Want to see what a bubble looks like?
Look at this:
This is the farmland price index for the Chicago Fed district (data source: Bloomberg 2013).
I show you this because I’ve been getting a lot of questions lately about farmland.
“Is it in a bubble?” People ask me.
“It’s only $8,000 per acre… so much cheaper than urban and suburban land,” they say.
“In the downturn you’re forecasting, surely farmland prices will hold up well,” they argue.
I tell you, at times like these, when people ask me such questions, and present such arguments, it takes all of my restraint not to yell out: “Are you kidding me?!?”
Listen up. Listen closely. Listen good.
Farmland is in a significant bubble… one that will burst sooner rather than later and burn anyone with a stake in it.
Just since early 2009, farmland prices have gone up by 81%.
For perspective, the S&P 500 has gone up 170% in the same time period, also inflating into dangerous bubble territory.
And residential real estate went up 107% from early 2000 into early 2006. If we calculate farmland gains since then, we’re looking at 280%!
So when we see a correction ahead, if the prices just fall back to that last low in early 2009 (circled in the chart) we’ll endure a 40% correction.
That’s the minimum loss you can expect in the years ahead.
Is This Bubble Burst Avoidable?
The chart also shows the last real-estate bubble that peaked in 1981 (that’s the little hump in the middle). From 1973 to 1981, prices went up 260%, but that was during a period of extreme inflation, which favors both commodity prices and real estate.
From 1981 to 1987 farmland prices in the Chicago District fell 50%. In the Kansas City District, prices fell 57%.
See a pattern?
Nine years up.
Six years down.
Looks like a Phil Anderson 18-year cycle to me.
So is the bubble burst I see happening in farmland avoidable?
We’re looking at a six to 10-year slowdown ahead, and deflation in prices, which is worse for real estate and farmland.
The Million Dollar Question
The million dollar question is this: Why have farmland prices gone up while commodity prices have generally dropped since mid-2008 and, agriculturally, prices have sunk even lower this year after the U.S., Brazil and Argentina enjoyed record crops?
The simple answer is the Fed.
The Fed-induced fall in interest rates since the 2008 crisis has lowered land acquisitions and machinery costs, thus increasing profits.
But now longer-term interest rates are starting to rise. They’ve moved from 1.38% on a 10-year Treasury bond to as high as 3% in the last year.
If interest rates continue to rise and agricultural and commodity prices continue to fall, farmland is toast!
My view is that interest rates will rise sometime into 2014 as the crisis builds. Then they’ll fall for years.
That rise is likely to be the pin that bursts the farmland bubble. Continued declines in commodity prices into the early 2020s will only aggravate the situation.
If you own or invest in farmland, seriously consider selling what you can… especially if you’re not using it for profitable production.
Managing Editor’s Note: Do we have a Black Friday deal for you! For more than nine hours of Harry’s insights, instructions and guidance – something that he typically charges upwards of $50,000 for – can be yours now for 98% off. Details here.
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