Parabolas make me jittery. Oh, I’m fine with roller coasters, but when a market surges straight up, double-fasten your seatbelt, or jump off. When you plot a speculative bubble on a graph, you often see a parabola, whether the NASDAQ in the late 1990s or Las Vegas condos in 2005. I’ve recently been looking at U.S. agriculture and come away concerned that farmland prices may be teetering on the slope of something ugly and parabolic. Since 2008, farmland prices have climbed at a roughly 25% annual pace, following mighty gains from 2000-2007. It’s time to raise a banner embroidered with Stein’s Law (named after Ben Stein’s father Herbert): if something can’t go on forever, it will stop.
Now I suppose farmland prices could keep soaring, but that’s a tough story to sell when crop prices have been savaged. Though you might not have seen price cuts on your foot-long BLT at Subway, during 2013 wheat prices dropped about 20%, corn 40% and soybeans 11%. But wait there’s more. The Obama White House might do something sensible and water down that absurd ethanol mandate, which diverts about 40% of the U.S. corn crop to fuel (see my Orange County Register op-ed).
Moreover, John Deere is warning that tractors sales will slump in 2014. Agriculture is not like the Internet, where a tech company can excite investors with blinking lights, even if it bleeds money. We’re talking bushels of corn and bull-feed, not the bull-stuff that can support the prices of some NASDAQ firms.
Farmland has seen parabolas before. During the mid-1980s, prices in the Midwest dropped 25 to 50 percent. Not much good came from this brutal collapse, except that Willie Nelson and his friends gave some great “save the farm” concerts, accompanied by sad-sack movies like The River and Country starring actors like Mel Gibson, Jessica Lange and Wilfred Brimley.
What has stoked farmland prices in the 2000s, aside from ethanol follies? The usual suspects: China and India. Speculators, confident that billions of new consumers in Asia will prop up demand, have been snatching up acres across the midwest. Of course, a similar argument was made for gold and steel prices a few years ago. On this basis, hedge funds and pension plans have leaped into the farmland frenzy, even though their investment managers wouldn’t know the difference between John Deere’s backhoe, Santa’s ho-ho or the hoes that Eminem raps about.