We don't understand jack...

About China.  I read this on MR recently:

In just two years, from 2011 to 2012, China produced more cement than the US did in the entire 20th century, according to historical data from the US Geological Survey and China’s National Bureau of Statistics. [More]

That quote itself is from the FT, but I used this pointer so you could see the comments. Most of the but-that-can't-be-right arguments are noted and dispensed with there with good links.

In fact, to buttress this mind-blowing fact, consider this previous CFOTD:

Before the Communists came to power in 1949, China had only 22 dams of any significant size. Now the country has more than half of the world’s roughly 50,000 large dams, defined as having a height of at least 15 meters, or a storage capacity of more than three million cubic meters. Thus, China has completed, on average, at least one large dam per day since 1949. If dams of all sizes are counted, China’s total surpasses 85,000. [More]

I mentioned this factoid on the show and the incredulity was uniform.  I'm still unable to wrap my intuitive thinking around it. The unavoidable suspicion is if I can't come to grips with this solid evidence of the enormity of Chinese construction activity, what makes me think I have any feel for their food industry?

Since I had been pondering "whither farmland prices?", oddly enough the two strands intertwined. I came up with these working theories:

1. The economy of China is not just bigger than we imagine, it is bigger than we can imagine.
2. We are most probably underestimating Chinese demand for ag products in the future.
3. By a lot.

Just like we totally missed - as in NOBODY called it - the incredible run-up in farmland prices in the last decade, I think we're about to do it again. China can drive the demand for protein especially to support routinely higher grain prices for the foreseeable future.

Bottom line, I see much lower odds of success by getting bearish on farmland simply because some bankers want to be the next Nouriel Roubini. They were wrong in 2009. I think they are short-sighted now.

Update:

Just like I did, the enormity of this disparity has some groping for a clearer picture.  So:

It's not heavily influenced by imports/exports.  The US only in the last few years have imported much more than a few percent.  China is currently producing about 25 times ( 2.2Btons vs. 74Mtons) our output and exporting. It exports ~17 Mtons. 

When farmers die...

I was puzzled by the fact that farmer ownership of land is actually dropping after hearing for years about how they were the major buyers in the market.

The 2012 Iowa Farmland Ownership Survey from Iowa State University Extension shows 62 percent of Iowa farmland was owned by non-farmers last year, up from 60 percent in 2007 and 55 percent in 2002.The survey, compiled every five years by ISU Extension, is mandated by the Iowa Legislature.While the high percentage of farmland ownership by non-farmers might appear to be unusual, the cost of land, equipment, seed, fertilizer, crop insurance and other expenses related to planting and harvesting a crop is a major contributing factor.“With the amount of capital required today for a farming operation, we need the partnership with the landowners to bring that capital to the table,” said Kirk Weih, vice president of Hertz Farm Management in Mount Vernon.“About 40 percent of Iowa farmland is cash-rented, where the landowner gives up control of the farm, but receives rent by the acre. The farm operator makes all the decisions regarding what will be planted and provides all the capital required for the crops.”Weih said Hertz Farm Management, which manages farmland for non-farmer owners, also sees about 40 percent that is custom-operated. In that case, the landowner hires a neighboring farmer to do the planting and harvesting, but the landowner makes the capital investment for everything from seed to tiling.“There’s also a crop-share arrangement where the farm operator receives 20 percent to 25 percent of the crop for his contribution of labor and equipment,” Weih said. “The landowner receives 75 percent to 80 percent of the crop for their contribution of the land and all the expenses to plant and protect the crop.”[More]

How could farmers be the major buyers of farm land and end up owning a lower share?

Well, duh, John  - they die, and non-farming children inherit. I had forgotten we aren't immortal. Also farmers become non-farmers, as I am gradually doing. 

There is no good way to truly capture how much land is closely held by non-farming family members. We count that as "famer-owned*" - a sort of virtual farmer ownership.

Meanwhile, we're back to great alarms about outside investors jumping in to buy up farmland.

The report notes that over the next 20 years, nearly half of US farmland—about 400 million acres—will be up for sale as our aging base of farmers moves into retirement. So far, Wall Street cash is moving onto US farms like a stream; financial firms own just about 1 percent of total acreage, and most farmland is still bought by farmers, not institutional investors, the report states. But as more prime land enters the market, the hot money could soon flow like a gusher. By mid-2013, farmland was such a hot commodity that institutional investors werecomplaining of a tight market for prime farmland—that is, they had more money committed to buying farmland than they could find attractive deals for. But the supply of prime farmland for sale will expand as farmers retire in the coming decades, and Wall Street looks poised to move into the market.And of course, you don't have to take on the risk of farming when you buy farmland; you can also collect rent checks from the people who take on that risk. According to this USDA report, nearly 40 percent of US farmland acres are rented, and in the ag-heavy regions of farm states such as Iowa, Illinois, and California, the number tops 50 percent. The Oakland Institute report points out that one of the biggest players eyeing US farms is UBS Agrinvest, an arm of the Swiss banking mammoth UBS. UBS's strategy: "Rather than gambling its profits on commodity prices that could rise or fall, Agrivest prefers the predictable income that comes from renting to tenants, usually through lease agreements that last one to five years." That strategy is looking pretty good right now, because corn and soy prices have fallen while land rents remain stubbornly high. Between 2010 and 2012, the value of UBS's US farmland portfolio jumped from $192 million to $415 million. [More]

Philpott is noted for his agrarian proselytizing, but that doesn't excuse the dude from doing some math.  The normal turnover for farmland is 3-4%, so "half in 20 years" noted above is strangely below normal. And just because it changes hands doesn't mean it goes up for sale. In fact, very little does - it's mostly inherited.

Here's a serious effort to tease out actual farmland sales, not just in-family estate settlements, etc.

