This post is the 4th in a series that contrasts and compares the farm prosperity of the 1970s with the current period of farm prosperity. This post examines U.S. farm expenses during the two periods. The previous 3 posts are available here, here, and here.
This article uses 3 variables: (1) U.S. cash farm production expenses by input category for the calendar year - includes farm origin and manufactured inputs, as well as interest, labor, property taxes, and land rent; (2) U.S. Gross Domestic Product (GDP) price deflator, and (3) acres of principal U.S. crops -includes almost all U.S. crop acres except acres in fruits, vegetables, and tree nuts.. Economists commonly use the GDP price deflator as a broad measure of price inflation in a nation's economy. The GDP deflator is obtained from the Federal Reserve Bank of St. Louis. Rest of the data are from the U.S. Department of Agriculture (USDA), Economic Research Service and USDA, National Agricultural Statistics Service.
To facilitate comparison of the two periods, some of the measures are indexed, also called benchmarked, to a 5-year period that immediately predates the start of the period of prosperity. The benchmark periods are 1968-1972 for the 1970 period of farm prosperity and 2001-2005 for the current period of farm prosperity. Five year benchmark periods are used to dampen the variability that can exist if a single year is used as a benchmark.
The latest calendar year for which information on farm expenses by input type is available is 2011, the 6th year after 2005. The comparable year for the 1970 period is 1978, the 6th year after 1972. There is no definitive way to decide when to start the period of prosperity or what period to use as a benchmark, but these choices are reasonable. As more data become available for the current period, the analysis period can be extended, but 6 years is long enough for an initial comparison.
Cash Farm Production Expenses
The previous post in this series (available here) found that farm debt, especially non-real estate debt, had increased more during the 1970 period of prosperity than during the current period of farm prosperity. Furthermore, interest rates increased during the 1970s in response to increasing inflation. In contrast, interest rates have declined during the current period of farm prosperity. These observations imply that interest expense should have increased more during the 1970 period of prosperity.
As Figure 1 illustrates, deflated interest expense was 87% higher in 1978 than during the 1968-1972 benchmark period. In, contrast, deflated interest expense was 7% lower in 2011 than during the 2001-2005 benchmark period. These different paths for interest expense is one reason that deflated net cash farm income declined during the 1970 period of farm prosperity after an initial spike higher but has increased steadily during the current period of farm prosperity.