The Housing Bubble

A two part series from Farm Futures. “About every year, Ron Pierson tries to trade one of his larger Case IH tractors for a new one. He did not this year because the dealer was reluctant to add another expensive piece of used equipment to the big supply already on the lot. Shorty Kulhanek, a custom harvester based in Colby, Kan., had the same problem with his combines. Each year he typically trades his three Gleaners for new ones, but this year the dealer still had the ones he traded the previous two years. ‘I normally had a one-year turnover in the combines, but I didn’t this year because the dealer had too many used combines,’ he says. ‘I am glad I waited. I’ll trade for the 2017 models when they will be eager to deal.’”

“The glut of machinery came about after several years of farmers upgrading fleets with new equipment when the farm economy was strong and crop prices were high. Manufacturers responded by ramping up production. Now, farmers have not been in a rush to upgrade because of their newer fleets and the downturn in crop prices. That slowed demand for new equipment. Meanwhile, the used pieces they traded remain on the lots. In addition, the weak farm economy has farmers selling used equipment to raise capital.”

“Another reason to move slowly is dealers expect a lot of leased equipment will come onto the market and will need to be sold. ‘We have to remarket those to our dealers as used machines, and they will have to sell some of those instead of selling new machines,’ says Jim Walker, vice president of Case IH North America. ‘Lease returns have hurt both John Deere and us in the high-horsepower tractor business.’”

The Journal Star. “Cash rent prices for Peoria County farmland have generally followed property sale and commodity prices downward in 2016 in a market highly dependent on broader economic conditions and individual relationships. A recent University of Illinois report indicated the average cost of rent per acre in Peoria County was $221 this year, down from $238 in 2014, the last year for which data was available. The 2016 price still represents a significantly higher premium than several years earlier, when rent prices began climbing along with commodity rates.”

“Cash rent prices tend to increase at a slower pace than commodity prices and similarly decline at a rate just behind that of grain, said Patrick Kirchhofer, manager of the Peoria County Farm Bureau. ‘Cash rents will continue to come down if crop prices remain where they’re at,’ Kirchhofer said.”

The Erie Times-News. “Dean and Suzanne Curtis paid a price in sweat, 14- and 16-hour workdays, scraped knuckles and vacations they never took. But together, the Venango Township couple built something. They own 515 acres, a herd of 150 dairy cows and the buildings and equipment needed to produce thousands of gallon of milk each year. In 2009, they were just months from having all of it paid off. Then came the recession and a historic tumble in the price of milk.”

“Today, two refinanced mortgages and seven years of unreliable milk prices later, the idea of being debt-free seems like a distant memory, said Dean Curtis, who has been farming for 50 of his 64 years. Curtis said he and his wife have far less debt than many dairy farmers, but worry that some fellow farmers might not survive a pattern of low prices that has persisted through 2015 and most of this year.”

“Some of those who remain appear to be in trouble. Curtis, president of the Erie Crawford Cooperative, a farmer-owned feed mill, sees it in the growing list of farmers who are delinquent in paying their feed bills. ‘It’s ridiculous,’ he said. ‘I’m not angry at the farmers at all. It’s the whole farm economy that is ridiculous and what farmers are expected to live on.’”

“As recently as 2014, dairy farmers were collecting some of the highest prices in history, said James Dunn, professor of agricultural economics at Pennsylvania State University. Farmers, who sell milk not in gallons, but in 100-pound increments, were collecting an average of $25.64 per hundred pounds or the equivalent of about $2.98 a gallon in 2014, Dunn said. In 2015, that fell to $18.48 per hundred pounds or $2.14 a gallon. For the first six months of this year, he said, the price fell to $16.45 per hundred pounds, about $1.91 a gallon.”

“There’s little agreement about how much farmers need to break even. ‘There are people who have all different costs of production,’ Dunn said. ‘It has a lot to do with when they bought things, how well their crops worked out and the decisions they made over time.’ What Dunn can say is this: ‘Somebody who expanded in 2014 thinking that (price) was the new normal has been severely disappointed.’”

From Grub Street. “It’s never easy being a farmer, but it’s particularly tough right now. Supermarket prices fell for the tenth straight month in September, down 2.2 percent from last year. This makes the 2016 decline in food prices, as analysts predicted would happen, the worst since 1960. A number of factors have contributed to the price plummet. After years of high prices and insufficient resources, there’s now an oversupply of meat and grains, including a record corn crop of 15 billion bushels forecasted. Demand from China has declined, and the global economy isn’t exactly running on all cylinders. Meanwhile, farmers are expected to produce 212 pounds per capita of beef, poultry, and pork.”