[More]

This is one of the most thorough efforts to measure the farmland market, and I expect it is still high. There are too many sales that happen before you know about it to be truly called open market transactions (buying out a long-time landlord, for example). 

The bottom line is these Cassandra-ish warnings about outside investors are perennial sensationalist drivel. Besides, how can the over-predicted farmland crash happen if all this hot money is wating to pounce?

Understanding inequality...

I am disturbed by growing wealth and income inequality, but don't have any really firm conviction what the implications are or what might be dome to mitigate it. Nor do experts seem to have firm answers to choose from either. For example, the common logic that growing inequality leads to revolutions from the have-nots isn't well supported by historical evidence.

In 1904, on the eve of military defeat and the 1905 Revolution, Russian income inequality was middling by the standards of that era, and less severe than inequality has become today in such countries as China, the United States, and Russia itself.  We also note how the interplay of some distinctive fiscal and relative-price features of Imperial Russia might have shaped the now-revealed level of inequality. [More]

And I really have a hard time imagining Americans in mobs with pitchforks, etc. singing some revolutionary anthem, even as we soar to new heights of inequality. Indeed, debate rages about the nature and urgency of the problem.

I see two big and very real problems: slow income growth for many income classes and a problem with excessively high returns to finance at the very top.  (As an aside, both of these problems contain elements of both “left-wing concerns” and “right-wing concerns,” and both problems are deeper than any particular ideology can solve and they should make virtually everyone rethink their views).Those are the problems and we should try to fix them.If we could fix these problems, that would mean a smaller financial sector, less moral hazard, better allocation of capital, and for most/all income classes rates of income growth comparable to the 1948-1972 period, chop it up as you wish.  Imagine that everyone’s income went up three percent a year, every year, and every generation was about twice as rich as the parents.  Whether there then would be more or less marginal “churn” in the relative income rankings is not a matter of irrelevance but having somewhat more churn should not be viewed as a major social goal per se.  It would depend on the reason for the immobility, and the real focus of our concern would be the reason (e.g., bad schools? some kind of unfairness?), and not the marginal change in the numerical churn per se.Given that background, and those two very real problems, you can in fact create other “problems” by creating and manipulating more complicated statistics, based on the initial problems, and that can lead you to various measures of inequality and immobility.  But not all inequalities are bad, or avoidable, and the same is true for immobilities.  The valid problems, as embedded in the new complicated measures, still will boil down to the two simpler problems mentioned above.  In the meantime, toying around with misleading and less transparent aggregate measures of inequality and immobility will bring confusion as to what is really at stake.Focus on the two very real and fairly simple (as distinct from simple to fix) problems. [More]

Well, here's a new theory about how inequality arises and plays out. It even has a somewhat cryptic, almost hieroglyphic, illustration.

How does growing economic inequality lead to political instability? Partly this correlation reflects a direct, causal connection. High inequality is corrosive of social cooperation and willingness to compromise, and waning cooperation means more discord and political infighting. Perhaps more important, economic inequality is also a symptom of deeper social changes, which have gone largely unnoticed.Increasing inequality leads not only to the growth of top fortunes; it also results in greater numbers of wealth-holders. The “1 percent” becomes “2 percent.” Or even more. There are many more millionaires, multimillionaires and billionaires today compared with 30 years ago, as a proportion of the population.Let’s take households worth $10 million or more (in 1995 dollars). According to the research by economist Edward Wolff, from 1983 to 2010 the number of American households worth at least $10 million grew to 350,000 from 66,000.Rich Americans tend to be more politically active than the rest of the population. They supportcandidates who share their views and values; they sometimes run for office themselves. Yet the supply of political offices has stayed flat (there are still 100 senators and 435 representatives -- the same numbers as in 1970). In technical terms, such a situation is known as “elite overproduction.”...Elite overproduction generally leads to more intra-elite competition that gradually undermines the spirit of cooperation, which is followed by ideological polarization and fragmentation of the political class. This happens because the more contenders there are, the more of them end up on the losing side. A large class of disgruntled elite-wannabes, often well-educated and highly capable, has been denied access to elite positions. [More]

While I'm not sure how much I buy completely into this explanation, it is a novel possibility, and one that seems to have some anecdotal evidence behind it (read the whole article).

But if true, it does have some pretty serious implications for agriculture, as the Battle of the Elites isn't too far from what we see around us right now. It also has considerable knock-on effects as it unfolds.

Tyler Cowen's book, Average Is Over, looks at several aspects of inequality and has provoked considerable debate. In addressing some questions about what the future could look like, I found this nugget.

6. In talks (but not in the book) I have suggested that food production is the best candidate for “what will be most difficult to augment” in an age of smart software.  Food production seems harder to “wall off” and it seems more embedded in local culture (for better or worse, usually for worse) than factory production.  See our MRU video on conditional convergence, which considers the work of Dani Rodrik in this regard.  It would mean that the price run-up for Midwestern farm land in the United States may not be a bubble. [More]

I realize I am biased toward strong land prices, so this could simply be me picking out voices that agree with me. But what if land prices are not simply a function of interest rates and corn prices, but increasingly affected by mechanisms mentioned above, as well as the liquid asset glut, confidence in alternative assets, etc. that are hard to measure and barely covered in ag econ classes?

What if we saw an income squeeze in agriculture and merely slower appreciation in farmland prices? We could simply shift the mix of buyers to favor outside investors, I think.

Casualties of the Crisis...

The autopsies of the financial crisis are beginning to appear. One of the more thoughtful, albeit disturbing is from Justin Fox at the Harvard Business Review. He suggests three pillars of modern macroeconomic theory have taken big hits:

1. Efficient market hypothesis (EMH): investors act rationally in the long-term and markets are informationally correct.
2. Capital asset pricing model (CAPM): assets are priced by their risk
3. Maximizing shareholder value

This critique pretty much undermines much of what we all believe about open markets - not a comforting thought.

