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Corn+Soybean Digest

Lessons Learned From The Sub-Prime Credit Crunch

Agriculture and the overall perception of the industry appear “hotter than a pepper sprout” right now! Well, if one observed the stock market and the real estate market, both were in similar circumstances a few years ago. Terminology such as, “It’s different this time” and “The industry is in a new normal” were abundant. Let us examine the lessons learned from those industries and apply it to the current state of agriculture.

  • First, there is no such thing as easy credit. Low documentation loans, quick and easy credit with low teaser rates and no concern for earnings and income are recipes for disaster. If it sounds too good to be true, it usually is.
  • Paper inflation, whether it is stock prices, real estate or loans, is only paper value until called in. When asset values and bubbles far exceed the capitalized value or profits and returns, the inflated number becomes vulnerable to economic and other shocks.
  • Easy money or “funny money” for investments can quickly inflate an industry and create a bubble. When this money seeks other investments and leaves an industry, it can cause an economic vacuum resulting in a crash as seen in the stock market and now in Florida and Las Vegas real estate.
  • Investors involved in an industry early in the cycle are usually the winners. One only has to observe alternative energy and other such investments in agriculture and rural America to confirm this point.
  • When individuals say, “We are on a new plateau or at a new normal,” this is usually a sign that you are late in the cycle. Build cash reserves and be prepared to stay for the long term or sell your assets at 50¢ on a dollar.

Editor’s note: Dave Kohl, The Corn And Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.

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