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

Fertilizer Tender close-up
MicronutrientsHow Micronutrients Fit Into 2017 Fertility Plans
January 10, 2017
Where do micronutrients stand going forward in fertility plans? For one thing, Tim Mundorf, Field Representative with Midwest Laboratories, says Read More
Fertilizer application
State of the IndustryCautious Optimism On Fertilizer In 2017
January 10, 2017
What kind of fertilizer rates are growers and retailers looking at in 2017 and beyond? According to stakeholders CropLife magazine Read More
Asmus Farm Supply crop protection products in storage
State of the IndustryCrop Protection Products Market: Complexity Begets Opportunity
January 10, 2017
While other key market segments in agriculture continue to see tumultuous shifts in sales volumes going forward (large equipment sales are Read More
Pioneer corn seed in storage
Special ReportsState Of The Seed Industry: Better Later Than Never
January 3, 2017
Traditionally, the majority of the nation’s grower-customers made their seed planting decisions in the late fall. Normally, when folks attended Read More
Trending Articles
Farmer and aptop
Matt Hopkins10 Warning Signs Your Website Is Grossly Outdated
February 8, 2017
Your Website is often a visitor’s first impression of your ag retail business. A positive first impression can set the Read More
AgriSync
Matt Hopkins17 Agriculture Apps That Will Help You Farm Smarter In 2017
December 9, 2016
Ag professionals are working smarter, not harder, than ever before. Smart farming technologies have enabled them to reduce costs, maximize Read More
R4023 Sprayer, John Deere
CropLife 100Ag Retail Equipment Report: The Green Party Continues
December 7, 2016
In the annual race for sales in the ag retail equipment marketplace, the color schemes for participants are a little Read More
Mike Stern
Precision AgClimate Corp. CEO Talks Retailer Support For Digital Ag
December 1, 2016
CropLife Magazine’s sister publication, AgriBusiness Global, recently sat down with Mike Stern, CEO of The Climate Corp., following the Monsanto subsidiary’s Read More
Precision AgTrimble Debuts End-to-End FMIS Platform
November 28, 2016
October’s inaugural PrecisionAg Vision Conference left this author with many thoughts and things to ponder in the coming months. Probably Read More
CHS Primeland
CropLife 100The 2016 CropLife 100 Report: Reviewing The Many Bulls And Bears Impacting This Year’s Marketplace
November 28, 2016
For virtually all of 2016, the nation was wholly focused on the big Presidential election. Some folks aligned themselves with Read More
Latest News
Greenleaf Technologies TADF03-D Dual Fan Nozzle
NozzlesSix Greenleaf Nozzles Approved For XtendiMax With Vapor…
February 22, 2017
Greenleaf Technologies has announced that six of its TurboDrop D Series nozzles have been approved for use with Monsanto’s XtendiMax Read More
Winter Wheat
Industry NewsTiger-Sul Hires Manitoba And Eastern Canada Account Man…
February 22, 2017
Tiger-Sul, a global leader in sulphur fertilizers and crop performance products, has announced that sales veteran Trevor Loewen has joined Read More
NFMS 17 Hagie Sprayer
Eric SfiligojThe Read From Louisville: Uncertain
February 22, 2017
By the time this column appears across the country, the annual Commodity Classic will be in full swing. This means Read More
SprayersApache 1000 Series Sprayer Earns 2017 EquipmentWatch Hi…
February 21, 2017
ET Works has been named a winner in the 2017 EquipmentWatch Highest Retained Value Awards program, the industry’s only award Read More
Measuring Bulk Tanks
StewardshipMeister Media Among 2017 Award Winners Presented By The…
February 21, 2017
The Pesticide Stewardship Alliance (TPSA) held its annual conference in San Diego, CA, earlier this month where three awards were Read More
John Reifsteck
CropLife 100GROWMARK’s Reifsteck Earns NCFC Director Of The Y…
February 21, 2017
GROWMARK Chairman of the Board and President John Reifsteck has earned the prestigious Director of the Year Award from the Read More
Roy Blunt
LegislationARA Recognizes Blunt, Heitkamp For Legislative Efforts …
February 17, 2017
Agricultural industry continues to face federal regulatory challenges. Thankfully, agriculture’s allies in the U.S. Senate stepped forward. The Agricultural Retailers Read More
LegislationThe Fertilizer Institute Commends Senate On Confirmatio…
February 17, 2017
The Fertilizer Institute (TFI) President Chris Jahn issued the following statement on the Senate confirmation of Oklahoma Attorney General Scott Read More
Trump, Senate, Cabinet
LegislationBREAKING: Trump EPA Nominee Scott Pruitt Confirmed by S…
February 17, 2017
Scott Pruitt, who as Oklahoma’s attorney general spent years suing the Environmental Protection Agency over its efforts to regulate various Read More
ManagementFebruary Road Trip Edition
February 17, 2017
Editors Paul Schrimpf and Eric Sfiligoj discuss their recent visits to Indiana and Kentucky. Read More
Heritage Cooperative Finished Building Aerial
ManagementHeritage Cooperative, Agland Co-op Approve Merger
February 17, 2017
Agland Co-op and Heritage Cooperative stockholders have both approved the merger agreement between Agland Co-op and Heritage Cooperative. Now begins Read More
LegislationARA Fly-In: Ag Retail Descends on Capitol Hill, Lawmake…
February 15, 2017
More than 100 agricultural retailers, distributors and suppliers headed to Capitol Hill Tuesday morning for the Agribusiness Congressional Fly-in, according to a Read More
Untreated soybean seed Heartland Coop
Seed/BiotechMarrone Bio Innovations, Groundwork BioAg Bio-stacked M…
February 13, 2017
Marrone Bio Innovations, Inc. and Groundwork BioAg, Ltd have announced successful seed treatment field trials of the world’s first all-biological Read More
NL5000 With G5 Technology
SpreadersNew Leader Introduces NL5000 Dry Nutrient Applicator Wi…
February 13, 2017
New Leader, a division of Highway Equipment Company (HECO), has announced the next generation of spreading technology with the NL5000 Read More
Fertilizer Storage
Crop InputsThe State Of The Fertilizer Industry
February 9, 2017
He’s all hat, no horse.” It’s a humorous way of describing a person who tells a good story, but is Read More
CropLife 100Pinnacle Agriculture Agrees To Credit Agreement Amendme…
February 9, 2017
Pinnacle Operating Corp. has entered into an amendment (the “Amendment”) to its First Lien Credit Agreement that will provide for, Read More
ManagementUpdates on Upcoming Trips, Dow-DuPont, and the Des Moin…
February 9, 2017
Editors Paul Schrimpf and Eric Sfiligoj review a few future travels, along with the latest on big company mergers and Read More
Championship Tractor Pull
EquipmentNational Farm Machinery Show Highlighted By Championshi…
February 9, 2017
The scream of monster engines, the stench of burning rubber and the ground-pounding vibrations of the country’s largest, loudest and Read More