In the early 1930s, policy errors by governments and central banks turned a financial crisis into a global economic disaster. In 2008 the financial shock was at least as big, but the reaction was smarter and the economic fallout less severe. We actually had learned something in the intervening three-quarters of a century about how the economy and the financial system fit together.
But we hadn’t learned everything—and we still haven’t. In fact, macroeconomists and finance scholars clearly forgot some important lessons along the way. And the seeming success (compared with the 1930s, at least) of the 2008 bailouts and subsequent government and central bank actions may actually dilute the lessons of the recent crisis. In the 1930s and 1940s, the financial system was essentially built anew, with tight regulation and drastically changed attitudes about risk and responsibility. That approach surely had its costs, but it ushered in a financial-crisis-free era in the United States and Europe that lasted for decades. This time around, the system has survived more or less intact. That seems like a good thing, on balance; but it may also mean we’ll be having more learning experiences soon. [More]

While unsettling, it also fits with my growing belief that markets evolve to elude participants. It's almost a predator-prey model. It also leads me to think that the growing complexity of our markets should send us warning signals about what to expect from efforts to master them.

Fox suggests more, not fewer, market shocks even as we build financial instruments to seemingly manage them. We may simply be shuffling risk and disguising it better and faster.

In such an environment, the low-velocity and rudimentary nature of farmland stands as a stark contrast. I think we could see a significant part of our land price be contributed by the relative lack of sophistication of the asset.  Which would give us a formula something like this:

P = IV + CV + SV, where 

       IV = intrinsic value of capitalized returns

       CV = control value (for farmers, primarily) for future generations

       SV = simplicity value for understandability and low maintenance (cash the rent checks annually)

Regardless, the macroeconomic community is in the throes of self-loathing, and are certainly not offering rosy pictures of the future.

The scarce market argument...

 For land prices. As asset bubbles are being spotted like financial Yeti all around the globe, people are trying to see some sense behind the prices. In this analysis about the boom in classic car prices see if the reasoning resonates with our favorite asset.

From our vantage point — and it certainly is a lay vantage point when it comes to classic cars — there seem to be three core attributes associated with vintage automobiles.The first is uniqueness.Value related to uniqueness is understandable since it relates to how easily an object or item can be sourced, replicated or mass produced. For now, there is little chance that a classic Bentley will be perfectly replicated. Value applied on these grounds seems rational enough.
The second is utility.Though, while this may be a bonus, we’d argue that in classic cars this is not necessarily a core value since most classic cars are notoriously unreliable and hard to maintain.In fact, a lack of utility can even be part of the appeal for classic car enthusiasts, since the joy of ownership is often linked to the challenge of maintaining the cars in working order, or getting them up to scratch.The third attribute, arguably the most important, is historical importance to car enthusiasts and sector specialists. [More]

The third point may be a bigger contributor to land prices than we think: land has continues to stand unchallenged as an historic form of wealth, and because it is intrinsically tied to location it also is a repository of history. To know an ancestor or beloved grandparent walked/bought/farmed an acre is to add the same type of value as knowing your childhood movie idol owned an item. Think of Spock's napkin or Jon Voight's car. Funny doesn't work without a wide acceptance of the underlying truth we feel.

When it come to land next to me, it is truly a scarcity market. And given my conviction that extremely large amounts of liquid assets are looking for a long-term home, farmland could be a semi-scarce asset that can at times possess some attributes of fine art or a Duisenberg. 

This means that using tools that select the best stock for your 401K may not help when making land decisions, especially if you farm. 

Unclear on the concept...  

Economists and ag journalists are so anxious to see a reversal of farmland prices so their decades-long warnings can be said to have come true they are starting to confuse an inflection point with a "tipping point".

Iowa farmland values have definitely hit a tipping point, agreed Iowa State University economist Mike Duffy. The state's ethanol industry helped spawn four years of 20% to 30% land appreciation since 2007, almost on par with 1970s-style inflation. "Now the gains are slowing down, but I don't see a big collapse ahead," said Duffy, who thinks Iowa markets might slip back to 10% year-over-year gains by November, half the year-ago levels. "This adjustment will feel more like a tire with a nail in it." [More]

I done the ciphering and "slipping back" to 10% gains  does not consitute a tipping point, IMHO. A lot of 401K owners would love a mere 10% annual gain.

And charts like this don't help.

[Same source]

This is bad charting. While labeled "Actual thru 2012", the blue line should be dotted or indicative of the shift to estimates for 2013 and beyond. The decline shown is all in the author's imagination right now.

Well, I'm going to an auction tomorrow for 80 screwy acres next to me. 

We own the 40 acres in the corner as well as farm all around it. The drainage ditch makes it a headache but does give us a great tile outlet.  Ground quality is meh. 

Since we're interested, my experience is it will go sky-high.  I'll let you know how it turns out this weekend on US Farm Report (we're bringing a shooter down).

I had hoped...  

To have grandchildren earlier.  This wasn't the reason, but...

New moms and dads with visions of Ivy League degrees dancing in their heads should be prepared to face a bill of $422,320 in today’s dollars if Junior heads off to one the country’s priciest colleges as a member of the class of 2034.

If college costs keep rising as they have for the last three decades, the inflation-adjusted price of four years of tuition alone will more than double at private colleges and nearly triple at public universities by the time a baby born this year is ready to enroll, an analysis by The Daily shows.

Even after adjusting for inflation, college tuition has increased by an average of 3.5 percent a year at private schools and 4.5 percent a year at public schools, the analysis showed. When room and board are factored in, the total cost of college has gone up by an average of 3.08 percent a year at private schools and 2.96 percent at public schools. [More depressing projections]

I wonder how this would compare to my own education cost and calculated in acres of farmland. If I remember correctly, it was about $6000 total at RHIT (1966-1970).  I think land was selling for about $600, so it cost ten acres to educate me.

