Tuesday, January 24, 2012

Farm land bubble

Cheap farm credit is available and this may lead to a bubble. If rates are cheap and farm prices are high, then farmers will borrow money. Farmer borrowing is not for seasonal buying of seed but to expand their farming through buying land. The government may be a primary cause of this potential bubble through the Farm credit system. The farm credit system makes government subsidized loans no different than Freddie Mac and Fannie Mae in the mortgage market. Its policy goal is to provide funding for farmers. It is the same system that needed to be bailed out in in 1987 after the farm crash in the early 1980's.

With farm prices high and few alternatives viable for lenders in the commercial and residential real estate market, money has flowed to the farm sector. Providing money to farmers seems like a good bet in a rising price environment but the seeds of destruction are being planted when the money is used to further lever the balance sheet of  farmers. Land prices go up. New equipment is bought. It also seems like a safe bet for farmers because interest rates are so low, but a decrease in prices will make it harder to refinance in the future. This will not be a short-run problem. Farmers should be able to make interest payments at these low rates, but roll-over risk in a falling price environment is real.

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