Is Agriculture Facing A Bubble?

Corn and soybean field

Today, the world of agriculture, especially Midwest agriculture, which is dominated by the three major row crops (corn, soybeans and wheat) is once again experiencing record or near record crop prices, with corn reaching close to $8 per bushel in June.

Recent sales of high productivity farmland in Iowa and Illinois have reached $11,000 to $13,000 per acre, reflecting a near doubling of prices in four to five years. Additionally, with annual farmland rental agreements up for review and renegotiation, there are some farmers that have been willing to sign four-five year contracts at $300 to $400+ per acre, which is consistent with the view of some farmers that corn prices have reached a new plateau of $6 to $7 per bushel.

It isn’t too long ago, during 2006-08, that agriculture, especially Midwest agriculture, faced what could be called “Ag Bubble 1.0.” During 2008, corn prices on the December futures market reached $7.96 per bushel, November soybean prices reached $16.35 1/2 per bushel and July Chicago wheat prices reached $12.72 3/4 per bushel. As is well known today, driving factors were: Tightening global grain supplies, reflecting the growing worldwide demand for grains, especially from developing countries, and adverse production shortfalls due to droughts in major grain producing areas; the dramatic step-function increase in grain/oilseed demand starting in 2006 from biofuel demand, whose price impact was amplified by the dramatic rise in world oil prices; the positive impact of the decline in the value of the U.S. dollars on foreign demand; and the growing impact of financial speculation in commodity markets. In 2008, many Midwest farmers reaped record per acre profits as prices surged above cost increases.

It was clear as early as the summer of 2007 that an ag bubble was forming, and that there was a strong likelihood that it would pop in 2008. Crop prices peaked in 2008. Record profits per acre were short-lived and dramatically declined due to the ensuing farmgate cost/price squeeze. Crop prices fell at the same time that many costs, notably seed and fertilizer, were still escalating. The dramatic reversal of fortunes for farmers’ bottom lines occurred even before the U.S. felt the full effects from the “Financial Armageddon” that gripped the U.S. and the world, starting in the fall of 2008.

Historical Perspective On Bubbles

The volatile events of 2007-09 are history. But today, a major question has spread from farmers’ morning coffee shop talk to the agricultural tradepress to the major financial newspaper around the world is — “Is Agriculture Facing a Bubble?”

The answer to this question, and — if so, whether the bubble will continue to inflate, deflate slowly over a number of years or pop in a dramatic fashion over the next year — is critical to farmers’ and ag input suppliers’ bottom line. Equally important will be the ripple effects on all the players in the broad supply chain who provide inputs, technology, machinery and services to the farmgate, including ag dealers/distributors and the basic suppliers of crop inputs.

Through the annals of time, human behavior — over-optimism and herd-mentality — has led to market and speculative financial bubbles, reflecting unsustainable price increases that dramatically overshoot fundamental or intrinsic values. Unfortunately, all the bubbles burst, with many having devastating market and financial consequences. In 1996, Alan Greenspan, former chairman of the U.S. Federal Reserve, coined the phrase “irrational exuberance” to describe over-optimism and the excessive escalation of asset values.

History creates perspective, especially when you hear “this time is different.” Looking back at history, financial and market bubbles have been surprisingly common. For example, during “Tulip Mania” in Holland during the 1630s, the price of tulip bulbs reached abnormally high levels. Nearly a century later, the “South Sea Bubble” occurred in 1720, during which British speculators drove up the price of the South Sea Co., which was formed to fund British government debt, in return for payments reflecting a monopoly on trade from the South Sea (Central and South America). More recently, the “Dot-Com Bubble” inflated during the mid-to-late 1990s as investors chased the IPO’s of a new generation of Internet-based companies and popped in 2000. Today, the U.S. economy is still suffering from the bursting of the “Housing Bubble” starting in 2007.