Pricing land at $12,000/A, today's 4-year private education cost looks like about $160,000 or 13 acres. 

These are quick and dirty numbers - just thinking out loud.

Still coming inside...  

I had wondered if financial turmoil has slowed the flow of fund money into farmland, like it has with commodities, but maybe not. At least one large hedge fund manager is doubling down.

Diggle plans to transfer ownership of his farmland into a holding company, in which outside investors can hold shares, he said. Vulpes, which currently manages about $200 million, will own and operate the company. After buying farms in Uruguay and Illinois, as well as a kiwi-and-avocado orchard in New Zealand, he plans to pour money into Africa and eastern Europe as global food prices soar.
The value of farmland in the U.S. has probably gained 20 percent to 30 percent in the last two years, while Diggle’s investments in Uruguay may have risen 50 percent as sheep and cattle prices almost doubled in Latin America this year, he said.
Agriculture would be the “single most interest opportunity over the next 10 to 20 years,” Diggle said.
Vulpes favors investments in metals, energy and food, and “dislikes” government bonds, he said.
“Being long stuff in the ground is going to be a better place to be than holding pieces of paper,” Diggle said.
The firm’s Testudo Fund, which is heavily invested in precious metals and the mining industry, has gained 2.5 percent this year. The Russian Opportunities Fund has declined about 10 percent in the same period. [More]

Of course, this may not signify much, because hedge funds are little more than a way to extract bloated fees from extremely rich people.

Much has been made about hedge funds’ failure to keep up with the major stock market benchmarks this year. But 2011 is merely the latest disappointment in a string of misses that stretches back nine years, according to one analysis of the hedge fund industry.
Money invested in hedge funds since 2003 would have generated a return of 18% through November, according to data compiled by Hedge Fund Research. That puts it far behind the Standard & Poor’s 500-stock index, which has generated returns of 29% over that same period, once dividends are factored in, according to Simon Lack of SL Advisors. The hedge fund underperformance is even starker when placed next to a small basket of investment grade corporate bonds, as measured by the Dow Jones Corporate Bond Index. That benchmark has gained 77% since 2003.
Factor in hedge fund mangers’ customary 2% management fee and a 20% cut in profits, and the gap widens even more.
While disappointing, Mr. Lack says investors have no one but themselves to blame.
“The investors are all sophisticated wealthy institutions, not retail investors. So frankly, it’s a lot of sloppy analysis,” he said. [More]

Maybe the continuation of hedge fund money into farmland is a bad sign, no? If nothing else, those farms will likely push the boundaries of cash rents if for no other reason than to pay their exorbitant fees. Try as I might, I can't work up much sympathy for the investors, however, which maybe underscores the growing social rift between that sliver of the very wealthy and even those of us doing pretty darn well. Be honest - aren't you rooting a teensy bit for the conniving hedge fund managers? Didn't you experience some titillating schadenfreude  during the Madoff revelations?

Yeah - me too.

Regardless, I think it is fair to say it is really hard to find places to put money that will 1) still be there in 6 months, and 2) earn a positive return. 

Could not resist...  

Just one quick post.

On the subject of The Great Land Bubble:

Is China about to implode? Paul Krugman is worth a read on the subject, though in the end he doesn't know any better than anyone else. For what it's worth, the one encouraging thing I've consistently read about China is that their property bubble is largely driven by cash purchases, not debt. And non-debt bubbles, like the dotcom bubble, are inherently less destructive when they burst than debt-driven bubbles. [More]

I agree whole-heartedly. The other difference with a farmland bubble is the low velocity. Most of us never want to actually sell the land, so after a while even a way off-base price is little more than an unpleasant memory. I suppose I have paid too much for land, but my heirs won't care, just like I don't care what my forebears paid for the land handed down to me.

Then again how often have we said, "This time is different?" But even if we are way wrong, the default rate on land mortgages in 1987 (the bottom) was about 7%, or viewed from the other direction, 93% gritted our teeth and scrounged up the payments somehow.

You can run...  

But you can't hide. I'm talking about hot money looking for safe place to live - theme that shows up constantly in my posts, I now realize.

I would guess I'm not surprised because I am ~130% invested in farm land, which not only has been safe for the last few decades, but lucrative. But if you are not a land nut, choices for safe investment are not ample.

You’ll find the above on page 143 of the Credit Suisse 2012 Global Outlook, which we’ve stuck in the usual place.
It shows how the world’s outstanding stock of safe haven assets denominated in either dollars or euros has evolved, adjusted to account for the Fed’s purchases of US Treasuries and other assets in recent years as part of quantitative easing.
You can see just how impressive the decline has been since 2007, and we’d also note that if Credit Suisse had been feeling uncharitable, they would have been justified in excluding French sovereigns.
The chart helps explain much of what’s happening in global financial markets now, especially in Europe (not on its own, mind you — we said “helps” explain):
– Begin with the ongoing collateral crunch, and how the decline of safe assets is directly tied to the dramatic fall in the availability of high-quality collateral in European lending markets. So much of it is now encumbered via direct bilateral funding agreements or by sitting at the central bank drawing liquidity. [More]

While I kinda thought this was happening, the scale of the shrinkage was alarming.It also makes me wonder, what will have to happen to make stuff that was downgraded upgraded in the future? I suspect only significant time and good performance.

Wall Street detour...  

