Monday, October 18, 2010

Farmland Bubble Warning

So Maybe I'm Not Crazy After-all
Because I was Beginning to Wonder

It's hard to be a contrarian sometimes. I was convinced the logic was there to support my case well over a year ago. Global grain stocks were too high to support commodity prices. Farmland's ever increasing prices didn't look sustainable based upon increasing input costs and decreasing commodity prices. Global macroeconomic conditions were decidedly deflationary. Add to the list that every last person wants to own it in their pension fund or outright, which is a warning signal for the end of a bubble's time line.

We've seen Ireland, one of the leading PIIGS, see a drop its farmland prices by close to 50% in the recent past. We are seeing farm loan delinquency rates here in the U.S. at a 17-year high. We are seeing the smaller farmer struggle with higher input costs. We see the consumer unable to support higher food prices at the supermarket. If you've followed my news closely in the past several months, we're even seeing more central and regional bankers issue warnings, as well as a few high level investment analysts.

We have a sector (farming) which is impossible to enter these days based upon exorbitant start-up costs. Is something wrong, when to make a profit, the industrial farmer is told to plant wheat and double-crop beans if his growing season is long enough? When we burn millions of tons of food for our cars to consume? Are we facing a future age of land barons employing serf farm laborers, or can government agricultural policy react to promote vibrant agricultural regions and small communities once again by embracing the smaller farmer while preserving our soils? A farmland price correction would be a necessary, healthy part of that picture.

Now, today, we get a warning from Sheila Bair, FDIC chair, saying that farmland may be the next bubble to break. From Reuters: FDIC chair warns of possible US farmland 'bubble'.

I have written a number of warnings on this subject this past year-and-a-half. To see them, go to the "Farmland Values" tab above, where they are linked. When I did my recent August farmland update thread, I introduced it by saying:
For those "investors" interested in this thread, I continue a cautionary outlook on farmland investing. There are too many contra-indicators historically to warrant a dive into owning farmland as a "sure bet" during this deflationary environment. Any student of the Great Depression knows that it is not a "sure bet". A diversification, yes. If you've got all of your other bases covered.

It's all in the timing.

I have written more on this topic previously so will not go into it further here. See: Agriculture is a Bubble Ready to Pop, and Farmland Investment Still Premature.

Especially these past few weeks with Ben's QE round II, and the recent run-up in farmland prices again, I've felt lonely and unpopular with this bearish farmland outlook. Yesterday, for example, the Omaha World-Herald had this article, Land's Back in the Picture.

Even today, there are too many confusing dynamics at play to predict with any extreme certainty the timing, one being the strength of the frenzied movement itself, to buy farmland. But, at some point down the road we will see austerity measures enter politics here in the U.S. The UK's DEFRA is bracing for a possible 30% cut in agricultural supports in their current budget. That might give a window into some kind of crystal ball here in this country, and perhaps sooner than later.

How much longer will the perceived "safe harbor investment" last and when it finally breaks, how far will it fall? Those are the big questions.