September 15, 2016

Central Bankers Succeeded In Inflating Asset Prices

A report from the Wall Street Journal. “We wonder if this crop-sciences marriage would ever have happened if not for a bushel of Beltway policy mistakes. For Monsanto owners, selling to Bayer provides a premium of 44% over Monsanto’s closing share price on the day before Bayer first proposed a combination in May. With little overlap between the companies, there doesn’t seem to be an antitrust argument to keep them apart. That would take some nerve in Washington, given that it created the conditions for this deal. The Federal Reserve in particular has played a role with its monetary adventurism. In the years after the financial crisis, central bankers succeeded in their policy goal of inflating asset prices. That included a boom in commodity prices and Midwest farmland.”

“But the bust that has followed has been rough, with corn prices falling by more than half over the last four years. Squeezed farmers are less able to buy seeds and technology, which has meant a wave of layoffs and agribusiness consolidation. Monsanto is the latest firm to decide it’s better not to go it alone.”

From Bloomberg. “There’s an avalanche of grain coming as U.S. farmers gear up to harvest record corn and soybean crops. And one question looms large: where will it all go? Growers are clearing bin space and elevators are prepping outdoor facilities to manage the surge of grain that will come off combines starting this month. But it may not be enough. U.S. supplies of corn, soybeans and wheat — including newly harvested crops along with leftover inventories from last season — will outstrip all crop storage capacity for the first time in records through 1988, government data and analyst estimates show.”

“A third straight bumper harvest has paved the way for the storage crunch. Adding to the squeeze, a prolonged slump in agriculture prices made growers less willing to sell reserves from last season. Farmers still own 10 percent of last year’s corn production, estimates Kent Jessen, director of grain merchandising at Heartland Co-Op in West Des Moines, Iowa.”

“‘The clock has rolled over to a point that the farmer’s run out of time, so he’s emptying bins and bringing it to town as fast as he can,’ said Jarod Creed, the Omaha-based senior director of customer risk management at Gavilon Group LLC. ‘The problem with that is the crop size last year was large enough that the western Corn Belt states just are not going to be able to dig themselves out of a hole.’”

The Farm Forum. “The current average cash rent to value rates of return on agricultural land in South Dakota remain very low, explained Shannon Sand, SDSU Extension Livestock Business Management Field Specialist.”

“‘The 2016 rent to value average of land value was 2.7 percent for all agricultural land - this is 0.5 percent down from 2014,’ Sand said. ‘The annual average gross cash rates of return for all-land, rangeland and hayland are the lowest calculated over the past 26 years,’ Sand said. ‘The gross rate of return for cropland is the second lowest in the past 26 years.’”

“Sand said this is the seventh consecutive year that gross rates of return have been 4.0 percent or lower. For comparison, the 2000-2009 average was 5.5 percent and through the 1990’s the average was 7.4 percent. This means that if agricultural rents were the sole source of returns from farmland it would take twice as long for the land to pay for itself in 2015 (approximately 33 years) compared to 2002 (approximately 14 years).”

From Farm and Dairy. “A couple years of low milk prices have some dairy farmers thinking back to 2009, when most farmers were losing money by the cow and facing the possibility of going out of business. From October 2014 through April 2016, prices for milk fell by about 40 percent, with some improvement over the summer, according to data from the U.S. Department of Agriculture.”

“‘A lot of smaller dairies are struggling,’ said Kenny Rufener, a dairy farmer from Congress Lake Farms in Portage County. Rufener’s family milks about 650 head of Holsteins — still not a large farm by many standards. He said there’s not much that farmers like himself can do, other than bear the lows and hope that new demand comes along, bringing better prices.”

“Richard Owen, who milks about 70 head of Holsteins and Jerseys in Hadley, Pennsylvania, said smaller dairies are in more of a survival mode than anything else. Owen said he knows some livestock farmers who turned to crop farming during the last low-price cycle. But now that crop prices are low — that venture isn’t paying out, either. ‘It’s just a complicated issue,’ he said.”