Say what you will about the OWS movement, the idea of "The 1%" has taken root. While many before had questioned how the finance sector added so much value it was entitled to oversize profits, some of our best economic minds are having trouble seeing this to be true as well. In the process of thinking this through some are discovering something farmers have instinctively, if not consciously, believed. (Note my emphasis below)

But the bigger idea, I guess, is that the “normal people” helped by Wall Street are the 1%, and that Wall Street has its “fingers on the scales in their favor”, and that if the scales are tipped towards the 1%, then that means the 99% are the losers. They’re the prey for Wall Street’s predators.
I don’t buy this analysis. I don’t believe that Wall Street is meaningfully improving the lives of the 1%, except insofar as Wall Streeters are the 1%. (Remember that financial professionals make up only 14% of the top 1%, and 18% of the top 0.1%. They’re a large chunk, but by no means the majority.)
In fact, I suspect that the top 1%, if anything, are responsible for a disproportionate share of Wall Street’s income. Wall Street isn’t picking the pockets of the 99% and giving the proceeds to the 1%: it’s picking the pockets of the 1% and giving the proceeds to itself. And Wall Street is taking a whole bunch of money from the 99%, too. But for the 86% of the top 1% who don’t work in finance, I really don’t believe for a minute that Wall Street is helping them out by giving them the hard-earned money of the 99%.
I also don’t believe in some halcyon era when Wall Street was “an economic helpmate” to the 99%. It has always been very good at extracting rents, and very bad at creating wealth for its clients.
Narrowly speaking it’s easy to see where Emerson’s speech is coming from: the housing bubble was certainly instrumental in allowing millions of Americans to live beyond their means. And yes, Wall Street was a necessary part of the machinery of the housing bubble. But of course the Americans who bought beyond their means did not “get to continue living like kings”; instead, they got foreclosure and eviction notices. And Wall Street wasn’t there to help them when that happened.
But I don’t believe that Wall Street has its fingers on any scale. There are wealthy families who have managed to preserve and grow their wealth over many centuries — Italy and Germany both have quite a few of them, the ultimate Black Swan that was World War II notwithstanding. Those families tend to have a lot of real property: income-producing land, if you’re growing things like grapes or trees, is an amazing long-term asset, since the main rents you’re extracting come directly from the Sun. By contrast, the rich families who hire Goldman Sachs to look after their money and end up invested in Global Alpha or pre-IPO Facebook shares tend to be much newer money. They made it quickly, and they’ll probably lose it quite quickly too — it could quite easily all be gone within two or three generations. [More]

Long before I even suspected what was going on in big banks, I resented their seemingly unnecessary fee extraction rackets. This from a 1996 Top Producer article:

Much has been said about the single-minded focus of farmers for land. Interestingly enough, we are not the only profession with such prejudices. I have noticed accountants and financial advisers, for instance, tend to favor money, especially cash or easily convertible assets. The reason is analogous - they “farm” these assets like we do land. If you make your living by moving others’ money from one form to another, seeing it tied up for centuries in land, which ends their involvement (and commissions) is not attractive.[More]

The global financial sector is not earning its pay, IMHO. "Efficient allocation of assets", my posterior! We have cash piling up in companies and banks while deflation remains an ominous threat in the developed world, for the fifth year running. Does that sound efficient to you?

What finance has done is perfected rent-seeking tactics for all those who prefer cash as an asset over all other things. In a totally unexpected development, the world is awash in such assets, as the growing global economy and technology /productivity have generated more available capital and simultaneously tempered demand for private investment. We have enormous wealth looking for somewhere to be.

I feel perversely lucky I have always been absolutely terrible at managing money, and piled my wealth into other forms instead. Moreover, debt is one really good method to countering to the One Percent, when you think about it.  Nobody embezzles a loan.


When the game is rigged against you, don't play. And while everyone should feel free to to mock and deride the loopy protestors in the Occupy movement, it should give you pause that there is some serious kernel of truth fueling this anger.

There is nothing more truly American...  

Than paying too much for land. A fair case can be made our country was invented not so much by religious hard-liners (despite what the TP imagines) as men who knew where wealth really, really comes from.  Like Ethan Allen (from a new biography review):

Randall works hard to make this a story about salt-of-the-earth, democratic New England settlers fighting off New York's aristocratic land barons—so hard, in fact, that you have to admire the effort. Alas, the evidence won't conform. The Green Mountain Boys were driven less by ideology than by a desire to keep their land and, at least in Allen's case, to legalize deeds bought on the cheap to sell for a hefty profit. Both sides were gambling wildly, and as the imperial conflict heated up, the stakes rose.
Back in London, groups of well-connected investors were eying quantities of land so vast as to make the Vermont speculation seem like child's play. The greatest of these ventures was the proposed colony of Vandalia, covering 20 million acres in what now comprises West Virginia and Kentucky. Parties to the enterprise at various times included Benjamin Franklin and two of George Washington's brothers. Unfortunately, Virginia claimed the land in question, as did Connecticut and Pennsylvania—each state having sold the land to settlers and investors—although by 1774 it was all, according to the British government, under the jurisdiction of Québec. Vermont, in short, was a very big story writ small.
Indeed, who wasn't a land speculator in this freewheeling age? George Washington, a former surveyor, had amassed thousands of acres in the Ohio valley and spent 10 years lobbying the governor of Virginia to legalize his titles. Gen. Thomas Gage, who would lead British forces against Washington, held 18,000 acres, and had married into one of the greatest landowning families on the continent. When fighting broke out in 1775, these contested speculations loomed in the background.
Just how these contests over land play into the Revolution is one of the most debated questions in American history. In 1909, historian Carl Becker argued that the American Revolution was not so much about home rule as "who should rule at home." The struggle for independence, in other words, centered less on exalted principles than on the quest for political and economic power by provincial elites. Popular among muckraking classes during the age of Robber Barons, this interpretation was hard to reconcile with a patriotic account of the nation's founding and eventually fell out of favor. [More]

There are times I think this insatiable desire for land, even over cash, is hard-wired into my genes. If so, maybe I can trace my ancestry back to some illustrious figures of our past, albeit illegitimately, no doubt.

