The farmland bubble: sowing the seeds of pain and destruction....

My original thesis about commodity markets suggests, in addition to rising global demand, financialization of the markets allowed for a series of bubbles which propped up commodity prices much higher, and for much longer, than the global fundamentals would have dictated.  This gave rise to a belief (in all commodity sectors--fuel, minerals, and food) that high prices were here for the foreseeable future.  Huge sums of capital flowed in, fueling an expansion in all sectors.  Most of my analysis has focused on oil, but I have mentioned mining and farming a few times. This post  focuses on farming and the plight of farmers.

As I previously stated, the mining sectors went through a crunch, but with highly concentrated industries, the big firms can simply shut down facilities and weather the storm.  In the farm sector, while there may be many producers on the sell side, there is a monopsony on the buy side for the major global food commodities.  The likes of Cargill, ADM, Bunge, and Continental dominate US grain markets and own most of the storage and milling facilities. While farming is often touted as a "competitive market," the truth is farmers focused on the markets for global grains (corn, wheat, and soy) are captive sellers to the big grain merchants who dictate prices paid, much like Walmart dictates prices it will pay to its suppliers.

Regardless, farmers were swept up by the same whirlpool of speculation in commodity prices, and borrowed to expand operations.  In addition, financial interests have literally "bought the farm" in a big way.  Private equity funds were created to invest in farmland (cerespartners), pension funds added farmland to their portfolios (TIAA-CREF), and commodity ETFs allowed anyone to bet on almost any commodity just like betting on a company's stock price.   The commodity price bubble beget a bubble in farmland values as well.

As the figure above shows, and as I mentioned in a previous post, farmland values have been falling for the past two years and farmers are hurting, not unlike the 1980s farm crisis.  Since August 2012 the price of corn and wheat have fallen by 55%, and soybeans by 40%.  One unfortunate indicator of how this collapsing bubble is hurting farmers was given in a recent article with the following title: Safety Watch: suicide rate among farmers at historic high. As mentioned in the article, suicide rates among male farmers is 50% higher than in 1982, the worst year of the last farm crisis.  

For investors, the worst thing that can happen from the collapse of the food commodity price bubble is a loss on their portfolios; for farmers, the impact can be a matter of life and death....