Danger, Will Robinson!

A number of years ago, there was a TV show called “Lost in Space.” There was a robot in this show that alerted the human, Will Robinson, of danger.

The other day I had a lender play this role by asking me a very interesting question. The individual quizzed me on whether I had heard of any interest-only loans for real estate in my travels.

Drawing from my institutional memory from those dark days of the 1980s in the Farm Crisis, I recalled that this strategy was alive and well just before the land bust!

Interest-only is an attempt to stretch cash flow to take advantage of capital appreciation in land values. This strategy works well when capital assets are appreciating; however, it is usually a signal that values are reaching the peak and are being stretched by creative financing.

In the 1980s, many land investors lost their down payment or secured collateral and lenders had large amounts of land in inventory. This resulted in a buyer’s market as land failed to seek its agricultural capitalized return.

If any lenders or producers are reading this column, realize that with increasing interest rates and a softening of commodity markets, it is only a matter of time before 70 percent of your farm balance sheet and collateral could start to decline in value.

View from the Road

The economy is booming again. Airplanes are packed full of infrequent flyers and roads are congested!

I’ll be touching down in Nebraska, Wisconsin, Illinois and Iowa this week. Let’s hope the transportation system works in my favor!

My e-mail address is:sullylab@vt.edu

Editors' note: Dave Kohl, The Corn and 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.

To see Dave Kohl's previous road warrior adventures type Dave Kohl in the Search blank at the top of the page.

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