Monday, December 13, 2010

A Farm Belt Asset Bubble?

Thursday's Wall Street Journal's lead staff editorial was entitled The Farm Belt Boom.

In yet another piece of a larger inflationary mosaic, the piece detailed the recent dramatic rises in land prices in the US farm belt. For example,

"The Federal Reserve Bank of Chicago reported in November that farmland values across the upper Midwest have jumped 10% since 2009. The year-over-year increases were even more dramatic in some states- 13% in Iowa, 11% in Indiana......Land fever is running rampant."

The Journal editorial credits global crop prices, but also adds this cautionary information,

"But the price surge has been so rapid and so broad across nearly all commodities.....that it can't merely be a function of new demand for specific grains.

This is where monetary policy comes in. As the greenback declines amid easy Fed policy, commodities rise in value. Farmland booms have typically coincided with periods of Fed easing, such as the 1970s and the late 1980s. It's no accident in our view that the latest commodity price surge began this summer when the Fed's talk about another round of quantitative easing began in earnest.

The problem comes if the boom is an artificial, money-fed bubble."

Which echoes my recent post discussing the risks to banks of the low-rate environment,

"One is, obviously, the greater probability of asset bubbles, against which loans may be made, in low-rate environments. We just saw this over the last seven years. Now rates continue to hover at record lows.

The second aspect involves risks versus rates. At ultra-low rates, projects of marginal merit appear to be worthwhile and may be funded. Yet they are precisely the most vulnerable loans, once rates begin to move upwards towards more normal, sustainable levels."

Somewhere, banks are lending to buyers of this expensive farmland. At some point, if and when this commodity price boom softens or turns south, the typical outcomes will obtain, i.e., over leveraged landowners, bankrupt farmers and insolvent banks holding worthless loans on now much-less valuable farmland.

As the Journal piece concludes,

"We hope Fed Chairman Ben Bernanke is right when he says asset bubbles and price spikes in commodities are nothing to worry about. Of course, he said the same thing about housing and oil in the last decade. We're not predicting an imminent bust, but we do hope someone at the Fed is watching prices grow in farm country."
Scary, isn't it? We're not two years on from the financial meltdown caused by an overheated mortgage banking sector, exacerbated by low rates, and the Fed is still biased toward keeping them ultra-low.

No comments: