Are we headed for another farm debt crisis like the 1980s? This AP article discusses the similarities between the current ag economy and the late 1970s/early 1980s. In brief, crop prices are at record highs, leading to increased land prices and higher input costs. This has led to increased debt as farmers finance more costly inputs and more valuable inventories, or try to expand. If crop prices fall, many farmers will be bankrupt.
The farm economy is presently booming (in contrast to the overall economy). What could cause the farm economy to weaken? Last time it was changes in government policies, including the Soviet grain embargo following the Soviet invasion of Afghanistan in late 1979 (President Carter) and the restraint of rampant inflation in the early 1980s (President Reagan).
This time, many people are worried about ethanol. U.S. government policy has strongly favored ethanol production, and this has been a factor in the present high crop prices. Could ethanol fall out of favor?
There are two reasons to be concerned that it could. First, the high crop prices have driven up food prices around the world, causing food riots in at least 14 countries. Last October a UN official (granted, a controversial UN official) called the production of biofuels from food crops a "crime against humanity" because of the effect on food prices and world hunger. The second reason to be concerned is that the supposed carbon benefit of ethanol has been questioned. Recent studies have suggested that ethanol increases greenhouse gas emissions, rather than reducing them as generally believed.
Another factor I wonder about is China. The increasing wealth of many developing countries, especially China, has driven up world wide demand for food, causing higher prices. I have no doubt that long term this trend will continue. But that doesn't mean there can't be short term interruptions. China is presently preoccupied with the 2008 Summer Olympics. It reminds me of when the U.S. was preoccupied with Y2K. Could there be a pause in China's growth after the Olympics, like there was a recession in the U.S. after Y2K? If so, that could have a significant effect on world wide food demand and prices for a time.
Finally, it is well to remember that markets and prices change over time, sometimes dramatically, not only because of external factors, but also sometimes because of their own internal dynamics. High prices breed strong emotions. Fear and greed can lead to hoarding and speculation, which can lead to price bubbles and collapses without any external cause. There may be some of that going on now, too.
UPDATE 7/01/08: Unfortunately the link to the original AP article above no longer works. I cannot find that article anywhere on the Internet. It was a good article, too. Google News maintains a tremendous archive of news articles, back to the 1920s, so the loss of this link seems odd. But it may be because AP has recently been making waves about people linking to and quoting their articles. That's another issue, for someone else. More info here if you are interested.
UPDATE 7/02/08: Jeff Thredgold, an economist, posted interesting comments today in his weekly newsletter the "Tea Leaf" about price bubbles. He doesn't specifically mention food prices, but he writes about commodity prices (especially oil) and commodities would include food, too. Some readers of this blog may recall hearing Jeff Thredgold speak at various Farm Credit conferences.
