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The Market ‘Bubble’ You’ve Never Heard Of
By Nin-Hai Tseng, Writer May 10, 2013 Some economists are worried that farmland prices are nearing bubble territory. How bad can it be if no one’s heard of it? FORTUNE – Following the collapse of U.S. home prices in 2007, analysts and economists have been eager to spot the next big bubble. There’s been talk of a bond bubble . And as U.S. stocks hover near a five-year high , many have wondered if a bubble is in the works. There have also been worries over the market for student loans in which defaults have recently risen. Then there’s apparently a new bubble that few have ever heard about: America’s farmlands. Thanks to higher crop prices, the costs for farmland nationwide have risen rapidly, particularly across the Midwest’s Corn Belt. Demand for corn soared as the use of ethanol in the U.S. and abroad has risen. Because higher prices for crops means farmers could make more on their land, many are using their growing profits to buy more land. Investment firms have caught on — they’re buying too. The Kansas City Federal Reserve said irrigated cropland in its district rose 30% in 2012, while the Chicago Fed reported a 16% increase. And despite the drought in Iowa last year, farmland prices have nearly doubled since 2009 to an average of $8,296 an acre. Prices in Nebraska have also doubled during the same period. Analysts and economists have quietly warned of a bubble in farmland since 2011. The latest comes this week — a group of bankers advising the Federal Reserve warned prices aren’t justified and have entered bubble territory, according to records obtained by Bloomberg of meetings of the Federal Advisory Council. As investors shy away from bond markets and search for bigger returns, members say they’ve opted for farmland. They blame the central bank’s super-low interest rate policies . “Agricultural land prices are veering further from what makes sense,” according to minutes of the Feb. 8 gathering of the Federal Advisory Council. “Members believe the run-up in agriculture land prices is a bubble resulting from persistently low interest rates.” True there’s some bubbly behavior going on, but that doesn’t mean the market for farmlands has entered bubble territory, at least according to Yale University economist Robert Shiller , who first warned of a housing bubble back in 2003. The most obvious sign: Nobody has ever really heard about it. Even if prices went belly up, it likely won’t cause nearly the kind of financial havoc that sub-prime loans did onto the housing market and the nation’s financial system. As Shiller wrote in 2011 in Project Syndicate , an online opinion forum featuring leading economists., the market for farmlands isn’t nearly as big as the housing market or stock market, for that matter. Whereas farmland had a total value of $1.8 trillion in 2010, the U.S. stock market’s value was $16.5 trillion, and the housing market was $16.6 trillion. Plus farmland bubbles are rare, he adds. While prices in the Midwest declined dramatically in the 1980s, Shiller notes that there has only been one farmland bubble in the U.S. during the 20 th century, when there was a fear of overpopulation in the 1970s. True, farmland prices could fall if interest rates rise and if crop prices decline in big ways, making it difficult for farmers to repay loans. But unlike America’s latest housing market bubble, which saw the supply of new homes rise rapidly as investors banked on new mortgages, there is no increase in the supply of farmland. Admittedly it’s hard to say if there is indeed a bubble, and if so, when might it pop. Corn futures have been on a steady decline for the past nine months. Nonetheless, there are plenty of reasons why farmland is still the “bubble” many have never heard of. Continue reading
Farm Belt’s Boom Shows Signs of Slowing
The Wall Street Journal Menu By Mark Peters The rise in prices for agricultural land slowed somewhat to start the year in parts of the U.S. Farm Belt, new reports showed, signaling a boom in land values might be moderating as commodity prices cool and incomes for farmers are expected to weaken. The Kansas City Federal Reserve Bank said in a report Wednesday that prices for nonirrigated farmland in its region rose 3.4% in the first quarter from the fourth quarter of 2012. That was much slower than the 7.7% quarter-to-quarter increase recorded for the same region a year earlier. A separate report from the St. Louis Federal Reserve Bank also released Wednesday showed that land values in parts of the Midwest and Southeast regions fell by an average of 2.3% in the first quarter compared with the previous quarter. Analysts cautioned against making too much of a single quarter. And even with those slower rates, values for nonirrigated farmland in the Kansas City district, which stretches from western Missouri to Wyoming, have soared a total of 19.3% over the past year to record levels, the bank said. More information will come on Thursday in a report expected from the Federal Reserve Bank of Chicago, whose region includes several of the biggest corn-growing states in the upper Midwest. Economists have been watching farmland values closely, with some voicing concern about a possible bubble, as farmers have plowed the money from a record run-up in commodity prices back into the land. A low interest-rate environment has exacerbated the situation, making the rising farmland more attractive for farmers seeking better returns on their money. But signs of a slowdown are emerging. The benchmark corn contract has fallen more than 20% from records set last summer as federal forecasters predict a record corn crop this autumn. Farmers’ costs also are increasing, especially for key goods such as seed and fertilizer, the Kansas City Fed said. On Wednesday, tractor maker Deere & Co. forecast net cash income for U.S. farmers will fall 9.5% to $122.7 billion in 2013. But executives added that farmers should be able to withstand lower incomes because debt levels aren’t rising, even after big investments in land and equipment in recent years. “You see in the U.S. very strong farmer balance sheets, despite what’s been happening with land prices,” said Deputy Financial Officer Marie Ziegler. Nathan Kauffman, an economist with Kansas City Fed, said it will take a few quarters to determine whether the first quarter’s “modest” slowdown marks a fundamental shift in the farmland market or a short-term ebb. Bill Davis, chief credit officer at Farm Credit Services of America, said the agricultural lender saw a flurry of sales at the end of 2012 as farmers sold land ahead of tax increases that took effect this year. And while sales continue in farm states such as Iowa and Nebraska, the surge in prices hasn’t. “We have seen things level off in the first quarter,” he said. Bankers surveyed by for the Kansas City Fed’s latest report said debt levels for farmers generally remain manageable. But they noted that young farmers and those who are expanding operations face rising debt levels. The Fed bank has warned that farmers historically have increasingly turned to debt to continue capital investments even as incomes decline, which can magnify problems in a downturn. –Bob Tita contributed to this article. Continue reading
