Tuesday, 29 March 2011

Look Who Wants to Buy a Farm

We all live with, and worry about debt.  As you could gather from the last post,  I am concerned that many farmers are dealing with debt levels that are well beyond the norm, probably unsustainable. I worry that this has a negative impact on their year to year decisions,  and  certainly worry about what it means for the rest of us in the future.

I've never gone to sleep at night owing a bank three or four million dollars, having to look at spring planting decisions like a trip to Las Vegas: spend a lot of money for the small, small chance that everything will go right here, and not so right elsewhere,  leading to a big payoff at the end of the year. Twenty years ago potato farmers used to say that if they could get one good year in three or four, they'd move ahead, build their equity, and over thirty or forty  years come out ahead with a business, and a farm asset, worth passing on or selling. Those days appear to be long gone,  partly because farmers everywhere have become so good at what they do there's rarely a shortage, and even if there is,  farmers just don't seem to have the economic clout to cash in.

Right now PEI potato farmers should be making good money: there was a drought in Russia, and tons of PEI potatoes were exported to make up the shortfall. Holland (PEI's big international competitor) had flooding and had to give up all of the Caribbean market to PEI. PEI itself planted the smallest crop in a decade, so it's not as if there's a huge supply. Even with all of these positive factors, farmers are still getting just over $1.80 for a ten pound bag, that's just above the cost of production, and it took weeks to get there.

The long term consequences of big debt are troubling too.  Farmers will resist any kind of land zoning to protect farmland, because land with development potential could be a way out of the poor house.  It also makes farmers vulnerable to offers from people who wear three-piece suits and drive around in fancy cars.  There are several stories this week from economists who say farmland will be the next big asset bubble: rising food prices, growing populations, limited supply of farmland, just what a hedge fund manager is looking for, and a welcome sight for a heavily indebted farmer . 

PEI does have the Land's Protection Act which limits corporate ownership to three thousand acres, so is somewhat protected, but in the second item below, a report put together by the National Farmers Union,  there's good evidence this kind of speculative investment in farmland is well underway in Western Canada.


The next market bubbles

People frequently ask me, as someone who has written on market speculation, where the next big speculative bubble is likely to be. Will it be in housing again? Will it be in the stock market?

I do not know, though I have some hunches. It is impossible for anyone to predict bubbles accurately. In my view, bubbles are social epidemics, fostered by a sort of interpersonal contagion.
A bubble forms when the contagion rate goes up for ideas that support a bubble. But contagion rates depend on patterns of thinking, which are difficult to judge.
Big speculative bubbles are rare events. Little bubbles, in the price of, say, individual stocks, happen all the time, and do not qualify as an answer to the question.
And, because big bubbles last for many years, predicting them means predicting many years in the future, which is a bit like predicting who will be running the government two elections from now.
But some places appear a little more likely than others to give rise to bubbles. The stock market is the first logical place to look, as it is a highly leveraged investment – and has a history of bubbles.
Food prices
There have been three colossal stock-market bubbles in the last century: the 1920s, the 1960s, and the 1990s. In contrast, there has been only one such bubble in the United States' housing market in the last hundred years, that of the 2000s.
We have had a huge rebound from the bottom of the world’s stock markets in 2009. The S&P 500 is up 87 per cent in real terms since March 9 of that year.
But, while the history of stock-market prediction is littered with too much failure to try to decide whether the bounceback will continue much longer, it does not look like a bubble, but more like the end of a depression scare.
The rise in equity prices has not come with a contagious "new era" story, but rather a "sigh of relief" story.
Likewise, home prices have been booming over the past year or two in several places, notably China, Brazil, and Canada, and prices could still be driven up in many other places.
But another housing bubble is not imminent in countries where one just burst. Conservative government policies will probably reduce subsidies to housing, and the current mood in these markets does not seem conducive to a bubble.
A continuation of today's commodity-price boom seems more likely, for it has more of a "new era" story attached to it.
Environment and economy
Increasing worries about global warming, and its effects on food prices, or about the cold and snowy winter in the northern hemisphere and its effects on heating fuel prices, are contagious stories.
They are even connected to the day’s top story, the revolutions in the Middle East, which, according to some accounts, were triggered by popular discontent over high food prices – and which could themselves trigger further increases in oil prices.
But my favourite dark-horse bubble candidate for the next decade or so is farmland – and not just because there have been stories in recent months of booming farmland prices in the US and the United Kingdom.
Of course, farmland is much less important than other speculative assets. For example, US farmland had a total value of $1.9 trillion in 2010, compared with $16.5 trillion for the US stock market and $16.6 trillion for the US housing market.
And large-scale farmland bubbles are quite rare: there was only one in the US in the entire twentieth century, during the great population scare of the 1970s.
But, farmland, at least in certain places, seems to have the most contagious "new era" story right now. It was recently booming, up 74 per cent in real terms in the US in the decade ending with its price peak, in 2008.
And the highly contagious global-warming story paints a scenario of food shortages and shifts in land values in different parts of the world, which might boost investor interest further.
Homes and farms
Moreover, people nowadays easily imagine that the housing and farmland markets always move together, because prices in both boomed in recent memory, in the early 2000s.
But, from 1911 to 2010 in the US, the correlation between annual real growth of prices for homes and farmland was only five per cent, and the latest data on farm prices have not shown anything like the decline in home prices.
By 2010, real farm prices in the US had fallen only 5 per cent from their 2008 peak, compared to the 37 per cent decline in real home prices since their peak in 2006.
The housing-price boom of the 2000s was little more than a construction-supply bottleneck, an inability to satisfy investment demand fast enough, and was (or in some places will be) eliminated with massive increases in supply.
By contrast, there has been no increase in the supply of farmland, and the stories that would support a contagion of enthusiasm for it are in place, just as they were in the 1970s in the US, when a similar food-price scare generated the century’s only farmland bubble.
Still, we must always bear in mind the difficulty of forecasting bubbles. And, for daring investors, it is not enough to find a bubble to pile into. They must also try to determine when to cash out and put their money elsewhere.
Robert Shiller, Professor of Economics at Yale University and Chief Economist at MacroMarkets LLC, is co-author, with George Akerlof, of Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism.
This article was first published by Project Syndicate1

And here's the link to the NFU study: Please put this URL into your browser, the link isn't working properly.


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