The State Journal Register. “Slumping commodity and farmland prices are rolling through the rural economy as the fall harvest begins in Illinois and across the Midwest. Manufacturing, banking, farm equipment sales, housing and auto sales, employment and overall consumer spending have been affected across a 10-state region, including Illinois, tracked by a monthly Rural Main Street Index at Creighton University in Omaha, Nebraska.”

“The index was down for the 12th month in a row in August, meaning the rural economy continued to slow even as the U.S. Department of Agriculture forecasts possible record harvests of corn and soybeans this fall. Troubles in the rural economy, said Creighton economist Ernie Goss, have been masked by improvement in the larger economy.”

“‘I think it’s really been underappreciated,’ said Goss. ‘You have this significant diversion of what’s going on in the agriculture economy. You have Chicago versus the rural communities in Illinois. If you go into the overall economy, there’s been massive growth in professional and technical services, in health care. When you’re looking at rural areas, you’re talking about job losses.’”

“Manufacturing layoffs at John Deere, Case New Holland and Caterpillar have been linked to the farm economy slowdown. Closer to home, owners of a German-Bliss dealership said slowing farm-equipment sales were among the reasons for closing the store at the west edge of Springfield last month. Dealerships in East Peoria and Princeville were not affected.”

“A stronger dollar, which makes U.S. farm products more expensive overseas, a weaker global economy and bumper crops all contributed to the downturn in the farm economy after six strong years, said Goss. He added that there are indications of a gradual rebound in 2017, barring weather problems and further weakening of export demand.”

“While farmers are inherently cautious about yield forecasts, Sangamon County farmer Tom Jennings said the proof remains mostly in the fields for now. ‘Some have found what they thought was out there isn’t,’ said Jennings.”

A Telltale Sign Of A Shift In The Market.

The Orange County Register reports from California. “The market for Orange County’s existing housing isn’t slowing down. Well, unless your selling a home for more than $2 million. ReportsOnHousing publishes an intriguing benchmark of the local market’s selling speed, a ‘market time’ barometer that tracks the number of new escrows in the past 30 days vs. the supply of homes for sale. Countywide, market time was 78 days on Sept. 8 vs. 80 days a year earlier (and 98 days two years ago.) Once homes get pricier, the speed picture changes significantly: $2 million to $4 million: 342 days vs. 229 days a year ago – or 112 extra days! Above $4 million: 507 days vs. 347 days a year ago – or 160 extra days!”

“The current luxury trend has been evolving with a dramatic slowdown in the higher price ranges, says ReportsOnHousing’s Steve Thomas. ‘The luxury end above $2 million has been profoundly slower with a lot more inventory and considerably less demand.’”

The Press Democrat. “Sonoma County’s housing market experienced its slowest summer in five years, with sales falling 9 percent from a year earlier. From June through August, buyers purchased 1,384 single-family homes in the county, including 461 last month, according to The Press Democrat’s monthly housing report, compiled by Pacific Union International senior vice president Rick Laws.”

“‘This summer was very busy until we hit the Fourth of July and then it seemed to change a little bit,’ said Brian Connell, managing broker at the Coldwell Banker office on Mission Boulevard in Santa Rosa. Since then, he said, ‘our buyer activity has just become a little less frantic than it was before.’”

“The median sales price in August rose to $590,000. That amounts to a 9 percent increase from a year earlier. The sales slowdown is the latest chapter in a tumultuous decade for a housing market where home prices soared, crashed and rebounded. The median price hit a record high of $619,000 in August 2005, then sank to a low of $305,000 in February 2009. Starting in 2012, median prices have risen each year by an annual rate of 8 percent or more.”

“Grace Lucero, director of investments for Vanguard Properties in Healdsburg, said it wasn’t that long ago that buyers who thought a home was overpriced would simply walk away without making an offer, partly because they thought someone else would still pay the price or even bid higher. But recently Lucero saw a change when she listed a three-bedroom, two-bath home in Cloverdale for $379,000, under its appraised estimate of $385,000. No buyer offered to pay full price.”

“‘I got three offers under asking price,’ she said, each one in the $350,000’s. For her, such a change in strategy by buyers ‘is a telltale sign of a little shift in the market.’”