The Housing Bubble

A weekend topic starting with Western Farm Press. “Aggressively accommodative global governments and central banks have an agenda to extend the business cycle and to maintain global economic momentum at all costs. These actions likely will create market bubbles or excessive movements in financial asset classes like equities or stocks, fixed income or bonds, cash equivalents or money market instruments, real estate, commodities, and fine arts. Also likely are currency market distortions, expanding debt burdens and deficits through borrowing or simply money printing.”

“Globally, governments and central banks in 2017 found their fiscal, monetary, trade and regulatory policies at a crossroads, simplistically stated as: Option Not Chosen: They could allow markets globally to correct with hopes of managing a U.S. and global recession. Managing a U.S. and global recession even today would likely have a low probability of success for an array of social, economic and political reasons. So not choosing this option, as far as the near term is concerned, is very appropriate, but longer term, that is another issue.”

“Chosen Option: They could globally financially engineer an extended country-by- country growth cycle through accommodative government and central bank intervention policy activities.”

From the Progressive Farmer. “Craig Dobbins, an ag economist at Purdue, can show the trend line of land values in Indiana from 1910 through 2015. If the natural trend line were followed through 2020, the average per-acre price would be $5,396. Instead, the actual average Indiana land price now is $7,150. The implication is that land values could fall back another 24% if the trend line were to hold.”

“In the Purdue survey, 39% of respondents said they believed farmland values would rise during the next five years — but only by a total of 7%. What optimism there is for farmland values within the ag sector doesn’t spill over into the financial sector. Numerous commentators have suggested that the farmland ‘bubble’ is bursting. They cite weakening commodity and land values, as well as upticks in farm debt levels.”

“In the Federal Reserve Bank’s 10th District, including Kansas, Missouri, Nebraska and Oklahoma, 15% of bankers reported they denied more than 10% of applications for operating loans in 2016. The year before, only 5% of bankers reported they denied operating loan applications at that rate. In Indiana, farmland values were down about 9% from 2015 to 2016.”

From the New Food Economy. “America’s dairy farmers are getting a refund. So hopes Senator Kirsten Gillibrand of New York, who introduced a Senate bill to return millions of dollars from a disappointing federal insurance program. Known as the Dairy Premium Reform Act of 2018, her bill would refund leftover premiums to farmers who’d paid to cover their losses under a federal margin protection program. Currently, those leftover premiums go to the Treasury. But under Gillibrand’s plan, they would be mailed back to farmers in the form of a one-time check.”

“But Gillibrand’s bill is really a response to a larger issue. When the last farm bill was first passed, dairy prices, which are set by the federal government, were sky-high. New York was on its way to becoming the ‘yogurt capital of the world.’ The price bubble burst, however, and now milk is as cheap as it’s been in decades.”

“So while her constituents could certainly use some money back, Gillibrand’s bill is not a long-term solution to what’s emerging as a national problem, or generational reckoning, for dairy farmers. What Gillibrand’s pushing for is something like a stopgap or band-aid, until a more robust dairy ’safety net’ can be implemented, as part of the next farm bill later this year. So far, that’s looking like a billion-dollar cash infusion to dairy farmers, even though, in the midst of an oversupply, Americans don’t need any more milk.”

From Undercurrent News. “Chinese shrimp importers are sitting on product they cannot sell, according to an importer source based in the country. The source, who buys shrimp and then imports it to China through Vietnam, said this has led importers to renege on ‘many orders,’ forfeiting deposits. ‘Current prices are very low. It’s not possible to sell before Chinese New Year,’ he told Undercurrent News. ‘Though they’ve paid a deposit for the order, say for example 10%, due to the falling price they don’t want any container or their money back,’ he said. He added that after Chinese New Year, prices ‘will definitely crash.’”

“The comments correspond with a shrimp panel discussion in at the Global Seafood Market Conference held in Miami in January. At the show the panel said China ‘has high-priced stocked inventory for Chinese New Year. The market is in chaos [in China] because everybody wants shrimp but fear they are paying too much.’”

