What do we really learn from a crisis?
The 1980's farming bubble taught some hard truths. Did they stick?
Douglas Harford had no crystal ball. He had no special insight into exotic mortgages or the shaky securities that backed them. But from his corn-and-soybean farm in Mazon, Ill., he saw the housing crash coming.
He could see it because, as a young farmer in the 1970s and early ’80s, he had seen firsthand the twin temptation of easy money and soaring real estate prices, the giddy expectation of unrelenting prosperity, and the bust that follows boom. “The best learning experience I had was the 1980s,” says Mr. Harford.
Scarcely remembered in the rest of America, the ’80s farm crisis is seared into the memories of older farmers and rural lenders. It taught hard lessons about prudence, restraint, the dangers of debt, and the importance of sticking to old principles of thrift and caution even when everyone else is profiting by abandoning them. Many in farm country say the crisis of the ’80s has made agriculture stronger today.
In the coffee shops and bankers’ offices, co-ops and equipment dealerships of rural America, many people see in today’s economic troubles a reflection of that crisis a generation ago. They wonder if Americans will learn the lessons that they learned then. But they also know that even lessons painfully learned are easily forgotten. That was another lesson of the ’80s farm crisis. How long, some ask, will the lessons of America’s “great recession” stick around before they, too, begin to fade?
Lesson 1: Everything comes and goes.
Young and ambitious, Harford and his wife borrowed in the mid-1970s to buy 60 acres of farmland, the first ground they had ever owned. A few years later, as land values rose, they sold the 60 and bought 160. They also bought several tractors and other farm machinery to cultivate their expanding acreage. Inflation was so high that equipment bought one year was often worth more the next.
The Harfords had one advantage: They listened when a banker friend warned them to be careful. “He said, ‘Pull up. This is going to end badly,’ ” Harford recalls. And it did. When the Federal Reserve clamped down on the money supply in order to stop high inflation, interest rates soared and land prices plummeted. The Harfords managed to keep their farm and pay their debts, but it wasn’t easy. The land they bought in 1979 cost $3,500 an acre and seemed cheap at the time. Eight years later, similar land in their area cost a third of that – a price plunge as yet unmatched by today’s debacle in residential real estate.
Harford says the ’80s farm crisis taught him to be “more deliberate.” It taught him more rigorous accounting. But more than anything else, it taught him that farming was as much about managing risk as it was coaxing corn and soybeans from the rich prairie soil of Illinois. Even a reckless farmer could do that. “In economics, everything comes and goes,” he says. “The economy looks to me like a roller coaster.”
Lesson 2: Resist temptation.
Even when it’s hard. The farm crisis was set off by its own peculiar set of events: soaring inflation, big increases in interest rates, and the fizzling of an export boom. Moreover, it was limited mainly to farms and farm communities; it barely touched the rest of the country. But many in farm country see uncanny parallels in the present crisis, both with the freewheeling years of the ’70s and the suffering and retrenchment of the ’80s.
For Harford, those parallels helped illuminate, if not predict, the housing bubble and its collapse. “You could see it was coming,” he says. “But you had no idea how long it was going to be.”
One thing in particular farm people say they understood is how easy it is to throw off caution and to imagine that the old rules no longer apply. At farm auctions in the late ’70s, lenders lined up to offer loans on terms that many farmers found hard to resist. “Most farmers had never really borrowed money until then,” Harford says. “And everyone was borrowing money. You can only sit and watch that for so long.”
Alan Tubbs, a banker in Maquoketa, Iowa, says he tried to resist the “inflationary psychology” of the time. His two rural banks lost customers to lenders who were willing to offer terms he considered too risky. “We felt bad at times, but as you look back it was the right thing,” he says. When it was over, there were fewer banks, fewer farms, and fewer farmers.
“That was painful emotionally on both sides,” he recalls. “I think people who went through that vowed they were not going to do that again.”
Lesson 3: Be careful. Be thrifty.
“It just comes back to being fiscally conservative,” says Donna Jeschke, who also farms in Mazon and serves on the Illinois Corn Marketing Board. “Maybe we all don’t have to have everything now. None of us is entitled to everything.”
That lesson is not new, and it can be traced back further than the ’80s farm crisis. Many older farmers have parents or grandparents who endured the Depression and tried to impart its lessons to their children.
“My father was born in 1909,” says Ms. Jeschke. “We had a lot of those Depression discussions. The two things he imparted to us were: You have to work hard and be conservative in your spending; and also, you have to be diversified. He felt it was important not to have all your financial eggs in one basket.”
In the ’70s, many farmers forgot those admonitions. Urged on by experts and public officials and encouraged by the soaring price of grain, they got rid of their livestock and concentrated on corn, soybeans, and wheat. Indeed, the secretary of Agriculture urged them to plant fence row to fence row to supply newly opened export markets.
Convinced that demand would continue to boom, farmers boosted production and bid up land prices to unprecedented heights. When demand fell and crop prices plummeted, farmland values fell like a stone. Many farmers ended up owing more than their farms were worth. Twenty years later, the farm was a house.
Lesson 4: New generations forget.
The recession has largely spared the farm economy. Several years of high crop prices and decades of more cautious borrowing have put most farms on a solid footing. In contrast to the years preceding the ’80s farm crisis, most farmers have low debts. “I think the reason we didn’t get into the same trouble now is that we’ve got people still in business who still remember that,” says Michael Duffy, an economist at Iowa State University in Ames. “It didn’t let us get as much exposed. As a result, we haven’t got hit as hard.”
Nevertheless, farmers haven’t been immune from the economic troubles. Lower demand has meant that the prices for many crops, including corn and soybeans, have sunk far below the record levels of last year. Indeed, the corn that Midwestern farmers are harvesting this fall may have cost them more to grow than it will fetch at the local grain elevator. Livestock and dairy farmers are in much deeper trouble: They’ve been losing money since last year.
“It’s been two generations since we’ve seen anything as difficult as we’re seeing now,” says Shelly Mayer, a dairy farmer in Slinger, Wis., and executive director of the Professional Dairy Producers of Wisconsin. “Our families are struggling.”
Economists don’t expect to see a collapse either in crop prices or land values anytime soon. Still, farmers are increasingly anxious about the financial risk of commodity agriculture. Farms are less diversified than ever and more and more dependent on one or two crops. The cost of land, machinery, fertilizer, and fuel has been rising, and with it the cost of putting in a crop. Profits are higher, but so is the potential for loss.
At the same time, Neil Harl, a retired Iowa state economist with long experience in government and academia, worries that the restraint learned in the ’80s may be disappearing. The high commodity prices of recent years encouraged more aggressive lending and borrowing than he liked.
“I’ve been distressed,” he says. “I was beginning to see in the last five or six or seven years that the lessons learned in the ’80s were not as much remembered as I thought they would be.”
To some who have witnessed both the downturn of a generation ago and the one now unfolding, the most troubling lesson is the seemingly unlimited capacity of humans to forget.
“When you pass a generation or more from those crises,” says Mr. Tubbs. “It almost seems you’re doomed to experience it again.”