Many times, it is difficult to gauge whether escalating prices and asset values tied to improving market fundamentals reflect the development of price or asset bubbles, resulting from over-optimism and the psychology of crowds. Clearly, the recent resurgence in crop prices, starting in mid-2010, and continued dramatic escalation in farmland values reflect well understood basic fundamentals: Tight U.S. and global grain supplies tied to the impact of weather-impacted production constraints in the U.S. and other large global grain producers, on top of the continued increase in global food demand, led by the insatiable appetite of China, and the impact of the continued decline in the value of the U.S. dollar on global grain demand.

In addition to basic supply/demand fundamentals, the upwards escalation in ag price and asset values are also being driven by a dramatic increase in investors/speculators interest in ag commodities and farm assets, driven by the goal of investment diversification, as well as global investors growing appetites to invest in commodities through the proliferation of commodity ETF’s (Exchange Traded Funds). Commodity markets have become the victim of “financialization.”

The question is simple: Is the resurgence of major grain/oilseed crop prices to new highs and record Midwest farmland value a new normal or are they symptomatic of “Ag Bubble 2.0.” which could deflate, possibly resulting in a dramatic decline in crop prices and farmland values? Timing of the peak crop prices will critically depend on the size of the U.S. harvest this fall, given the uncertainty of severe weather impacts during planting and the current growing season on acreage and yields in many of the key U.S. growing areas, as well as other major grain/oilseed production areas of the world.

AgInnovation Advisors has raised the number one issue facing farmers and production agriculture today: “Is Agriculture Facing Ag Bubble 2.0?” Forthcoming articles will deal with an answer to this question.

Leave a Reply

State of the Industry Stories

State of the IndustryAgriculture’s Troubled Waters
March 3, 2014
Water quantity and quality issues threaten to hamper agriculture on a wider scale in the not-too-distant future. Technology breakthroughs and improved practices are providing potential solutions. Read More
State of the IndustrySponsor Profiles: Simplot, SST And WinField Support CropLife State Of The Industry Report
January 8, 2014
The sponsor partners of the CropLife State of the Industry report have demonstrated ongoing leadership including their support of this report. Read More
State of the Industry2014 State Of The Industry: Agricultural Concerns Creep In
January 2, 2014
With many strong sales years under its belt, the agricultural community is hoping for another positive growth experience in 2014, but mindful of a few challenges that might keep this from happening. Read More
State of the IndustrySeed Systems Top Watch List
January 2, 2014
Retailers are closely following herbicide tolerance and drought resistance traits. Read More

Trending Articles

Retail FacilitiesWaconia Manufacturing Builds Facility Designed For Speed, Efficiency
July 7, 2014
To make its new hub facility more efficient, Cooperative Elevator enlisted the aid of Waconia Manufacturing. Read More
EquipmentSummer Show Preview 2014: Superior Sprayers Take The Field
July 3, 2014
In this final installment of our coverage of the major categories of Big IRON that retailers can expect to test-drive at this summer’s events, here is a look at 19 sprayers. Read More
Scouting a soybean patch at Green Valley Ag.
EmployeesCropLife Compensation Survey: Battling Talent Drain
July 2, 2014
Retailers too often lose employees to companies outside of agriculture, while recruiting efforts are most often limited to competitors and other ag-focused organizations. Read More
HerbicidesDow AgroSciences Introduces SureStart II Herbicide
June 16, 2014
The enhanced formulation has improved viscosity and increased stability under heat and controls more than 60 high-anxiety grasses and broadleaf weeds found in corn fields. Read More
HerbicidesBASF Investing $270 Million To Expand U.S. Herbicide Production
June 11, 2014
BASF has invested more than $270 million to expand herbicide production capacities in the U.S., including more than 20 new products to be launched over next two years. Read More
EquipmentGPS: 25 Years And Still Growing
June 2, 2014
The evolution of global positioning systems applications in agriculture remains ongoing as the technology hits a notable milestone. Read More

