05-06-2013 03:51 PM
Just wrote a quick piece on a Fed report on the boom-bust cycles in our business and how things are basically setting up for another bust to happen.
"Historically, the sharp accumulation of debt has preceded financial crises. After farm booms in the 1910s and 1970s, lower incomes and higher interest rates contributed to farm financial crises and waves of farm bankruptcies during the 1920s and 1980s," says Jason Henderson, Federal Reserve Bank of Kansas City vice president and Omaha branch executive. "Rising bankruptcies and the resulting deleveraging in agriculture echoes the recent financial crisis which was characterized by home foreclosures and lost housing wealth."
So, what's happened at those times? The boom times have a common thread. "Farm enterprises historically have used wealth to support consumption and investments when income fades," Henderson says. "During years of low income, farmers tap their existing wealth to finance spending on capital investments such as buildings, vehicles, machinery and other equipment. Thus, similar to nonfarm households, the wealth effect often leads to sharp increases in debt and leverage in farm enterprises."
So, what do you think? Is Tiger's "Peak Corn" idea part of this? Is it going to happen? If you think it is, what are you doing to get ready? I want to hear from you! Unless you're able to get out and start planting corn. If that's the case, get out there and plant all day and night, then come back and share your thoughts! Ha!
Hey, hope everybody's staying safe out there!
05-06-2013 04:42 PM
I was going the back road home this afternoon and drove by a 4wd tractor and 48 row planter and a couple tractors hooked to diggers across the road, rained/snowed out from the other day. They were all new obviously well over $1 million just sitting there, now to think that maybe 5, 6 yrs ago a guy needed LDP payments just to pay the grocery bill ...I don`t know if this is a "Rockefeller getting stock tips from a shoe shine boy" just before the crash moment or not, but things are really frothy out here.
It seems the stock market is more focused on what the fed will do with interest rates than company revenues in determining where the Dow goes. When interest rates have to go up one day, it`s lights out Irene!
05-06-2013 07:33 PM
05-06-2013 10:22 PM - edited 05-06-2013 10:26 PM
I really enjoy the Federal Reserve and everyone else talking about how low the debt to asset ratio is, and how this is not like the 80's. Well . . . when this thing blows land prices will fall, today the investment bankers are predicting that the dollar will strengthen by 9% this year, that means we will be over 90, that means the brakes will be slamming on this economy which has been gutted by Bomber Ben.
The inverse relationship that exists between a strong dollar and declining exports will be accelerating. The only reason there are not riots in the streets and our country is not under martial law is because the FED condinues to print money to purchase the US Bonds no one else wants to own.
when land prices collapse we can then discuss the wonderful statments being made that bankers are making now, that debt to asset ratios are not like they were in the 80's. Let $5,000 an acre melt off current land prices and lets see what song they are singing.
It will happen, those who have no debt will be O.K. but it does not take much of a decline in value of land against which debt is owed or other land that is pledged as additional collateral to secure the mortgage to blow debt to asset ratio's all to hell.
The bankers are always wrong, they were wrong in the 80's, they were wrong in the residential housing fiasco, and they are wrong now.
Land values mean absolutely nothing unless you plan on selling at these prices. These farming operations will be dropping like flies when grain prices readjust to historical norms and no direct payments to buy that new pickup with.
On Bloomberg this morning,the government was already predicting record corn and soybean crops in their attempts to continue to talk markets lower. if they are right and we are looking at $4.50 corn and $8 beans come fall, you will be seeing major adustments being made in farm country next year.
But WTF do I know! Adios Amigos. John
05-06-2013 10:41 PM
Jeff, one big red flag to me that signals a possible bust is all the outside investors paying top dollar for marginal farmland. Take Stamp farms for an example. When Stamp Farms land was auctioned off it wasn't sold to long time farmers, it was sold to an investment firm for $7,000+ an acre. That may not be a big deal for those located in the central cornbelt, but for us farming the marginal ground of southwest lower Michigan it is. When the government raises interest rates, tweaks crop insurance and gets rid of direct payments we will see some farms go under. I doubt we see anything like the 80's farm crisis, but the young hot shots without any equity paying top dollar for land and new paint will be the first to go.