Stephen Thompson (letter to the editor) in Ontario Farmer: Farmland bubble likely to burst
At this time of year farmers become giddy when talking about what people are paying to buy farmland, especially in recent years when prices have skyrocketed.
Agriculture’s talking heads try to normalize the situation by claiming things are fine, even as the excesses become ever-increasingly wretched. Particularly cringe-worthy is the claim by some lenders that they don’t have a problem because their farm borrowers have oodles of equity.
Unfortunately, this type of claim ignores the reality that this isn’t earned equity, but speculative equity based on land prices that aren’t tethered in any meaningful way to any earnings component for that land.
Astute investors pay heed to two long-standing investment ‘Bibles’ as well as one relatively recent book and even a movie. The first is the 1841 book by Scottish author Charles Mackay -‘Extraordinary Popular Delusions and the Madness of Crowds’ the second is the 1949 book – ‘The Intelligent Investor’ by legendary Wall Street investor Benjamin Graham; the third, published initially in 2000, is ‘Irrational Exuberance’ by US economist Robert Shiller and the movie is ‘The Big Short’ released in late 2015.
The common thread of all four references is the emphasis on the danger of investing in something that has either no earnings potential or an earnings profile completely estranged from the market price of that asset, as is presently the case with farmland.
Another common denominator is the significance of the fear of missing out, also a large part of today’s farmland price scenario.
That we are in the midst of a farmland speculative bubble is not open for debate or even discussion. In addition to having thrown any sort of price/earnings multiple restraint out the window, we farmers fundamentally believe “this time it’s different” (it never is) and we believe the talking heads when we should be paying no attention to them at all. The result, in too many cases, is that farmland is being bought as a ‘trophy’ simply because we can.
The worst part about being on the other side of the psychological mania inherent in any investment bubble, as was well demonstrated in the Big Short, is that you can be wrong for years and be widely ridiculed for being wrong, but bubbles always eventually burst or deflate rapidly when least expected.
Via Ian Cummings
One more time … it’s the 80’s all over again. Drought … Trudeau… interest rates … inflation… FCC willing to give you all the money you want. People saying you have to buy now, they aren’t making any more land. It will pop. With that will come a word of hurt.
It’s going to pop, very soon now I fear. Farmer I know wanted to buy some land with FCC financing. He had more than enough deposit, deal was all worked out, just needed to sign the loan, then bam – Farm credit manager stopped and said they needed more security. Didn’t make any sense, deposit and value of the land met all the criteria, but they knew the farmer had other land that didn’t have any liens against it. They wanted that land added as security to the deal. Would have put the security way above the normal percentage.
He said no. Seems to me that the Farm credit people have been told something, why else stop the deal – makes no sense.
‘Extraordinary Popular Delusions and the Madness of Crowds’
Highly recommended if you can find a copy. Some literature really is timeless. Despite its being written over 150 years ago, it still has gems that resonate today. It contains lots of history of spectacular frauds and hoaxes that people fell for in the past. People continue to fall for similar things today.
And if you cannot find a copy, you may read it for free here:
https://www.gutenberg.org/ebooks/24518
Thanks FTLjt
My friend has a few hundred acres just outside of a city north of Calgary. The farmers below him sold off a small 60 acre parcel of land for $600,000. There looks to be a house going up on said parcel, so now he has new neighbours..
Most of the farmland around the major cities is being converted to large tracts of housing, some of it “affordable” and most of it not.
As the cities encroach on the farms, the land owners are finding it very profitable to sell the land off to developers, rather than trying to continue farming, as it is becoming unprofitable. The farmers are aging out and the children may not be interested in keeping the tradition going. Their parents will most likely pass on the wealth to the kids and they won’t have any want or need to keep farming the land.. the only way a person can farm these days is with intergenerational wealth and land. No one is going to buy land at $10,000 an acre just to farm it. So it will end up that the government or large agri-monopolies will be the only ones able to afford to keep the food production machine going and that will allow them to control what and how much is produced, without much say from the consumers. We will be under total control of what we eat, the energy that we can use and the places we can go.
Not a favourable outlook…
I wonder how much land is needed to grow a few trillion crickets.
And what do we feed them to grow big , healthy and strong.
