Bubble in the Heartland

When I give speeches and talk about the real estate bubble, a lot of people get it.

But it’s harder to argue against real estate falling, or gold, as these are more emotionally charged financial assets than stocks or other commodities that we’ve all seen rise and fall in bull and bear markets.

Real estate is an asset that is tangible, useable and rentable. Gold is intrinsically valuable and the only real money throughout most of history, along with silver.

But I keep arguing that after a debt-driven bubble, all these financial assets have been overinflated. Debt and financial asset bubbles go hand in hand throughout history… and they always burst together.

But what is more tangible than farmland?

Farmland gives the ability to grow the most fundamental commodity for human survival in an era of exponential population growth — the greatest bubble of all since the late 1700s? Down the road this has to be a good thing.

A recent study showed which investments have had the best returns adjusted for risk/volatility from 1994 to 2013: U.S. farmland, British farmland, U.S. property and U.S. forestry — in that order. The S&P 500 is next, then gold in the mid-range. International stocks and then commodities have fared the worst.

I have a friend, Doug Bell, who has raised money for farms in Uruguay with some of the most fertile soils in the western hemisphere. He sees growing population and middle-class sectors in the emerging world as putting ever more pressure on the needs for food, while farmland keeps getting eclipsed by rapid urbanization in almost all countries, especially now the emerging ones.

How can this not drive agricultural prices upward and farmland with it?

In the long term, I have to agree with that concept… but there is a short-term issue in our bubble economy that we have to examine.

When I look at the commodity price spiral downward (that we predicted many years ago), I tend to separate industrial and energy commodities from agricultural. Industrial commodities peaked on our 30-year cycle between mid-2008 and early 2011.

They continue to spiral down, likely into around the early 2020s or so, as they did from 1980 into the late 1990s before bubbling again into 2008 to 2011.

These industrial-based commodities have been crashing in recent years from oil to iron ore to copper and even the precious metals like gold. And more recently, lumber prices have been declining due to the slowdown in homebuilding trends and it’s panned out just as we expected and should continue to do so much more ahead.

But agricultural commodities have been more varied and often countercyclical. They tend to spike up more so than down — things like corn, soybeans, wheat, cattle and hogs.

In Uruguay, Doug has learned that you have to diversify with different crops and feedstock to survive the volatility in this agricultural sector.

What Will Bring the Change?

A slowing global economy, which we see in spades, would generally disfavor most commodities, just the industrial much more than food. The last thing anyone cuts back on in a downturn is basic food, and of course, water.

But the emerging wild card in agriculture is climate change. Forget global warming for now. More variable climate is clearly here and is likely to continue into the future and it threatens food production as any extreme between droughts and flooding is bad for production.

Doug and I agree that the climate is likely to get colder for the next decade or more, despite CO2 levels rising for decades at unprecedented rates which have been associated with global warming.

And taking from my disciplined long-term research that is just one cycle that has been rising since the late 1700s.

Keep in mind that this is a man-made cycle. Long-term scientifically proven cycles for warming would have peaked 5,000 to 8,000 years ago at the height of the emergence of the agricultural revolution. Yet, temperatures are still high and trending toward warming in the last century. This proves that something else is going on.

However, sunspot cycles dominate intermediate-term cycles in solar radiation and rainfall and are currently declining in intensity since the late 1950s. They affect sunshine and rainfall by 20% at the top.

This is a real and proven factor for agriculture and for the global economy. These types of alternating cycles generally pointed down in intensity and did so radically from the mid-1600s to the early 1700s causing a mini-ice age.

So far, we aren’t seeing the near-zero intensity of that rare period… but the lowest levels since the early 1800s will continue to weaken in the current down cycle and are likely to continue into 2020 at a minimum and likely into 2030 or longer.

That means more restrictions on agricultural production, especially in colder, more affluent areas as global population continues to march forward toward a peak in 2060 to 2100 at 9 to 10 billion!

But here’s my short-term problem with farmland prices:

  1. A global downturn will only put some downward pressure on food prices, although it is less than on industrial commodities.
  1. Farmland has seen its own extreme bubble since around 2002 (on a lag to home prices) as the next chart shows in the Midwest in the U.S.

It’s mind-blowing.

In Iowa, it’s gone up 7.7 times since 1990 and 4.6 times since 2000. In Indiana, it’s up 12.3 times since 1987 and in Illinois it’s seen an increase of 6.8 times since 1987.

This bubble that has been driven, like all bubbles, by super cheap money and speculation!

I see this bubble bursting in the next few years just like all the rest of the debt bubbles and speculation unwind around the world.

However, I’d rather own farmland over much higher-priced urban land if I had to make a choice.

By the early 2020s, a global boom dominated once again by emerging countries will accelerate demand for agriculture (and industrial commodities) more than ever. Then a few decades down the road, rising pollution, CO2 and methane levels — which are cumulative in nature and don’t dissipate for a long time — will likely cause another period of warming again, but beyond most of our lifetimes.

Both cooling in the next few decades and warming over the next century will cause havoc and continued unprecedented climate change over the rest of our lifetimes. That will likely make agricultural commodities the most interesting sector for investments in the long term.

The farmland bubble will very likely burst in the next several years, and more in developed countries with limited land than in emerging countries. Couple that with cooling trends against expectations and agricultural commodities could end up seeing the greatest bubble from the early 2020s forward, along with industrial commodities and gold again.

Farmland around the world, like India and emerging country stocks, are likely to be the best long-term investments after the next great crash and deflation cycle — and likely well ahead of the bottom in industrial commodities due more in the early 2020s — possibly in the next year or two. Get hip on both and do your research because the knowledge you gain will be an asset.

For our March issue of Boom & Bust, I’m looking at giving you an illuminating and more in-depth analysis of climate cycles from a more hierarchical and proven approach.

You’ll have a clearer view of climate cycles than most scientific experts! If you want to dig deeper, consider subscribing to Boom & Bust.

I agree with most scientists on climate change longer term, but like Doug Bell, I believe that over the next few decades a critical shift will continue. Cooling is the trend ahead, not warming.

What an opportunity if you see it coming!

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Harry

P.S. Lance explores the ongoing bond bubble in today’s Ahead of the Curve. Read up on it because we all know what happens to bubbles!

Dollar: The Currency is Here to Stay

Don’t be fooled by the naysayers. The dollar WILL remain the world’s most important currency… and the latest report from Dent Research reveals one sure way to profit from continued dollar dominance. Read more in Harry’s Dent’s new report Dollar: The Reserve Currency is Here to Stay.

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Categories: Forecasts

About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.