“The price declines are significant. Last month, a pound of ground beef was down to $3.66 from $4.13 last year; bacon fell to $5.48 a pound from $5.73; and the cost of a dozen eggs fell more than 100 percent to $1.47 from $2.97. Some of the worst-hit by the decline have been pig farmers: The National Pork Board says that pigs are selling for $97 each, down from an all-time high of $280, in 2014.”

“While pig farmers can reduce their herds, there’s little crop farmers who are paying rent on the land they farm can. Supermarkets, too, are suffering: Grocery chain Supervalu says second-quarter revenue fell 4.8 percent, while Kroger lowered expectations and plans to cut capital investments by $500 million this year and next.”

From Bloomberg. “It was advertised as Brazil’s ‘new frontier,’ the vast savanna running alongside the Amazon jungle that would help meet China’s insatiable demand for food. The farmers of Brazil heeded that call, razing trees, plowing virgin land and planting soybeans at a frenetic pace for much of the past decade. Now, soybean demand from China has slowed and the world supply has increased amid a record U.S. crop, denting international prices. In parts of northeastern Brazil, so little rain has fallen in the last four years that farmers find themselves stuck in what is the worst agriculture crisis to hit the country in a decade.”

“Vanguarda Agro SA, Brazil’s second-largest farming group, has been gradually moving out of Matopiba since 2014 and won’t plant a single hectare in the region this year, said CEO Arlindo Moura. Moura said the investment needed to transform scrubland into farmland is no longer feasible following the decline in soybean prices over the past few years. ‘When the soybean price was at $15 a bushel, every piece of land was good for planting,’ Moura said. ‘With soybeans under $10, you have to produce more than 50 bags per hectare (44.6 bushels per acre).’”

The Wall Street Journal. “Harvests are under way of what are projected to be the largest corn and soybean crops in U.S. history, which soon will hit a global market already sitting on the largest-ever grain stockpiles. Indeed, some farmers are hoping for a weather hiccup somewhere in the world to curb yields and breathe life into crop prices that recently hit multiyear lows. They may be waiting a long time.”

“It is a dramatic turnaround from four years ago, when prices for many commodities were soaring to the highest levels U.S. producers had seen in their lives. The boom-bust cycle of commodity production in America has expanded across the globe in recent years, as crop and livestock farmers in South America, China and the Black Sea region have adopted farming practices that largely mirror those in the U.S. breadbasket. That has raised the potential risks and rewards for producers looking to sell, as weather, currency swings and policy changes in far-off countries have a greater impact on U.S. food prices than ever before.”

“‘The world is still expanding production area, and because of that, this cycle could go on awhile,’ says Dan Basse, president of Chicago-based commodities firm AgResource Co., who notes that farmers world-wide have added nearly 180 million acres to cultivation in the past decade, about as much as the combined acreage of the entire U.S. Grain Belt.”

“The barnyard-wide glut stems from decisions made globally to plant more row-crop acres and to raise bigger herds in response to new demand and high prices during the most recent shortage. ‘There’s an old industry adage that money makes milk, and more money makes more milk,’ says Chuck Nicholson, a professor of supply chain and information systems at Pennsylvania State University, who focuses on agricultural markets. The current glut has ‘a lot to do with the decisions that farmers make in aggregate—producers can turn on the milk spigot relatively quickly and tend to be more reluctant to turn it off.’”

“To make space for crops like corn after a massive wheat harvest last summer, Frank Riedl, general manager at Great Bend Co-op, a Kansas grain elevator and farm supplier, bought and leased extra land on which to build bunkers the size of football fields where he can heap millions of bushels of overflow grain. ‘There’s an abundance of corn out here in the country and we don’t have the storage base for it,’ he says. ‘Farmers are trying to find any place they can to dump their crops.’”

A report from the Sydney Morning Herald in Australia. “Wayne Byres, chair of the Australian Prudential Regulation Authority, was on Thursday asked by Greens senator Peter Whish-Wilson about a report from UBS that last month ranked Sydney fourth in a global ‘bubble index’ that sought to measure the risk of a real estate bubble. Mr Byres, who oversees a banking sector with almost $1.5 trillion in mortgages, stressed the risks in the property market but said the ‘B word’ was not helpful. ‘I deliberately avoid using the B word. I think it sort of simplifies the debate somewhat,’ Mr Byres said. ‘It leads people to either, we are, in which case we’re all ruined, or we’re not, in which case, she’ll be right. And in fact the situation is far more nuanced than that.’”