I hated 'em then...  

I hate 'em now. Not really, but some guys can't seem to stop catching a break.

The two had already sold slightly more than 300 acres outside Chicago, at an average of $25,000 per acre.

They took those proceeds and bought 4,000 acres, in 17 downstate counties, that they rented to other farmers. That left them 1,800 acres to farm corn and soybeans in Chicago's exurbs, including fewer than 1,000 acres they owned.

That's when fate smiled on them.

During the past year, corn prices have doubled on increased demand for use as livestock feed and biofuels, and soybean prices have risen by more than 50 percent.

As those prices rose, the Baltz brothers began selling their fertile land downstate that they paid $2,500 to $4,000 an acre for and which is valued at as much as $8,000 an acre. During the past 12 months alone they've sold more 2,000 acres. Now they are more active farmers in their own backyards.

During the past three months, they've purchased from lenders almost 1,000 acres of farmland in Will and Kendall counties that were once scheduled for homes, paying a fraction of what developers paid years ago.

"A lot of (banks) just want it off their books," Ed Baltz said. "We got a little more power because we got the cash to spend."

On a recent warm afternoon, the brothers stood behind a weathered, vacant white-frame home and barn north of Black Road in Shorewood, on 246 acres that, at their peak, sold for $65,000 an acre and in 2005 were annexed by the village and zoned for more than 400 single-family detached homes.

The Baltz brothers paid $3.6 million, or about $14,500 an acre, for land that already has subdivision utilities brought to the property line. This year, though, the only thing rising out of the dirt will be the corn that Bob Baltz planted last month. [ More]

 [Click to enlarge]

This is the world we live in. And it is germane to recall that Chicago was a mere military outpost when southern IL was booming.

I also use these examples to remind me my decisions about land (like yours) can have disproportionate consequences.

Are you refinancing?...

Even with record low mortgage rates, refi's aren't flying out the door at banks and mortgage companies.

Mortgage rates dropped to another record low this week following the Fed's move to pump hundreds of billions of dollars into the U.S. economy. Though officials hope that buying Treasuries with newly-printed money will give the slow-growing economy a big boost, the move likely won't give today's homeowners much relief.
Now is one of the cheapest times in decades to finance a home, but few are actually locking in record low mortgage rates. This isn't just because many don't qualify for refinancing as home prices plummet and banks continue to enforce tighter lending standards.
It's also because many owners who locked in relatively low rates between 2003 and 2005 don't think it's worth refinancing, according to a U.S. Federal Reserve study of the mortgage market released in September. This is a factor that has largely been overlooked. [More]

This got me to wondering about farmland refinancing.  Even though it has been widely advised by ag business gurus, I can't find any good stats (outside the Farm Credit System) to show farmers are leaping to lock in low long-term rates.  Anecdotal data from around here seems like they are: it takes several weeks to get a title policy done because they are backed up with refi's.

But if the number is smaller than rates would seem to suggest (i.e. the savings are significantly greater than the costs of refinancing), I think I can guess some reasons holding guys back.

• Loan-office aversion.  On the whole we would just as soon not borrow any money, and even if we have a good relationship with our lender(s), it is not a transaction we enjoy.  There may need to be a powerful incentive to get us to initiate the always emotionally fraught moments in the bank.
• Lender reluctance.  You can sure bet your lender isn't going to trade a higher rate mortgage for a much lower one spontaneously.  Hence the trigger is tripped only when faced with the loss of the mortgage by you going somewhere else for your money. But it is important to remember bankers face the same tricky calculation when interest rates are rising.
• Personal ties. A good lender becomes a close adviser and often one of your best friends.  Even mildly adversarial conversations ("I've had an offer from another lender") seem to put a real chill in the air.
• Ignorance.  Many farmers may not know where interest rates (especially long term) are as they don't read much or talk to friends about money. And even if they do, they may not be able to calculate the savings or analyze the possibilities with any confidence.  Maybe they've always left it up to their banker. 
• Pure laziness.  Lookit, prices are good.  I'm making my payments.  Why stir up trouble or make more paperwork for myself? Besides not all my bank experiences have been happy ones.
• Still not low enough.  I'll  bet there are a few holding out for 2%/30-year fixed mortgages.
• Only X years left anyway.  [Where X<5] I'll bet some guys my age can see the end of the tunnel and the trade-off may be worth it, but inertia is pretty powerful.

Doubtless there are many other reasons, but if American homeowners are slow to take advantage of lower rates, I really wonder if some farmers aren't also missing some opportunities.

How we will know it's a bubble...

From FDIC head Sheila Bair to Marcia Taylor, eyes are peeled for a bubble in farmland.  But all the experts are tut-tutting the warning.

Today, I'd like to follow-up with an analysis coming out of the University of Illinois by Gary Schnitkey, who concludes that farmland prices are not a bubble and an appreciation of 3% next year would be in line with current conditions. His number one concern for downward pressure on farmland prices is the potential for (perhaps rapid) interest rate increases. His second main concern would be a decrease in farmland returns. He doesn't see either in the short term. [More]

I am way too close to the problem to be objective, but I do think this theory might help.

I was reminded of all of this today by an excellent post from Mike Konczal pointing out this exact phenomenon across bubbles and industries:

In my personal opinion, in the same way middle-class people turned amateur stock analysts was the sign of a tech bubble, or middle-class people turned amateur realtors was the sign of a housing bubble, middle-class people turned amateur credit risk analysts and credit channel intermediaries was the surest sign of a credit bubble.

