A lot of these farmers presumably owned their land prior to QE? Maybe it’s the ones who bought land after who are going to the wall.
In the UK, economists say QE has been a success to the point where some say we have learned how to print money without creating Weimar-style inflation. However it looks like the inflation has simply transferred to assets, particularly property including farmland. And we don’t yet know what the impact is. Again in the UK, we might say in the future, increasing property prices resulted in a reduced birth rate, and an increased need for inward migration to plug the gap. Just speculation, but we don’t yet know how this experiment plays out - and with your interesting insight, we might ask whether the end of mid-scale farming was the impact. Given the importance of this group, for many reasons, on American culture and identity, what will be the victim of QE?
In the US, the subprime mortgage lending crisis was caused by good borrowers over leveraging the cheap mortgage rates they could get and buying extra homes to flip. When the money dried up and there was no one to flip to, they went under en mass. If farmers have been over leveraging on farm land, then something similar to a crash makes sense especially if yields are down or prices fall because of surplus.
Farm land borrowing is through completely different organizations from home loans. Farm Credit Association, for instance. And the backer is FmHA, the farmer lending equivalent of FNMA.
Farm lending is not nearly so highly leveraged as home lending. FmHA equity requirements are much larger than on home loans.
Farm land prices are driven by commodity prices. When corn and soybeans were high, Iowa cash rents went up, and land prices followed. Commodity prices have come down, cash rents have come down, and land prices are following.
There is some speculation on price appreciation -- just about any Iowa farmer will tell you about "the piece of ground he wish he had bought", but didn't have the stomach to bid higher on at the auction. Most farmers are buying land with the idea that it is a multi-generational investment, and when good ground near/adjacent to your current farm comes up, you tend to dig deeper into your pocket and hope your children will see the value appreciation -- because that piece may not come on the market again in your lifetime. So there is a certain psychological component priced in to the bid, but mostly it has to pencil out.
If you think land prices are completely unhinged, then here is an anecdote: I own some ground in Winnebago county Iowa. When land in Winnebago county was selling for $11K/Ac there was land 5 miles north on the Minnesota side of the state line selling for about $10K/Ac. Same soil type. Same weather. Same local market elevators to sell crops to. Same local market seed/chemical coops to buy your input. Why the difference in price? Minnesota real estate taxes are higher (I won't go into the politics of that.) The taxes are a per-acre annual production cost, and get priced into the land value.
Commodity prices are coming down, that is causing the income squeeze. Leveraged farmers are going to feel a squeeze, certainly. But the amount of leverage is nothing like what was happening to home owners during the housing crisis. Farm land owners simply can not borrow at those kind of loan-to-value ratios.
(Source: Owner and/or partner in several pieces of farm land in Iowa and Minnesota, some inherited, some purchased.)
Oh.. about corn prices... back when there were enough ethynol plant building permits on file to eventually make Iowa a net importer of corn... yeah, that was a corn price bubble. Those days are gone. (Let's not diverge into the silliness of ethynol, we all know it defies physics.)
This was quite frankly astonishing. Given that so much of our pensions and wealth are tied up in the markets, it's astonishing to hear that every Tom, Dick and Pavel is massively invested in destabilising the whole thing. And these are only the guys who got caught! What about the ones who aren't.
Insider trading isn't illegal because it's unfair to retail investors--it's illegal because it's unfair to _existing shareholders_ , which is a much more defensible position.
Imagine you're an executive with inside information that you think will make the stock go up. So you buy some stock (from an existing shareholder, obviously), and then the stock goes up. That shareholder rightly will feel stiffed.
Conversely if you sell stock and it goes down, the person you sold it to--now a shareholder to whom you have a fiduciary responsibility--is left holding the bag.
Can you elaborate on what you'd consider fair? Or do you think it would be acceptable to allow trading on inside information in the current system?
The only fair system I can imagine (fairer than the status quo by my estimation) would be complete transparency updated on a continual basis. But I can imagine it would be difficult to keep that up while making productive business relationships.
Is it "fair" that quant hedge funds have hundreds of PhDs developing algorithms to trade the markets efficiently, or that fundamental hedge funds spend millions on research? While there are a few restrictions around insiders trading, it is very much not the case that fairness in the sense of everyone having equal access to all information is or should be the goal of financial regulation.
Matt Levine has written about this many times, here's one:
My point is that in the markets, like in sports, a "fair contest" does not mean that both parties are equally likely to be successful. "Fairness" means that the rules were followed. Right now a PhD with a model is allowed to use his information advantage if he's trading against someone less informed, but an insider to the company is not. It may be the case that insider trading laws as they currently exist are good and help financial markets work better, but if that's true it's not because no one with an information advantage should be allowed to trade.
