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sw363535
Honored Advisor

Re: Does $4 corn support $14,000+ per acre land?

BA the comment about banks is a big one.  What the lender is willing to take as collateral ------- and for right now, farm land looks like it will pay the interest and a little principle.  Not many other investments are that reliable.  

It has as much to do with the other options as it does farm land.  

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hardnox
Advisor

Re: Does $4 corn support $14,000+ per acre land?

Speaking to generalities more than any specific analogies.

 

In 1979, everybody knew that farm land only goes up, they only made so much of it and hyperinflation was a certainty.

 

Whodathunk that Jimmy Carter would appoint a very conservative Fed Chairman who would attempt an untested strategy of interest rate targeting to squeeze inflationary expectations out of the system. With the world's growing population and demand for food, whodathunk that we'd have a corn carryover of over 50% of annual use in five years (and that would even be after the '83 combo of PIK and Drought).

 

Almost nobody, specifically, even if they can later claim to have been smart just because they weren't climbing on the bandwagon.

 

And I don't think that you should probably look to the repeat of those events- if something changes drastically it will probably be what Dougout Don referred to as "unknown unknowns."

 

I don't have any better idea, really, but here are a few what ifs.

 

What if it turns out that crony communism in China actually isn't a lot more efficient than crony capitalism and their massive debt bubble has  a crash (although Smart People suggest that the worst possible scenario is a Hard Landing. Those are the same people who said that housing always goes up, hyperinflation is coming, soon etc). That would probably set off a very hard selloff in the commodity sector near term with a very long tail of reduced demand, broad financial impairment, etc.

 

Or suppose that the Tea Party actually wins Congress and the White House in 2016 and decides to enter into a period of extreme austerity. First, they might actually feel the need for some ideological consistency and decide if they're throwing all the poor people off welfare they probably need to throw rich people off, too.

 

I actually don't give that (the throwing rich people off part) too much probability because the capacity for hypocrisy among all political types is beyond question. But I would say that if they think that severe austerity in the face of an economy that still isn't that far from a deflationary debt spiral is a good idea, good luck on that one.  And be working well in advance on who you're going to blame when your $14,000/acre land doesn't work out (say what you will about Obama, for Ag the last 5 years have been vastly bettre than what you might have imagined at the end of 2008- even if it is a phony recovery, that is more profitable than a real depression).

 

Just a couple of scenarios in the $%^& happens category. And even in our current Truman Show, it does and something will.

 

Interesting conversation and speculation but as I said, I don't know. And what I've found is that people are going to do what they are going to do, sometimes for what appear to be the craziest rationalizations, and sometimes they work out. And the best laid plans of mice and men will oft go awry, too.

 

PS. As far as quantum shifts go, I recall a passage in Secrets of the Temple, a history of the Fed in the Volker years when the decision was finally made to follow Volker's plan of interest rate targeting to wring out inflation. One of the dissenting Governors is quoted as saying, "thus begins the slaughter of the innocents."

 

When the Gods on Olympus are playing above the heads of mere mortals, sometimes you're on the right side, sometimes the wrong.  Recently Ag has been very much on the right side of the games, I wouldn't necessarily bet on that continuing to the same degree.

 

 

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elcheapo
Veteran Advisor

Re: Does $4 corn support $14,000+ per acre land?

I don't know if this would be compairable,
But Herr in northern Kansas I'm hearing 10k
Plus for fair irrigated ground, some good
Dryland about 8k.
I had some pasture come up for sale next
Door. I talked to the bank that our family
Has done business with for 70 years.
The loan officer said it would not be
a problem, "more than enough assets",
Plus a very good price on the ground.
but....had to do paperwork, provide everything, and then lastly, I asked how
Much down did they need (in the past
20%).....he said they were of the opinion
that ground was going to drop.....so
They were requiring 50% down!
I could do it, but it irked. Me. I talked to
the seller who we have known for years,
Got to visiting, and he said why he was
Wanting to sell. The Dr told him his kidneys
Were failing. We've know each other for
Years and it would fit right in with ours.
after knowing what kind of jerk the bank
Had become, and the rest of the story
Why he was selling, I told my neighbor
He could get more, and I would help
Him get the word out.
Long story short, a month later he got an
Offer of more than double what he ask.
He was able to buy the first new pickup
He ever owned, and buy a modest home
In a bigger town where his doctors are
At.

Best ground I never bought

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BA Deere
Honored Advisor

Re: Does $4 corn support $14,000+ per acre land?

Nox, I know this is dangerous of "getting political" here ...(corn ended down 4¢, beans up 6¢)...pheeew!  🙂    But do you seriously think that #1 the Tea Party could win big in 2016 and #2 they could/would bring on a period of "extreme" austerity???   As it looks now, especially with this country`s demographics, a "Jeb Bush" is about as "extreme" as we could get elected.  Reagan, Bush #41 and Bush #43 were about as far from "austerity" as you can get.  And if a "Ted Cruz" did get in and slash and burn, he`d lose his congress in 2018 and finish his last and only first term.