Latest News

HerbicidesPurdue: Late Season Weeds May Require Manual Removal
July 24, 2014
Hand-rouging and pulling late season weeds by hand may be the best way to remove them, more so than using a herbicide, a Purdue Extension weed scientist says. Read More
Soybean Field
InsecticidesTranform WG, Closer SC Insecticides Receive R&D 100…
July 23, 2014
Dow AgroSciences has received the award from R&D Magazine for Transform WG insecticide and Closer SC insecticide with Isoclast active. Read More
EquipmentKinze, Raven Team Up On 4900 Planter Monitor
July 23, 2014
Kinze Manufacturing announces a partnership with Raven Industries to develop a standalone monitor solution for the Kinze 4900 series planter. With this new Read More
LegislationNew Farm Bill Continues To Confuse As Growers Await USD…
July 23, 2014
The new five-year Farm Bill eliminates many of the direct payments previously payed to growers and could benefit from USDA clarification, reports a Toledo Blade columnist. Read More
EquipmentPrecisionAg.com Relaunches With Responsive Design For M…
July 22, 2014
PrecisionAg, the worldwide leader in precision agriculture information and analysis, announces the launch of its completely redesigned website, PrecisionAg.com. Read More
FungicidesEPA OKs Two Willowood Fungicides
July 21, 2014
The EPA has approved Willowood Azoxy 2SC and Willowood AzoxyProp Xtra. two widely used broad spectrum, preventative fungicides with systemic and curative properties. Read More
Precision AgFarmers Learning Fast As UAVs Take Off
July 17, 2014
Farmers and others interested in how UAVs can be used in agricultural applications were able to learn more about the technology during the recent Precision Aerial Ag Show. Read More
CropLife 100Bobby Knight, Richard Petty To Highlight Ag PhD Field D…
July 17, 2014
Attendees at the July 24 Ag PhD Field Day at Hefty Farms will learn about the latest agricultural technologies, and get a chance to meet legendary sports figures Bobby Knight and Richard Petty. Read More
WebinarsUpcoming Webinars
July 17, 2014
Register for one of our upcoming Webinars or access our archive of past Webinars to view recordings of presentations that may be of interest to you. Read More
A finished Willmar 16-ton side-shooting tender.
TendersNew Production Facility Helps Willmar
July 17, 2014
In 1963, a group of businessmen started Willmar. Today, a half-century later, the company is one of the ag industry’s longest-running brands. Read More
FertilizerCF Industries Sells Carbon Credits To Chevrolet, Donate…
July 17, 2014
CF Industries has completed the sale of a large block of carbon reduction credits to Chevrolet, and will donate the net proceeds of $600,000 to the National FFA Foundation. Read More
CropLife 100Grainland Cooperative, Minier Cooperative Grain To Merg…
July 17, 2014
The shareholders of Grainland Cooperative and Minier Cooperative Grain Co. approved a merger of company operations effective August 1, 2014. Read More
ManagementStudy: Drought Costing California Billions
July 17, 2014
A new study has found the drought has cost the state $2.2 billion, primarily in lost farm revenue and wages. Read More
FertilizerCF Industries Resumes Production At Oklahoma Nitrogen C…
July 17, 2014
The company had shut down production at the Woodward, OK, facility in April to address an issue in one of the site’s boilers. Read More
CropLife 100Wilbur-Ellis To Relocate Agribusiness Division To Denve…
July 16, 2014
The move Eastward will allow Wilbur-Ellis’ Agribusiness Division to be more accessible to relevant geographies and is expected to enhance communication and collaboration among the division’s nearly 3,000 employees. Read More
Soybean field
FungicidesValent Launches New Seed Protection Fungicide For Soybe…
July 16, 2014
The INTEGO SUITE System contains the first new, novel seed protection fungicide chemistry registered in 30 years by the EPA for protection against Pythium and Phytophthora. Read More
Crop InputsSyngenta Drive To Thrive 10 Finalists Announced
July 15, 2014
Finalists are chosen based on the quality of their essays and photos depicting what makes them thrive. Read More
FertilizerHow To Minimize Phosphorus Losses In Runoff
July 15, 2014
Phosphorus losses from agricultural fields can be divided into three categories: flash losses of soluble phosphorus, slow leak losses and erosion events. Here's how to minimize losses in each instance. Read More