“Sydney prices have risen by about half since 2012, the UBS index said, and APRA has in recent years clamped down on poor lending by banks in the housing market, and curbed lending to investors.”

From Domain News. “National Australia Bank has compiled a confidential borrowers’ blacklist of more than 600 towns and suburbs where it has capped lending to property buyers because of growing risks in the housing market. Buyers in any of the 120 postcodes across the nation will need a deposit of as much as 30 per cent to be eligible for a loan ‘to ensure that we are lending responsibly and sustainably,’ according to internal documents used by the bank to explain its change in strategy to mortgage brokers.”

“Lenders have also responded to pressure from the Reserve Bank of Australia, ASIC and APRA to reduce lending to higher risk investment borrowers, particularly for apartment markets in central Melbourne and Sydney, by cutting back on interest-only loans and increasing deposits to about 40 per cent of the asking price. For example, earlier this year AMP placed apartments in 140 suburbs on a blacklist because of growing concerns about oversupply, off-the-plan sales, and, in some areas, falling prices. Lenders also slammed the brakes on foreign borrowers.”

The Australian. “Australia’s residential market is set to split in two, with first home buyers finally getting a shot at owning inner city apartments, while relatively strong rental yields mean that seasoned investors will look towards investments in houses. Discounting is expected to be most common among high-rise ‘clusters’ where there have ­already been rising levels of ’settlement difficulties.’ But the outstanding opportunity in the market will be for first-home buyers, especially in 2017-18 when a flood of new apartments are expected to hit the market.”

“‘We are looking at a market where you will see pressure on prices, and you may also see some rental yield decline … I think both markets are vulnerable,’ said Nigel Stapledon, a research fellow at UNSW Business School. ‘On the upside, it becomes a buyer’s market and also a renter’s market.’”

From Smart Property Investment. “The six regions across the country worst affected by the mining downturn have been uncovered by a new report. The report, ‘The carnival is over: house prices in mining towns now the boom is gone,’ compiled by Propell National Valuers, said recent figures and stories of investors’ suffering ‘beg the question of why anyone would take the risk’ of buying into these regions. ‘Price increases of 10 per cent per annum, 20 per cent per annum or more have been replaced by falls in the past two years of up to 38 per cent per annum.’”

The Brisbane Times. “Dozens of expectant Perth homeowners have been left in limbo after the collapse of national building company, Collier Homes. Nearly 30 homes across Perth sit unfinished and subcontractors are owed thousands after liquidators moved in on parent company, Homes Australia, owned by Family First Senator, Bob Day. The multi-million dollar collapse has also left around 20 staff members at Collier Homes’ Osborne Park office out of a job, without any notice. Mr Day resigned from Federal Parliament after announcing the the collapse.”

“Sub-contractor, Ron Van Zoelen and wife, Tracey, fronted the politician’s South Australian electorate office shortly after learning of the closure, claiming they were owed more than $25,000. ‘We’re just shocked and devastated, this is our livelihood, this is our income, and we’ve got family to support, bills to pay, mortgage to pay, it’s really quite upsetting,’ Ms Van Zoelen told Nine News.”

From News.com.au. “A ruling by the tax office could offer a glimmer of hope to locals wanting to buy an off-the plan apartment by putting them off-limits to overseas investors. Under Australian law, foreign investors can purchase only new properties. If an off-the-plan sale falls through, the property will be considered second-hand, The Australian reports. This means thousands of potential foreign buyers will be stopped from buying the properties and potentially lowering the resale price.”

“Confirmation on the ruling comes amid reports of a growing number of Chinese buyers walking away from off-the-plan apartment sales, forcing them to sell. ‘Under subsections 15(4) and (5) of the Foreign Acquisitions and Takeovers Act 1975, a dwelling is considered to be sold when an agreement becomes binding,’ a spokeswoman for the Australian Taxation Office said. ‘If the property is onsold after the date upon which the contract becomes binding, and prior to settlement, then this is considered to be an established dwelling.’”

“LJ Hooker chief executive Grant Harrod told The Australian the real estate agency was starting to see apartments coming onto the secondary market, particularly in Brisbane and Melbourne. ‘We have seen some developers come to us with buildings that have been completed but the owners have been unable to close,’ Mr Harrod said. ‘The original owners who bought off the plan are finding it challenging to raise capital because the banks have raised the loan-to-valuation requirements. There is going to be a real issue if we start to see construction projects not being completed and developers getting into trouble.’”

“Last month, billionaire property developer Harry Triguboff, founder of Australia’s largest apartment builder Meriton, said a ‘very significant’ number of Chinese buyers were failing to settle their purchases.”