 

That`s not to say that one day we won`t have a "austerity" that is forced by our creditors.  But as long as there`s income and farms and businesses to tax, you`ll never see austerity from an elected official.   Too many "easier" paths to take.

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hardnox
Advisor

Re: Does $4 corn support $14,000+ per acre land?

That was hypothetical.

 

But there is a greater than in the past risk to the status quo via political extremism and a "it can't get any worse, so do something" mentaility (farming is doing very, very well in the current status quo, btw, or anyone who's forgotten the previous 25 years).

 

Whatever that might be it probably only happens as part of a serial catastrophe, which is sort of how quantum historical changes happen.

 

I guess the greater point is that the forces that created the boom might have aligned in a fashion that is about as good as its going to get.

 

They can also align in a manner that is not very good at all.

 

Specifically as to your question about the Tea Party, yes, I think Republicans are pretty confident that they can nominate a member of the country club set who would be pretty much the same as Bush or Obama in regards to the status quo.

But the likelihood of getting that done is quite a lot less certain than one might have thought possible 8 years ago. The falcon has been flying out of the reach of the falconer on several occasions recently.

 

And actually as far as the hypothetical case goes, I don't think that a Tea Party government would touch farm subsidies. Those go to Real Americans. 

 

And probably would run much higher deficits as any cuts that could be achieved would be less than tax cuts. So that's an interesting economic puzzle in its own regard.

 

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WCMO
Senior Advisor

Re: Does $4 corn support $14,000+ per acre land?

Shaggy -- it's kind of the same thing as --

 

Land sells for $10,000/acre in northern Iowa, so it must be worth that here -- even though our average yields are much less.

 

And, neighbor down the road gets $250/acre cash rent, so his other neighbor (my landlord) thinks I should pay that, too -- I told my landlord he could rent to the other guy if he wanted -- I'm still farming it.

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kraft-t
Senior Advisor

Re: Does $4 corn support $14,000+ per acre land?

So you hought a few farms on the way up.  $1k per acre $2K per acre and $3k and $4k. THose farms are all paid for and throwing off more income than you need to live. So where are you gonna invest the excess? Stockmarket? Bond market? More land? Well why not?

Farm #1 and farm #2 helped pay for #3 and #4. #1,2,3,&4 will help pay for #5 and #6 & #7.

 

Your not overlyconcerned about short term return on investment. You are focused on the long term and building wealth. You already have enough spending money to do the things you want to do. Why not build your nestegg for the next generation?

 

I'm not saying that everyone is driven by  this strategy, but some  are focused on that objective. In fact one wise old chap told me he wasn't interested in buying more land. But he did make the downstroke and his three sons were expected to pay for their quarter shares out of earnings. So if he made a 40 acre downstroke on a quarter, he enabled the procurement of 120 acres for his three sons.. A different method to build family wealth instead of personal wealth.

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hardnox
Advisor

Re: Does $4 corn support $14,000+ per acre land?

Is it or isn't it overvalued? I don't know.

 

But if you're throwing off an extra $30K per year after tax from your existing land and buy an 80 for $1 million and have enough income to pay interest and taxes it is going to take 33 years to pay it off.

 

Or if income drops $100/acre on an existing 300 you never will.

 

On the other hand if the price just keeps going to $30,000 and income increases by $200/a , you'll pay it off in 10-15.

 

None of the other farmland price spikes in US history have gone on indefinitely without a significant and lengthy pullback.

 

However in non of those cases was the government as generous and determined to support prices.

 

Kind of like the reverse of Winston Churchill's famous speech "never in the annals of history have so many done so much for so few."

Red Steele
Veteran Advisor

Re: Does $4 corn support $14,000+ per acre land?

the big play has been to keep interest rates low, and to keep the deficit manageable as a % of GNP.

 

I still believe that what we are seeing is the proverbial dutch boy with his fingers in the cracks of the dike, and that sooner or later all the forces burst out.

 

I might know that, but it still doesn't give me any insight on what will happen when the pent up forces go rushing out.

 

Maybe we see deflation, 20% interest rates, and  foreign or domestic forces trumping the desires of a soft money federal reserve. Maybe we see $100,000 per acre land and more....$50 for a loaf of bread.

 

I agree that the dance has gone on a lot longer than I figured it would, and the bill to the fiddlers is getting pretty huge.

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Canuck_2
Senior Contributor

Re: Does $4 corn support $14,000+ per acre land?

Nox, you made a very good post.

As you state 'you' don't know and nobody else does either.

 

History has shown that when everyone 'knows' land is going higher and you have to buy now, it often does not work out well.

Some of us have experienced the good times and spent accordingly.

Some did not survive to use the new equipment and land, some of us were lucky and a life event made us slow down just soon enough that we were able to scratch through.

 

Like you I don't know but I think it is a safe bet that there will be some financially troubling times in everyones future but I do not know when.

 

If we never take the big leap and commit to buying though we will never buy.

There has to be a moment when you just do it and work hard and smart and hope luck is on your side.

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