One of the bigger asset bubbles in recent US history has nothing to do with stock, bonds or commodities, and unlike the real estate bust of 2007 (which has since rebounded only for the ultra-luxury segment), barely batted an eyelid during the Great Financial Crisis. Curiously, it was not until early this decade that the institutional money even noticed said bubble, something he discussed in October of 2010 when we profiled TIAA-CREF's investment in this particular asset class. We are talking of course about farmland.
And yet, like all other bubbles - be they the result of retail euphoria or central bank rigging - this one too must come to a close, and as the WSJ reports, the first crack in the farmland bubble are appearing, after farmland values declined in parts of the Midwest for the first time in decades last year "reflecting a cooling in the market driven by two years of bumper crops and sharply lower grain prices, according to Federal Reserve reports on Thursday."
Putting this in context, the average price of farmland in the Federal Reserve Bank of Chicago’s district, which includes Illinois, Iowa and other big farm states, fell 3% in 2014, marking the first annual decline since 1986, which makes farmlands the only asset class that had not seen a down year in nearly three decades!
Prices for cropland during the fourth quarter remained steady compared with the previous quarter, according to the bank’s survey of agricultural lenders, though half of all respondents said they expect farmland values to decline further in the current quarter.
Demonstrating the robustness of farms as an asset class, the price decline was sporadic and not pervasive: "in the St. Louis Fed’s district, which includes parts of Illinois, Kentucky and Arkansas, prices for “quality” farmland gained 0.8% in the fourth quarter compared with year-ago levels, despite lower crop prices and farm incomes in the region. A majority of lenders in the district expect values to cool in the current quarter compared with the first quarter of last year, reflecting reduced demand for land amid tighter profit margins for farmers."
Still, the sudden bout of commodity deflation that spooked markets in late 2014 and which the permabulls are calibrating on a daily basis to determine if lower or higher oil prices are bad or good for the economy, is being felt not only across the entire commodity supply chain, most notably in China and the BRICs, but across the US farmland sector. According to the WSJ, the reports "spotlight an overall slowdown in the U.S. farm economy and in the appreciation of farmland prices. Crop prices had soared for much of the past decade, fueled by drought and rising demand for corn from ethanol processors and foreign importers. The gains pushed agricultural land values so high that some analysts warned of a bubble."
And like any burst bubble, it is likely to only get worse as price discovery to the downside accelerate: on Tuesday, the U.S. Department of Agriculture projected net U.S. farm income this year would fall to $73.6 billion, the lowest since 2009, from $108 billion in 2014.
Not helping is a crop season that has been far better than was expected due to "flawless weather" over the growing season, leading to the largest ever US crop by value, leading to a crash in the prices of corn which have tumbled more than 50% since the summer of 2012, when they soared to record highs amid a severe U.S. drought.
As a result, farmland values in corn-producing states are the first to go:
In the Chicago Fed district, farmland values in the latest quarter dropped in major corn-producing states like Illinois, Iowa and Indiana compared with year-ago levels, while land values in Wisconsin increased slightly and were unchanged in Michigan. The fourth quarter of 2014 marked the first time since the third quarter of 2009 that cropland values in the district dropped overall compared with a year earlier.
“Lower corn and soybean prices have been primary factors contributing to the drop in farmland values,” David Oppedahl, senior business economist at the Chicago Fed, wrote in Thursday’s report, adding that for 2015, “district farmland values seem to be headed lower.”
What will exacerbates the situation is that like with the US shale patch, farmers are clamping down on expenditures in hopes of preserving cash flow: the St. Louis Fed said farm income, household spending by farms and expenditures on farm equipment declined in its region. Midwestern bankers expect a continued slowdown in the current quarter in those three categories.
“It is very difficult for farmers to buy farmland and new equipment with corn prices in the $3.50 range,” said one Missouri lender in the St. Louis Fed report.
What is worst, is that while the junk bond funded shale boom, which judging by the record rig closures, is well in the bust phase, the next industry that may see a dramatic surge in indebtedness is none other than America's food belt:
Bankers in the Midwest also noted a rise in financial strain for crop farmers in the latest quarter. Lenders in the Chicago region reported a dramatic increase in demand for farm loans compared with year-ago levels, with an index of loan-demand reaching the highest level since 1994. Farm loan repayment rates also were “much weaker,” in the fourth quarter of 2014 compared with the same period a year earlier, the bank said, with an index of loan-repayment falling to the lowest level since 2002.
In short: US farming may be on the verge, if not already in, a recession.
That's bad; what's worse is that banks, full to the gills with fungible excess reserves, will be delighted to provide vulture capital to farmers desperately in need of capital in the coming years. Why? Because as is widely known, the "money" is really created in computers, either the Fed's or banks', out of thin air. Money, which will be promptly collateralized by arable, rich farmland.
And should the industry fail to recover if the mega-commodity bubble of years gone by is unable to reflate? Well, guess who will be the proud owner of America's vast and rich farming heartland? Answer: the same people that quietly over the past few years also became America's largest landlord.
And with that, the great asset transfer from everyone to the wealthiest 0.1% will be almost complete...