Lessons learned in 1980s farm crisis help Nebraskans do better in current recession
Jason Henderson
By Lori Potter, The Kearney Hub
Nebraska ag producers who think causes of the current recession sound familiar are right. They have seen it all before.
"We got into this mess because Wall Street didn't understand the farm crisis of the 1980s. They didn't learn those lessons, " said Jason Henderson, vice president and chief economist at the Omaha branch of the Federal Reserve Bank in Kansas City.
In an economic update Thursday at the 22nd-annual Governor's Ag Conference in Kearney, Henderson said conditions leading to the current recession are "eerily similar to the 1970s."
Now as then, debt grew initially because of relatively low interest rates and bankers' willingness to loan large amounts of money on asset value instead of cash flow. The ag economy withered under its debt load in the 1980s, and the housing bubble burst in 2008.
"Debt, use it wisely," Henderson said. "The low interest rates are a huge incentive to leverage up."
He and Gov. Dave Heineman said there is good news for agriculture and Nebraska in general because the state has weathered the recession better than most states.
He and Gov. Dave Heineman said there is good news for agriculture and Nebraska in general because the state has weathered the recession better than most states.
"Agriculture is doing so well that some of you are gonna pay income taxes," Heineman joked. "... That's OK. We can use that money. It certainly would be a good sign of the health of this industry."
Relatively good economic times for Nebraska's No. 1 industry - better for farmers who grew record bushels of corn and soybeans in 2009 than for livestock producers - were critical in softening the recession's blow.
Heineman said Nebraska's 4.7 percent unemployment rate is the second lowest in the nation and compares with a U.S. rate of 9.7 percent. Ten to 15 states are at 12 percent or greater.
When he's asked about Nebraska's economic stability, the governor said he replies, "Out here in Nebraska, we have a lot more common sense than on either coast. Our fundamental financial principle is we don't spend money that we don't have."
Other governors are amazed when he tells them Nebraska's $335 million budget shortfall was handled in a 12-day special session last fall with no new taxes and a unanimous vote in the Legislature. "We have an ability to disagree in an agreeable way ... and we deal with issues head on," Heineman said.
After listing other measures of the state's "fiscal fitness," he said Nebraskans are steady, reliable and dependable. "We're not flashy."
Henderson said there will be an economic rebound only when consumers feel secure enough to spend money - when they go back to eating steaks at restaurants instead of hamburgers at home.
That won't happen overnight.
That won't happen overnight.
Henderson expects a 3 percent increase in the U.S. gross domestic product in 2010. That compares with a common first-year-after-recession rate of 4.5 percent-9 percent.
"It's gonna feel sluggish," he said, and 2010 will resemble a "jobless recovery" last seen in 1999-2001.
The drag of unemployment will make it difficult for U.S. consumers to recover wealth lost in home values, pay rates and long-term investments. "Investors who don't know the rules aren't going to make investments," Henderson said.
The drag of unemployment will make it difficult for U.S. consumers to recover wealth lost in home values, pay rates and long-term investments. "Investors who don't know the rules aren't going to make investments," Henderson said.
The rules are fuzzy because of uncertainties about long-term effects from the private sector leveraging public sector debt, changes in overseas markets and infrastructure needs.
Nebraska continues to do well in export markets, despite being in the middle of the country. Heineman said the state has the fourth-largest ag economy and ranks fifth for exports.
Henderson said the potential to grow Nebraska exports goes beyond world population growth.
He asked his audience to think about how food-buying habits in emerging economies such as China, Brazil and India will change as more people get refrigerators and microwave ovens.
He asked his audience to think about how food-buying habits in emerging economies such as China, Brazil and India will change as more people get refrigerators and microwave ovens.
Getting food products to international markets depends on maintaining and improving railroads, surface roads and waterways leading from Nebraska to U.S. ports. Henderson said Brazil, a major competitor in ag exports, spent the last decade investing in such infrastructure.
Jumps in farm income are demand driven, he said, so anticipating demand is the key to the future.
"I'm never concerned about agriculture's great ability to produce anything. We often produce ourselves out of profits," Henderson said. "... but if we can get by on $4 corn, what can we do when things rebound?"
"I'm never concerned about agriculture's great ability to produce anything. We often produce ourselves out of profits," Henderson said. "... but if we can get by on $4 corn, what can we do when things rebound?"
Risk management is vital, whether it's protecting ag income from natural disasters or bracing for the inflation many economists predict will follow the recession.
"Volatility can kill," Henderson said. "For farmers, it's more critical to control input costs and market price than to plant a straight row."
Despite a recent forecast of another $30 million state revenue shortfall, Heineman believes the Nebraska economy has "bottomed out" and agriculture will be the foundation for recovery.
"When agriculture does well, main street does well," he said. "When main street does well, Nebraska does well."
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