The amateur credit risk analysts he is talking about are the person-to-person lending websites that were once very overhyped in terms of their potential. This is an amateur market I had not considered, but it certainly makes sense.
The lesson here is beware the amateurs. Wherever they gather in huge profitable masses a bubble has surely formed, and the longer they are able to walk around blithely picking up $100 bills off the sidewalk, the bigger the bubble is. [More]

I think these guys are dead-on.  And as a result, I think farmland will be hard to "bubblize" because there really is no market for amateurs to jump into.  Just like Berkshire Hathaway stock, farmland is denominated in too-large lumps for the truly Everyman investor.  Moreover, even now farmland trading velocity is not appreciably greater than the past.

The limited amount of land for sale, along with current returns and the safety of farmland as an investment, kept farmland values steady across the state in 2009. This is according to the 2010 Farmland Values and Lease Trends Report issued at the Illinois Land Values Conference. 

"There is a limited amount of land for sale," says Bob Swires, AFM, Swires Land and Management, Danville, and overall chairman of the annual survey and conference hosted by the Illinois Society of Professional Farm Managers and Rural Appraisers. "For example, there were 11,000 acres sold in northwest Illinois in 2008. That compares to only 5,900 acres sold in the same region in 2009." 

"Add to that the fact that potential sellers like the current returns, capital appreciation and safety of their farmland investment when compared to the low interest rates on CDs and bonds, and certainly the past performance of the stock market. They are just not letting go of the land," he says. [More]

In other words, nobody is "flipping" farmland. Combine that limitation with the tiny volume of farmland compared to financial instruments and other real estate, and the dynamics of a runaway market will be hard to achieve, IMHO.

What I think will happen is a steady chorus of jeremiads from outside observers for several years until a natural dip in the market occurs, (remember last year?) at which point they will dredge up their earliest warning and say they "called it".

But even then it will still be somebody's farm.  There is no bubble (or bust) if you are not selling.

Also, my barber is not giving me farmland tips.

The securitization downside...

The process of turning loans (mortgages) into securities was vaguely understood by the folk who generated these "tradable" pieces of paper.  But as we sorta knew then, it did muddy the water of ownership of the loan.

Heck, it turned it into sludge!

Consider the latest revelations. The big banks are so backed up with foreclosures that some of them resorted to hustling through repossessions without the proper paperwork. Some of them—including Bank of America, J.P. Morgan Chase and Ally Financial's GMAC Home Mortgage—have announced a temporary freeze in some states on further foreclosures while they sort through the mess.
In one case, a bank employee said she was approving 8,000 foreclosures a month. By my math, that's roughly one for every minute and a half. No, she wasn't reading all the documents thoroughly. (As one wit observed, the banks paid about as much attention to foreclosing on the loans as they did to making them five years ago.)
In many cases, thanks to the fallout from securitization, it's not even clear who owns the mortgage. The payments may be due to different financial institutions around the world, some of which have gone the way of all flesh. [More]

Thinking about this, I wonder if the wave of defaults is just beginning, and if the financial community has even the faintest hint of how to handle the result.

Farm mortgages are not in trouble, of course, and they are remarkably straightforward.  I can point to the folks to whom I owe the bucks.  Which makes you wonder if more lenders won't want farm real estate lending as part of their business, or more of it if they are doing it now.

Couple that with the continued slide in long term interest rates, and surging commodity prices, and my wildly bullish land price forecasts could seem embarrassingly tame.

Oh yeah, this is funny money...

Marcia Taylor offers her review of one of the latest post-mortem reports on the financial crash, The Big Short by Michael Lewis.  It was apparently a learning experience.

This month marks the second anniversary of the Wall Street meltdown that very nearly bankrupted the global financial system and triggered untolled human and economic carnage in its wake. I don't need to recount the misery wrought by the Great Recession, but I will admit that I didn't truly grasp the sheer depravity of the subprime mortgage crisis until reading author Michael Lewis's latest book, "The Big Short."

In it, Lewis decodes the financial double-speak that was meant to keep billion-dollar derivatives trades so opaque that even ratings agencies like Moody's didn't know how to properly rate them and instead magically turned Bbb- bonds into Aaa.. We learn exactly how a trader at Morgan Stanley could lose $9 billion on a single trade, apparently without adult supervision at his parent company. And--most amazing to me--that the icons of Wall Street magnified the crisis out of proportion by making their own house bets on borrowed money. [More]

This book seems to match many others flooding the market. But more interesting to me was to see the name of of one of the major actors in that drama pop up in my part of the economy.

Michael Burry, the former hedge-fund manager who predicted the housing market’s plunge, said he is investing in farmable land, small technology companies and gold as he hunts original ideas and braces for a weaker dollar.

“I believe that agriculture land -- productive agricultural land with water on site -- will be very valuable in the future,” Burry, 39, said in a Bloomberg Television interview scheduled for broadcast this morning in New York. “I’ve put a good amount of money into that.”
Burry, as head of Scion Capital LLC, prodded Wall Street banks in early 2005 to create credit-default swaps to bet against bonds backed by the riskiest home loans. The strategy paid off as borrowers defaulted, letting his investors more than quintuple their money from 2000 to 2008, according to Michael Lewis’s book “The Big Short” (Norton/Allen Lane).
Burry, who now manages his own money after shuttering the fund in 2008, said finding original investments is difficult because many trades are crowded and asset classes often move together. [More]

I'm not sure what "water on site" means, but if I were in irrigation country I'd be curious. Judging by the latest FRB Chicago report on farmland price increases the boom is hot enough in north central IA (14% y-o-y).

One more exhibit in support of my bullishness on farmland.

Howdja like to farm for one of these guys?  Think they'll be interested in a fair, risk sharing flex rent?

Yet another outlandish prediction...

Folks have asked me several times whether I think we are in a land value "bubble".  Bubbles are notoriously hard to identify when in progress.