“And what do we feed them to grow big , healthy and strong.”
My shoot-from-the-hip response was Lieberals, but reality kicked in. That would merely turn them into whiny, fauning, dependent pussy-crickets…
Not to worry, FCC podcast yesterday said all is well. Cough, cough. Ratio of land price to gross revenue is out of whack but hey, better I buy it than the other guy. Choke, choke. I think there is a significant amount of 3rd party money that big time operators have leveraged to expand their operations.
Much of the same things can be said about the housing bubble. It’s all the product of years of zero percent interest rates, which cause the price of assets like farmland to skyrocket.
The interest rate trend has reversed, but only meaningfully in the last year. It takes time for that to work its way through farm finances, but in the meantime commodity prices are still relatively strong, so that’s putting a floor under values.
Going forward, it looks like we’re going to see a Fed pivot within the year, possibly all the way back to zero. The recession will bring with it declining commodity prices, so we’ll have to see where that leads. We’ve got two very conflicting forces at work in the farm economy.
But since bailouts seem to be the magical solution for every crappy balance sheet, why not just add farmers to that growing list?
Buddy of mine has a dairy farm. He’s paying 8.2% on a revolving line of credit. That’s starting to be expensive
Hard to feel sorry for dairy farmers, they have been ripping us off for years.
Not sorry either , Quebec dairy cabal runs the show. But 8.2% is probably going to look cheap soon.
Three not sorrys.
“This time is different” … includes tulip madness, how to (NOT!) pay off your war debt… and other gems…
+50 examples of “this time it’s different” and, it never is… I wish there was a chapter on Venezuela, but it’s likely worthy of more than 1 chapter as it’s so steeped in marxist “thought”
Perhaps a future edition will include not running up your debt during times of 0% interest, then switching to normal interest rates in order to “combat inflation”
https://www.amazon.com/gp/product/0691152640?smid=ATVPDKIKX0DER&psc=1
It’s time for an update on this.
if this decade is the ‘Roaring 20s 2.0’…I sometimes wonder how the ‘Dirty 30s’ will pan out!
Farmer from Ontario here, with cattle, pigs and chickens, self sufficient for the most part. A property I lease for hay was just severed, 30 acres over 6 fields, decent land but not extraordinary, close to a lake but not on it, priced $260k. Will they get it? Probably. Why? Pretty good place for a weekend place and not bad SHTF escape. That idea is gaining a strong foothold for many people. With the world going to hell in a hand basket, having a potential “safer space” is appealing and priceless.
Meant to add. I pay $750 for the hay I pull off it which works out to about $12/bale for a 4’*5’ bale, approx 850 lbs and that’s all the land can earn, not suitable for cash crop.
Safe, only if you can protect yourself.
It depends.
1970’s farm prices kept going up and up. Early 1980’s when interest rates skyrocketed and inflation tamed, farm prices crashed.
Will Biden / Trudeau allow interest rates to continue to go up? Do they have the will to tame inflation?
If not, anything physical, including farms, will be valuable and the prices paid will look low. We just don’t know.
Want to pay in Bolivars (they have had two revaluations since 2018 resulting in an exchange of 1 trillion to 1)?
Want to pay in Argentine Pesos (revaluations between 1970 and 1992 resulted in exchange of 10 trillion to 1; from 1992 to 2023 it has gone for 1:1 with $US to 375:1)?
How about $C? $1 of your 1967 pocket change has a melt value today of $18.
I farm east of Edmonton. Every time over the last 20 yrs that the land market has wobbled and started to decline, QE was just around the corner and the downturn did not last very long. It did this in both 2009 and 2015 and 2019/2020. We bought the farm we live on in 2015 and for a long while afterward would likely have gotten less than what we paid for it until this last round of covid hyper inflation. We are happy to have this land as there is nothing else going on in the zombie canuckistanian economy. Tried to buy another 80 acres last January and made a good but cautious offer as interest rates were on the rise, however, was outbid by the usual suspect of course. My offer was not that much less than what it sold for. Land here at $4500/cultivated acre is cheap relative to the $30K an acre in southern ontariowe though.
our 0.06 acre “fahm” is a knockdown price of $400,000.