Financial Issues Affecting 

 Western Agriculture 



Aiarv/n Duncan 



Assistant Vice President and Economist of the 



Federal Reserve Bank of Kansas City, Missouri 



l\ range of agricultural finance issues are currently 

 of interest botfi to farmers and to public policy mak- 

 ers. The importance of many issues hias been heighit- 

 ened by ttie farm recession Some issues, however, 

 emerge primarily from the changing economic and 

 financial environment in v\/hich farmers now/ operate. 

 Still others are broad issues affecting both urban and 

 rural Americans, but bearing on farm financial 

 well-being This paper addresses the changing eco- 

 nomic environment and identifies agricultural finance 

 issues of major importance to the private and public 

 sectors. 



THE CURRENT ECONOMIC ENVIRONMENT 



Agriculture is currently undergoing a period of con- 

 siderable financial stress. That circumstance will likely 

 continue at least through 1982, the third year in a row 

 of depressed farm income (Chart 1). Some farm 

 product price problems are related to excess supply 

 — as in the case of food and feed grains. But more 

 importantly, the current farm recession has an impor- 

 tant demand side component, as weak economic per- 

 formance, here and abroad, has limited growth in 

 demand for US farm products. 



The nature of the current farm recession is best 

 understood, however, in a broader context than is true 

 for a cyclical downturn. The financial stress evident in 

 US agriculture has its roots in a number of funda- 

 mental changes in the economic environment in which 



farmers operate. 



Farm Programs 



Since the Great Depression, public policy has 

 placed a safety net under farmers. Policy has 

 become more market-oriented over the past two 

 decades But, a more rapid adjustment now appears 

 underway as the safety net across a broad range of 

 programs, from disaster payments for crop producers 

 to related dairy price supports to emergency credit 

 programs, is being reduced. In its place, long-run 

 government policy will place more emphasis on mar- 

 ket development and on the response of farm produc- 

 tion to market incentives. While this may be a prudent 

 direction for policy, in the short run the cutbacks in 

 assistance have occurred before the benefits of the 

 long-run policies are apparent. Thus, farmers who 

 made business decisions premised on continued gov- 

 ernment assistance may find those decisions to be 

 incorrect in light of the new policy environment. 



Price Inflation 



During the past two decades, farmers and 

 nonfarmers alike have come to expect increasing 

 rates of inflation — and until 1981, that expectation 

 was usually validated by price increases. As a result, 

 farm management and growth strategies changed. 

 Increased amounts of debt capital were used by 

 farmers since it could be paid off with ever cheaper 



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