The Housing Bubble

A report from the Southwest Farm Press. “‘Things will get worse before they get better.’ That’s the opening warning shot by Damona Doye, Oklahoma State University Regents Professor and Rainbolt Chair in Agriculture Finance, in her ag land management perspective presentation prepared for the recent OSU Rural Economic Outlook Conference. Bankers expect farm income to remain weak in the third quarter, she says. ‘Similar to last year, a significant number of bankers in each district expect farm income in the third quarter to be less than the previous year.’”

“‘They expect the rate of decline to be sharpest in the Mountain States and Oklahoma, which are relatively more dependent on income from wheat, cattle, and energy production than other parts of the district. As the outlook in these three sectors has become increasingly downbeat, more bankers in those regions expect farm income to decline further.’ Consequently, bankers are seeing severe repayment problems that are growing, but still at very low levels both in Oklahoma and for the district. ‘Major repayment problems have increased relatively more, with some growth in minor repayment problems also evident.’”

From The Packer. “The good news for potato growers is they have a bumper crop of potatoes. The bad news is this surplus of product has lowered early prices. Ralph Schwartz, vice president of marketing, sales and innovation at Idaho Falls, Idaho-based Potandon Produce LLC, said potatoes have flooded the early market and led to low pricing. Eric Patrick, marketing director for Grant J. Hunt Co., Kirkland, Wash., agreed with Schwartz’s market assessment, saying because there is more crop throughout all regions of the U.S., it’s a buyer’s market with aggressive pricing. ‘Russet potatoes also are in a buyers’ market with good quality out of Washington and Idaho,’ he said.”

From Undercurrent News. “Consumers will ultimately gain from a forecast increase in farmed whitefish production worldwide, to 12 million metric tons by 2020, said Rabobank’s chief seafood analyst. Speaking to an audience at Marel’s Whitefish ShowHow event held in Copenhagen Nov. 10, Gorjan Nikolik said production increases in the world’s fastest-growing protein industry will mainly be driven by Asia, though more countries are expected to become producers for export.”

“Earlier this year, Rabobank published a report outlining Brazil’s huge potential as a producer, which could see it challenge China in the long-term. But the overall increase in production will outweigh growth in demand. With an increasingly fierce battle for business, Nikolik reckons it will be ‘a buyers’ market for a very long time.’”

“The US market illustrates the effect of this competition — in just a few short years Vietnamese pangasius has risen to command a near 50% share of the frozen whitefish market there, according to figures from July, clawing share from Chinese tilapia. Frozen tilapia prices have subsequently fallen from $2.55 per pound in 2014 to $1.75/lb this year. ‘In 2008, Americans didn’t know what [pangasius] fish was. But in the space of a few years, it has become massive,’ said the analyst.”

“Today Asia produces 87% of the world’s farmed freshwater whitefish, owing to massive aquaculture industries in China, Indonesia and Vietnam. The production surge started with China and tilapia farming for export, thanks to the country’s heavily subsidized aquaculture sector. Indonesia quickly followed suit, also with tilapia, while Vietnam dived into production of pangasius.”

“This saw tilapia production increase by 1m tons every three years, according to Nikolik. By 2014, global whitefish production was just shy of 10mt. But ‘the biggest volume increase in production hasn’t even yet occurred,’ said the analyst. ‘And that’s a big thing to say if you see what has happened already.’”

“Despite Rabobank’s forecast for continued growth in global production, the world’s largest producer of farmed fresh water whitefish — China — faces long-term decline as an exporter, reckons Nikolik. This is on account of rising feed and labor costs, and growing domestic consumption, which are leading to a slowdown ‘and possibly, in future, a contraction’ in exports, he added. ‘Asia is the most populous part of the world – with 60-70% of the world’s population – but they have a small fraction of the available land and water to produce grain. They shouldn’t be the ones exporting farmed fish to us. It should be the other way around.’”

From AgriNews. “Cash rent as a percent of farmland price sometimes is used as a benchmark for determining the appropriateness of a cash rent level. Over time, cash rents as percentages of land prices have declined, with declines corresponding to decreases in returns of interest bearing financial assets. Until interest rates increase, cash as a percent of land price likely will remain at historically low levels.”

“An approach sometimes used in evaluating the appropriateness of a cash rent begins with two pieces of data: 1) land price and a 2) desired percent return. The desired return is the current, cash return desired from farmland and does not include capital gains (losses) due to increases (decreases) in farmland prices. A $9,000 per acre farmland price and a 3.0 percent desired return gives a benchmark cash rent of $270 per acre ($9,000 land price x .03 return).”

“Besides issues associated with determining the appropriate levels of farmland prices and returns, two issues complicate using this approach. The first is that theory suggests causality runs from farmland returns to land prices and not the other way around. Increases in cash rents lead to increases in farmland prices. Similarly, decreases in cash rents lead to decreases in farmland prices.”

“If the ‘market’ cash rent is below the benchmark cash rent, the price of farmland simply may be too high and needs to adjust downward. In the above example, suppose the desired return is 3 percent, but the “market” cash rent is $220 per acre rather than the $270 benchmark cash rent. A 3 percent return on the farmland investment results if farmland price decreases from $9,000 per acre down to $7,333 ($220 cash rent / .03 return).”

“The second issue is that the desired return varies with changes in market conditions. Since the mid-1980s, cash rents as percentages of land values have decreased. For state-level averages in Illinois, cash rent as a percent of land value averaged 8.0 percent in 1985. From these high levels, cash rents as percentages of land values had a consistent downward trend, reaching a low of 3.0 in 2016.”

“This downward trend corresponds to decreases in yields on interest bearing financial assets. For example, yields on the 10-year constant maturity Treasury note fell during the same period. Ten-year notes averaged a 10.62 percent yield in 1985, falling to 2.14 percent in 2015.”

“Yields on 10-year Treasury notes provide an indication of returns of competing investments to farmland. Moreover, 10-year yields provide an indicator of changes in interest rates on farm mortgages. Between 1985 and 2015, the correlation coefficient between cash rents as percentages of land values and 10-year yields is .93. When returns on interest-bearing assets are low, cash rent as a percent of land price should be expected to be low as well.”

“Interest rates have been on a declining trend from 1985 to the present, with rates being particularly low since the 2008 financial crisis. Since 2008, U.S. Federal Reserve Bank actions have been designed to encourage low interest rates. While the U.S. economy has been growing for the past several years, growth rates have not reached levels that occurred during the 1960s through 1980s. Moreover, much of the growth currently taking place does not appear to require much capital. Low demand for capital then leads to low interest rates. Furthermore, interest rates are higher in the U.S. than in many countries.”

“Currently, cash rent as a percent of land price is above the yield on the 10-year Treasury. From 1985 to 2015, cash rent as a percent of land price averaged .3 percent below the 10-year yield. If the -.3 relationship holds in the future, cash rents as percentages of land prices could decrease to near 2 percent. Cash rents as percentages of land prices have trended down as yields on Treasury notes have decreased. Further declines in cash rent as a percent of land prices are possible. Cash rents as percentages of land prices likely will remain low as long as interest rates remain low.”