For this reason I believe insider trading should be legal. It's already widespread and difficult/impossible to police. Keeping it illegal gives retail investors a false sense of security when in reality this is how the vast majority of hedge funds/sophisticated market players are making their money.
This seems as good a place as any to tell HN about my business:
We provide systems to banks to help them include activities which mitigate climate risk into credit agreements, and evidence of compliance into credit scores. It provides a nudge for bank clients to adopt practices which both mitigate climate change and build resilience to climate-related weather shock.
We're a fintech biz built on the fundamental insight that environmental damage, including climate change, is hardwired into the design of the credit system, because issue of credit is blind to resource overuse/abuse, creating a systemic perverse incentive for environmental degradation.
If you're interested in finance, tech and concerned about climate change, I'd love to hear from you in the comments below.
2 further points:
1. HN was the community that gave me the confidence to launch this business.
2. Through our learning experience, we have discovered that banks are already reducing exposure to agricultural lending due to concerns about weather shock. Where farmers can't get access to credit, their production can drop 75%. Although we are only in the foothills of climate change, our financial system will amplify its impact. There may be technological fixes for high value cash crops grown in controlled environments. Not so sure about staples.
Do you know what the effects of this "on the ground" are? Is it getting farmers to change what they grow to better adapt to the new local conditions? What affect does it have on agri-business as opposed to family farms, where the former might simply move or have the capital sufficient for large scale change in practices that the latter does not? Also are there any effects on corporations further along the supply chain - for example reducing food waste might have a greater impact on the volume of food needed which in itself would reduce environment damage?
> There may be technological fixes for high value cash crops grown in controlled environments.
Can you expand on this? I have felt the same way, and have a good understanding of the tech problem to be solved, but I'm having trouble selling the idea to any buyer. Would you attempt to anticipate crop price spikes and plant ahead of time?
By technological fixes in agriculture, I simply mean greenhouses and fertigation systems. Control the environment in which plants grow more closely and thereby mitigate risks associated with weather shock. Works great for things like capsicum, high value lettuce etc. I don't see how this can be replicated for things like wheat and maize, although admittedly GM crops potentially offer some route to solving this problem.
For wheat and maize it can't and it doesn't have to. Both are stable after picking and can be transported. Lettuce cannot be transported as well after being picked. Maybe shipping containers with live lettuce?
Re wheat and maize, it's what happens before they're picked that is the concern. Where banks project high rates of loss, they simply withdraw from the sector - understandably.
Re lettuce, I think what we will see is 2 things: firstly highly capitalised vertical farms close to where the lettuce will be consumed. Secondly, smallscale contract farming again close to point of consumption. Imagine a small greenhouse in your back garden. You pay for the infrastructure and have Uber like aggregator linking you directly to buyers. Oh god - I can see the pitch now: it's like Uber for Romain lettuce...
The problem with Uber for romaine is that it takes at least a month to fill the demand for romaine. Anyone with a car could, potentially, sign up and fill a ride request. In practice, this might not be a big problem if the shortage is longer than the time it takes to grow romaine.
This is where my mind was going with this but it would require people to have equipment sitting idle or be growing romaine lettuce anyways and sell it when the price is high enough.
I think you're right, insurance and banks are both looking at a similar problem. In our approach, which is agri-specific, we work with banks to include requirements for climate smart agriculture into loan agreements. Farmers must do x, y and z if they want a loan. From an insurance perspective, this is the equivalent of requiring drivers to wear a seatbelt. We use a remote-sensing system to verify that farmers are in compliance with the system, and if they are we pass a score back to the bank for inclusion in their credit scoring algorithm. Compliant farmers have an improved risk profile and should be able to access credit on improved terms to reflect the improved risk.
How are banks responding to your services? In insurance, we’re having a very soft market due to all the capital sloshing around the system. I imagine it can be challenging for lenders to impose significant risk controls when there’s alternative financing so cheaply available.
My wife works on climate change advocacy on the nonprofit side. Are you working with any advocacy organizations? Presumably they’re an important part of your approach.
TBH - climate silos and finance silos are difficult to merge. Different language, KPIs, incentives and concerns. We're trying though to reconcile the two! That said, banks are increasingly paying attention. The two drivers for this are: (1) Ratings agencies including climate factors in their ratings, and (2) G20 Financial Stability Board, Bloomberg Committee calling for voluntary disclosure of climate risk and mitigation steps by company boards.
