Asset Bubble Vs. Credit Bubble

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Everywhere one goes in agriculture circles, discussion centers on economic bubbles. With record commodity prices and some people indicating there will be no end to global growth, demand expectations are high. Land sales above $10,000/acre and land rents doubling in the past five years from $200 to $400/acre raise the eyebrow of those on a conservative path.

The question becomes, is the agriculture industry – particularly the grain and row-crop sectors – in an economic bubble? Upon analysis of the situation, one could contend that there is indeed a bubble, but this time it is not a credit bubble similar to the 1980s in agriculture and the early decade of this century in the housing and commercial real estate area.

Debt in agriculture is centered in the livestock industry, particularly hogs and dairy and to some extent the horticulture industry. Debt-to-asset ratios are quite low, below 10% on average, in the grain industry, particularly when it comes to land ownership.

One would describe this dark horse bubble as an asset bubble created by euphoric responses to global emerging markets, the growth potential created by ethanol, the low value of the dollar, an extended period of low interest rates and weather abnormalities in production centers in the U.S. and globally.

If these game changers move toward a negative direction, then air will be let out of the appreciated paper assets. One must keep in mind that credit bubbles end abruptly with rapid modifications in paper wealth. Asset bubbles, on the other hand, are slower in decline because of liquidity and equity shock absorbers in the balance sheet.

 

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.

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