Does Corn Bubble?

On the one hand, there are the harsh realities of the recent decimating drought and a clear dissipation of the largest underwater natural reservoir in the United States – the Ogallala Aquifer (stretching from the Dakotas to north Texas), which is projected to drop from overuse to 20% of its former capacity by 2020), which supplies vital water to much of the nation’s grain belt. If climate change experts are right, conditions will only get worse in the coming years.

On the other hand, there is desperation among investors, still skittish about the fundamentals in the stock markets and finding greater values in commodities, and a rising global population putting greater strains on food production (and hence food prices). I’m even ignoring our current and rather stupid corn-for-ethanol subsidies that waste valuable feed crops and consume precious excessive water to create a fuel additive; even the current roadblocks-r-us Congress can’t tolerate that program much longer.

Hard to think of dry, cracked earth where corn stocks and fields of wheat once waived as valuable and likely to grow even higher in worth over the coming years. “Across the nation’s Corn Belt, even as the worst drought in more than 50 years has destroyed what was expected to be a record corn crop and reduced yields to their lowest level in 17 years, farmland prices have continued to rise. From Nebraska to Illinois, farmers seeking more land to plant and outside investors looking for a better long-term investment than stocks and bonds continue to buy farmland, taking advantage of low interest rates.

“And despite a few warnings from bankers, the farmland boom shows no signs of slowing. Almost every year since 2005, except during the start of the recession in 2008, agriculture land prices have posted double-digit gains. In the same period, the Standard & Poor’s 500-stock index has had double-digit gains in only three of those years.” New York Times, October 22^nd.  Yup, more people on the planet make food production a whole lot more attractive… and truly brings into question why the words “farm subsidies” are even still in our vocabulary. But there’s a catch… if we continue to experience the above water and weather issues, if climate change actually alters the value of land for the particular crops contemplated, how can land that really doesn’t produce the expected milk and honey remotely hold these “newfangled” values?

Wall Street has stepped into the farmland chase, and wherever Wall Street goes… uh oh… a bubble is sure to follow. The numbers are actually scary: “An August survey by the Federal Reserve Bank of Chicago showed a 15 percent increase in farmland prices since last year across a region that covers Iowa, Illinois, Indiana, Wisconsin and Michigan. Another survey released at the same time from the Federal Reserve Bank of Kansas City showed even higher growth in the Great Plains states, where farmland prices have increased 26 percent since last year… The two Fed surveys and sales data have raised concerns from bank regulators about a potential farmland bubble, similar to the housing frenzy that helped set off the financial crisis. A year ago, rising farmland prices prompted regulators to warn banks not to relax lending standards. In July, the Kansas City Fed held a symposium to discuss concerns about a bubble.

“‘Any time you have an asset that doubles in value over a decade, there is cause for concern about how sustainable that growth is,’ said Richard A. Brown, chief economist at the Federal Deposit Insurance Corporation… For farmers in the land hunt, a potential bubble was barely a concern. Many said they needed to buy more land to expand their businesses so they can generate more income. And in this wobbly economy, they found safety in stashing their money in farmland.” NY Times.

A bubble does seem inevitable, even if weather conditions improve, unless food prices at least keep up with the rising cost of the land, an unlikely scenario even at current population growth rates. When is anybody’s guess, but given the power of the farm states (which each have two U.S. Senators regardless of population), a massive domino-effect of crashing farm prices could send even traditional Tea Party voters scurrying for federal bailouts in the years to come. They’re use to the government’s stepping in to support their businesses. Is there a message we can send to these farmland speculators? Outside of the subprime loans, most of those slammed with residential foreclosures were doing everything right… they were blind-sided by Wall Street chicanery and government military excess. But these new farmland speculators should know better!

I’m Peter Dekom, and this time the word that they need to understand better than ever is “speculating.”