by Mark (Trader Mark) Hanna, Mar­ket Montage

Looks as if some of the main­stream media is catch­ing whiff of the poten­tial for another Fed induced bub­ble – this time the easy money fuel­ing spec­u­la­tion in farm­land.  The impact of ‘the finan­cial­iza­tion of every­thing’ is hav­ing far reach­ing effects.  Too much money chas­ing too few assets, espe­cially as the Fed sucks up so much of the sup­ply of Trea­suries, leav­ing money that often go there seek­ing another home.  We have seen how this game ends – it will just be a mat­ter of when.

Via WSJ:

• Farm­ers like Terry Pratt are a big rea­son Mid­west farm­land prices seem to be defy­ing gravity—for now.  Inside the tidy red-brick com­mu­nity cen­ter here, a hushed crowd of town mer­chants and grow­ers watched as two of their own bid against each other at an auc­tion for 50 acres of corn and soy­bean land.
• The auc­tion was over in 15 min­utes. Mr. Pratt’s win­ning bid of $7,875 an acre was nearly dou­ble the rate he paid for a nearby par­cel just four years ago. “Chances are if another per­son bought it, it would have never sold again in my life­time,” Mr. Pratt said.
• The big ques­tion mark hang­ing over the farm econ­omy is whether a bub­ble is build­ing in Mid­west crop­land. Prices have dou­bled over the past five years in states such as Nebraska and Indi­ana. Iowa State Uni­ver­sity reported Wednes­day that the aver­age price of an acre of farm­land in Iowa, the nation’s biggest pro­ducer of corn and soy­beans, reached $6,708 this year, up 32.5% from 2010 for the biggest annual increase in the his­tory of the 70-year-old sur­vey.
• Part of what has econ­o­mists and rural bankers on edge is that Mid­west farm prices are climb­ing at rates last seen in the go-go 1970s, the period that set the stage for the farm­land bust of the 1980s, when prices sank by half. The bust ignited a rural cri­sis that pushed many farm­ers out of busi­ness and hun­dreds of their banks to the brink of collapse.
• “Land prices are too high. Things are get­ting out of whack” said Michael Swan­son, an econ­o­mist at bank­ing giant Wells Fargo & Co. He fig­ures that Mid­west farm­ers have his­tor­i­cally bought an acre of land for the value of corn it can pro­duce over four years. Now, an acre of land eas­ily fetches six years of crop production—at a time when crop prices are well above his­tor­i­cal aver­ages.

• The Fed­eral Reserve issued a memo to farm bankers in late Octo­ber warn­ing that the mar­ket for crop­land “may reflect overly opti­mistic long-term expec­ta­tions” and that land val­ues would fall if inter­est rates increase abruptly and farm prof­its shrink.  (Mark’s note – gee thanks Fed­eral Reserve.  This is like the arson­ist telling a home­owner her house is on fire due to matches and gaso­line the arson­ist brought to the scene)
• Those big returns are attract­ing some large investors hemmed in by the weak­ness of the gen­eral econ­omy. Since 2007, TIAA-CREF, the retire­ment sys­tem for employ­ees of non­prof­its, has acquired 600,000 acres of crop­land worth $2.5 bil­lion, about half of which are in the U.S. “If oppor­tu­ni­ties arose, we could dou­ble our port­fo­lio,” said Jose Minaya, TIAA-CREF’s head of natural-resources invest­ments, who sees farm­ers strug­gling to keep up with expand­ing demand, keep­ing grain prices high for years to come.
• Ster­ling Lid­dell, an agribusi­ness ana­lyst at Rabobank, said Mid­west crop­land prices could drop 12% to 15% some­time over the next three years to five years if inter­est rates climb back to more-normal lev­els, which would make alter­na­tive invest­ments more attrac­tive.  (Mark’s note – chances of inter­est rates being allowed to return to ‘more nor­mal’ lev­els in 3 to 5 years are slim to none)

See the WSJ link for the rest of the article.

Dis­clo­sure Notice

Any secu­ri­ties men­tioned on this page are not held by the author in his per­sonal port­fo­lio. Secu­ri­ties men­tioned may or may not be held by the author in the mutual fund he man­ages, the Pal­adin Long Short Fund (PALFX). For a list of the afore­men­tioned fund's hold­ings at the end of the prior quar­ter, visit the Pal­adin Funds web­site at http://www.paladinfunds.com/holdings/blog

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