1919, U.S. agricultural exports had almost doubled pre-war levels, rising 10 percent per year from 1916 to 1919 (Chart 1). In fact, U.S. exports accounted for almost 20 percent of U.S. food production during the war.2 The sharpest export gains emerged in the livestock sector, which rose fourfold.Rising exports during World War I sparked a sharp increase in agricultural prices and farm profits. With wartime food demand and the war's associated global supply shock straining global food production, agricultural commodity prices jumped to record highs (Chart 1). From 1915 to 1918, prices received by farmers for both crops and livestock doubled. Surging agricultural prices lifted farm revenues as gross farm cash farm income rose more than 70 percent (Chart 2). Despite higher input costs, net farm profits spiked to record highs as the returns to farm operators jumped 60 percent in 1917 and remained elevated through 1919.Farm prosperity, however, was short-lived as global food production rebounded, export demand collapsed, and farm incomes fell. With the conclusion of the war, export demand faded. By 1922, U.S. agricultural exports returned to pre-war levels, slashing agricultural commodity prices by 40 percent from 1919 to 1921. …