This Boom is Different

Will this boom turn into a bust as all others have? There have basically been two boom bust cycles in agriculture. The first was during the 1910s that resulted from sharply rising export demand during World War I. Farm incomes surged and farmland prices increased significantly. That soon turned into a bust.

During the 1970s, exports took off rapidly and triggered another sharp spike in farm incomes and farmland values. Starting in 1981, that boom turned into a bust with a financial crisis that bottomed in 1985.

Some characteristics have driven all three boom cycles: primarily strong global demand and tight supplies. But this particular boom is different than those in the past. I think there are three obvious differences in this boom:

1. Rising incomes in developing countries such as China have propelled a new demand base that is not likely to go away.
2. Ethanol has also provided a demand base for corn that we never had before.
3. Interest rates are low and debt is low. In the 1970s the boom was fueled by borrowing and then capped off with high interest rates that led to forced liquidation sales. Debt is now extremely low, interest rates are at an all time low and thus it is virtually impossible for forced liquidation sales to occur, which is a necessity if farmland prices were to go down.

The bottom line: While cycles always exist in commodities and agriculture, this particular cycle is quite different than any other that we have experienced. There will likely be a downward turn in this cycle. But the landing will be soft and much different than those in the past.

There are risks. As mentioned above, cycles in commodities will always exist and during this timeframe that particular factor will not change. The risk of this boom continuing or turning into a downturn will likely focus in three areas:

1. Lower grain prices. To me this is inevitable. All it’s going to take is one good production year, and supplies will outpace demand and corn prices will retreat to $4 or possibly lower. It’s not a question of if – only when.
2. Ethanol. Could the rug be pulled out from under this industry? Doubtful – but possible in an election year. At a bare minimum, the ethanol industry appears to be maturing, with little possibility of an increase in the mandates.
3. Worldwide recession. What is happening in Europe right now is at a minimum frightening. Productivity does not exist enough in most European countries to turn their financial woes around. The growth in the world is in China. Can that growth offset the downward economic pull that is happening and will continue to happen from Europe? We are, ourselves, in an “entitlement society” where more people are wanting than producing. Not a positive trend.

In summary, this boom/bust cycle is quite different. There will be a downturn at some point, and we could see a softening of farmland values and cash rents. There will inevitably be someone, although I think a relatively few, who will get stuck at the top with high rents and high input prices and little sold at high prices—resulting in an economic squeeze. The percent of those people, however, will be small and thus the impact on agricultural land prices will also be small. Like in the economy, recessions are sometimes necessary to cool things down. Something will happen to cool this boom down but the bust will be small.