“China, from being one of the world’s largest exporters, is now a net importer of shrimp, industry sources say. Chinese consumers are willing to pay a premium for live shrimp, a second source with a Chinese processor based in Zhanjiang, Guangdong told Undercurrent. He said he expects prices to continue to rise at least until Chinese New Year and potentially thereafter. ‘Supply does not meet demand,’ he said.”

“Prices are being driven by the seasonal drop in production; the holiday season; a poor harvest; and Chinese inflation, according to Landy Chow, general manager of Siam Canadian China. ‘Last year in my city [Zhanjiang], an apartment cost CNY 8,000 [per square meter]. This year CNY 12,000 per square meter. That means [a] 40-50% [increase] in one year. I think such drastic increases will soon cause wider inflation especially food price inflation,’ he told Undercurrent.”

From the Tribune Star. “While farmland values are projected to decline this year, Indiana remains in the top five states in per acre value, according to a national agricultural landowner services company. Vigo County farmer Brad Burbrink said he’s not surprised land values are forecast to drop again this year. ‘I think farmland values will continue to go down,’ Burbink said, ‘but in no way shape or form compared to the 1980s,’ when thousands of farmers filed for bankruptcy after falling behind on high-interest land and equipment loans.”

“‘I think land values will have to come down some more because the farm economy is kinda stagnant right now, but there is not the fear that the bottom of the market will fall out,’ Burbink said. ‘From a grain farmer standpoint, we have a lot of inventory, not only in the United States, but worldwide, which is causing commodity markets to be depressed.’”

“High-quality Indiana farmland peaked at $9,765 per acre in 2014, according to the Purdue Agricultural Economics Report — 2018 Agricultural Outlook, while average farmland peaked at $7,976 per acre in 2014. The Purdue report lists 2017 high-quality land values at $8,529 and average land value at $6,928 per acre last year.”

The Marshall Independent. “While farmers struggle with dropping commodity prices, they are also facing agriculture land rent rates that are not coming down as quite as quickly. Paul Lanoue, dean of agriculture and business at Minnesota West Community and Technical College: ‘In recent years, there has been a major change in land ownership with a transition to the next generation who view the land and rent obtained for it more as an investment opportunity along with a belief that the renter got a good deal in 2010-2012,’ he said. ‘The current reality is that with crop prices drastically reduced from prior levels, profitability is near non-existent for many farms.’”

From the Farm Journal. “The cash rent line on your budget likely has been a point of relief for the past few years. As margins tightened, many landowners agreed to lower cash rents. For 2018, that trend is expected to continue—but don’t expect a big drop. Landowners are still willing to negotiate their rental agreements, but the focus on dropping prices might ease, according to Pro Farmer’s 2017 LandOwner Cash Rent and Land Values Survey.”

“These drops are helpful, but they likely won’t be enough for farmers to be in the black on cash-rented ground, says Gary Schnitkey, ag economist at the University of Illinois. In Illinois, state-average cash rents peaked in 2014 at $234, according to USDA. In 2017, the average was $218, a drop of nearly 7%. Statewide average cash rents will likely drop $5 to $10 per acre in 2018, Schnitkey says. This is because Illinois farmers face reduced net farm incomes and continued negative returns on cash-rented farmland.”

“‘Reductions of this size are not large enough to cause cash-rented farmland to be profitable,’ he says. ‘However, declines in cash rents resulting in profitability are projected to be long and protracted. As long as corn prices remain below $4 per bushel, there will be downward pressures on cash rents.’”

“‘Farmers buy 70% to 80% of all farmland,’ says Steve Bruere, president of Peoples Company in Clive, Iowa. ‘But when margins are tighter, bankers get nervous. If farmers’ margins get tighter, they will become less dominant buyers, and other buyers won’t pay as high of prices.’”

“For the next few months, Jim Farrell, president of Farmers National Company in Omaha, Neb., expects land values to remain stable. ‘But longer term, I feel that land values have not hit the bottom yet. We will still see more down movement in certain markets.’ Increasing interest rates and an uptick in farmland for sale could send land values lower. ‘The slow farm economy could push more land on the market,’ Farrell says. ‘Any increase in land on the market will likely pressure values at this point.’”