 On the way up, bubbles encourage excessive investment in the bubble sector.  On the way down a bursting bubble can create wealth shocks, liquidity shortages, and balance-sheet death-spirals.  For both of these reasons, it would be good to be able to identify and pop bubbles.  Identifying bubbles isn't easy, however, because, especially when interest rates are low, prices can increase rapidly with small, rational changes in investor expectations.  But the difficulty of identifying bubbles is reasonably well known.  What I think may be less appreciated is that bubbles are hard to pop even when you know that they exist. [More]

Therefore, my opinion will be a pure shot in the dark.  But here it is:

We're entering a farmland bubble.

What this means is I expect farmland gains in value in double digit percent for 2-4 years, ending at least 50% higher than today, and depressing rent yields (even though they will rise, too) to 2% or lower.  By entering, I mean today's values will be viewed as rational and the level to which we might return when and if the general economy can accelerate growth above 2%.


This bubble could last far longer, however.  This is the primary reason IMHO:

“The number-one fixed-income conundrum is ‘Where do I go?’” said Mitchell Stapley, the chief fixed-income officer for Fifth Third Asset Management, who oversees $22 billion in assets. In credit markets, “the supply of sleep-at-night quality bonds has just collapsed,” he said in an interview from Grand Rapids, Michigan. [More]

It is by comparison that a hard-to-understand land market will perhaps make a little sense. Farmland is a "sleep-at-night" asset.

I see some parallels...

In the wake of the housing (mortgage) meltdown, some economists looking back are questioning the very basis of the "ownership society".  I think they make some sense.

The formula, however, changed dramatically at the end of the 20th century. From 1994 to 2005, the homeownership rate reached record highs, thanks largely to innovations in the mortgage-finance market that reduced down payments and minimized equity. This shifted the basic wealth-building proposition of homeownership away from savings to an almost exclusive focus on capital gains. Average down payments fell, reducing the savings required to “get in the door.” More significant was the rise of mortgages that involved no forced savings: the interest-only loan, in which no equity is built because the principal is never paid down, and the “negative amortization” loan, in which payments are so low that they do not even keep up with the interest, leaving homeowners more indebted, rather than less, each month. By 2006, more than one-third of subprime mortgages had amortization schedules longer than 30 years, nearly half of Alt-A mortgages were interest-only, and more than one-fourth were negative-amortization loans.

One effect was to reduce the social benefits of homeownership, because the benefits are a product of equity and not of the mere fact that a contract has been signed and a mortgage taken out. The relationship between homeownership and social goods had been misunderstood: The traits that enabled households to build up the savings necessary for significant down payments — hard work and the deferral of gratification — were misattributed to homeownership itself. Paying a mortgage did nothing to improve children’s educational outcomes; instead, the factors that gave rise to homeownership also led parents to raise children in a manner that led to greater educational attainment.

Without substantial down payments and conservative amortization schedules, the entire proposition of homeownership as a social good is turned on its head. Think of a homeowner with a zero-down, negative-amortization mortgage: The balance would equal at least 100 percent of the value of the house at origination and would steadily grow, putting him ever deeper in debt unless the market value of the house grew at an even faster rate. Rather than being a source of wealth, the mortgage would actually reduce the net worth of this homeowner below what it would have been had he rented.

Rather than providing a social benefit, then, homeownership without equity imposes costs. Andrew Oswald of the University of Warwick has argued that such homeownership can exacerbate unemployment by making workers less likely to move from one labor market to another. Labor mobility is badly undermined when homeowners in a depressed market can’t sell their property for anything approaching the principal balance of the mortgage they originally took out to buy it.  [More]

This may not be the minefield it first appears. Rather than saying we allowed the wrong people to borrow too much money betting on always-rising home prices, I believe the authors correctly suggest the housing policy was a gigantic subsidy to the wealthy and housing-specific businesses (construction, RE, finance, etc.) that actually harmed low-income people by diminishing the social goods associated with home ownership. 


In fact, what has been viewed as a causal relationship (home owners become better citizens, etc.) was probably a correlation.  As they illustrate, the behaviors that got a 20% downpayment and other underwriting criteria met are the same ones that cause more civic participation, education, social mobility, etc.


So far so good.  But tell me why this reasoning should not apply to the numerous farm ownership efforts or beginning farmer programs?


Back in the day when I served on the old FmHA local board, I wondered at the cases that clearly would never "graduate" to economic "adulthood".  I also began to question whether we actually helped with low interest, low downpayment, etc. tools.  It would be interesting to see the persistence of ownership from beginning farmer loan programs that subsidize first-time buyers with public funds.  How many still are farming or own the land in say 10 years?


Are there any records of the outcomes (with privacy protected, of course) for agencies such as IFDA? None that I can see from their minimal website.


Without such followup data, we could be fooling ourselves as to whether these programs are helping folks or simply employing transaction agents.

1031 in China...

With all the development in China, I'd wondered if the displaced farmers and villagers got any compensation when massive housing or business areas were constructed.

It's even better than I imagined.

This nice little suburb, it turned out, had been built in 2006. And like a lot of things in China, it was built all at once, on top of a village that already existed.
The obvious question with this sort of rapid development is what happens to the people who had the shack that sat on the land where the government wanted to put condos? The answer, at least in Dalian, was that they bought the previous inhabitants off. A conversation with some residents revealed that they didn't just get one free apartment in the new building. They got four free apartments, three of which they were now renting out. And medical coverage. And money for furnishings. And a food stipend. And -- I'm not kidding, by the way -- birthday cakes on their birthdays. Sweet deal.
If you've spent any time around local politics, you'll often hear people joke of doing this sort of thing. A massive development that a lot of people are excited about will be blocked by a handful of people who're worried that the traffic will destroy their quality of life. Frustrated reformers often muse about giving each of them a million dollars and sending them on their way. In Dalian, at least, the government is pretty much doing exactly that. [More]

OK - I'll swap 10-1 and throw in a cake...

[Update: Other experiences vary, apparently]