Farm Bill Gets House Hearing After Senate Panel Approval
By Alan Bjerga – May 15, 2013 The U.S. House Agriculture Committee debated legislation today to reauthorize farm programs, a day after the Senate panel approved a version that will cost $955 billion over 10 years. The House measure, which proposes spending an estimated $940 billion, would cut $40 billion over the next decade by eliminating $20.5 billion from nutrition programs including food stamps , the biggest USDA program, $18.6 billion in farm subsidies and 4.8 billion in environmental programs, the Congressional Budget Office reported. Crop insurance, which is making record payouts after last year’s drought, would rise by $8.9 billion under the House measure. Enlarge image Senate and House committee leaders have said they’ll end a program that pays growers of corn, rice and other major crops regardless of market prices, and use some of the savings to insure revenues in less-profitable years. Photographer: Daniel Acker/Bloomberg “Farmers, ranchers and American taxpayers are counting on us to pass a farm bill,” said House Agriculture Committee Chairman Frank Lucas , an Oklahoma Republican. “This committee will mark up a reform-minded bill that was developed with true bipartisanship.” The House version, like the Senate’s, includes $6.4 billion in mandatory budget cuts known as sequestration that took effect March 1. Crop subsidies benefiting buyers such as Archer-Daniels-Midland Co. (ADM) and food stamps subsidizing purchases at Supervalu Inc. (SVU) are targets for lawmakers seeking to trim the deficit. Senate Action The full Senate will take up its version of the bill next week, said Senator Debbie Stabenow , the Michigan Democrat who heads that chamber’s committee. Lawmakers are seeking to pass a bill after failing to renew farm policy last year. The Senate passed legislation last year by a vote of 64-35 that included the first major reductions in farm aid since 1996. The measure died in the House, where Republican leaders wanted deeper cuts to food stamps. The current law, passed in 2008, was extended until Sept. 30. House Majority Leader Eric Cantor , Virginia Republican, said he plans floor action by August, giving both parties time to negotiate a final package before current law expires. The House committee today rejected an attempt to limit a revamp of dairy policies that would re-introduce supply management into the boom-and-bust milk market. Dairy Plan The Dairy Security Act, part of the committee’s draft, would subsidize insurance policies for producers to ease tight profit margins created by low milk prices and high feed costs. In return, farmers would agree to cut milk production once prices fall below a set limit. A producer in the program who ignored the agreement would receive less in government payments. Money saved would then be used to buy dairy products for distribution to the poor — another way to lower inventories. Small dairy producers say subsidies are needed to stabilize their boom-and-bust business. Groups representing companies including Dean Foods Co. (DF) say the market distortions would harm trade and consumers. Representative Robert Goodlatte, a Virginia Republican and former chairman of the committee, offered an amendment stripping the supply-management provisions from the bill. The proposed dairy language would “penalize both consumers and dairy producers who want to expand their operations,” Goodlatte said. Representative Collin Peterson of Minnesota, the committee’s top Democrat who crafted the program, said his proposal was a realistic way to deal with price swings. ‘Worst Interest’ “We’ve got to understand that we have to deal with milk, and if we have an oversupply, what do we do?” he asked. “Volatility is in the worst interest of the dairy producer.” The amendment failed 20-26. Both Senate and House committees plan to end a program that pays growers of corn, rice and other major crops regardless of market prices, and use some of the savings to insure revenues in less-profitable years. The House and Senate proposals would each also expand crop insurance and introduce some form of “shallow loss” protection for farmers with revenue reductions not covered by indemnities. Government-subsidized crop insurance sold by Wells Fargo & Co ., Ace Ltd. (ACE) and others have soared to records, galvanizing groups fighting for less farm aid. Indemnities for last year’s Corn Belt drought, the worst since the 1930s, are at $17.1 billion so far, according to the government. Distribution Disagreement In Senate committee debate yesterday, committee members differed on how payments should be distributed. Senator Pat Roberts of Kansas, the top Republican on the committee last year, disagreed with successor Thad Cochran of Mississippi over provisions setting floor prices for commodities, which were added this year to satisfy lawmakers from the South. It’s “beyond frustrating” the Senate last year passed a bill without target prices and is now approving “a rear-view bill” that continues obsolete policies and may bring challenges before the World Trade Organization , Roberts said. Under a recent trade case, the U.S. is paying $147 million a year to Brazilian cotton farmers in a temporary settlement of a case over U.S. policies that support the fiber. “The WTO stove is hot,” said Roberts, who voted against the bill. “We should not reach out to touch it again.” Republicans unsuccessfully sought larger cuts to food stamp funding. “The Americans who rely on” the aid “are not nameless, faceless people looking for a handout,” said Senator Kirsten Gillibrand of New York , the lone Democrat to oppose the bill. “They are children, hard-working adults, struggling seniors, veterans, active duty troops and the families that stand by them. That’s who suffers in this callous political fight.” To contact the reporters on this story: Alan Bjerga in Washington at abjerga@bloomberg.net Derek Wallbank in Washington at dwallbank@bloomberg.net To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net Continue reading
