Friday, June 7, 2019

Stresses in farmland - An example of the problem of leverage

A recent Financial Times article "US farmers' borrowing boom is built n shaky land value" highlights the issue of leverage and the overvalue of assets in the farm industry. Farm prices have been somewhat depressed and only worsened withe the decline in exports from the tariff wars. This issue has only be exacerbated for some farmers with the wet planting season in the Midwest. Prices may have moved higher, but if you don't have a crop there is no income. 

Debt is at the same levels as the peaks in the early 1980's, yet now farmland prices are falling. Leverage is increasing for farmers, so they are vulnerable to any shock in the price system. The result will be a disruption in the farm industry structure. Weak hands will have to pass assets to others which may be institutional. Improvements will be delayed and productivity will be shocked. 

This disruption will not jeopardize the crop food chain, but just like the farm debt crisis of the 1980's there will be a human toll and an impact on industrial organization that will affect margins and future pricing. This can be viewed as a fall-out from cheap money for too long. High debt and leverage, cheap money, and market uncertainty will result in unexpected changes. View this farm industry disruption as a warning.

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