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Corn+Soybean Digest

Is There a Sub-Prime Bubble in Agriculture?

That is the million-dollar question. With land selling for $8,000+/acre in Iowa, there appears to be a fever pitch in acquiring land assets. Of course, the alternative energy boom, compounded with volatility in equity markets and Wall Street with large paper wealth gains in farm balance sheets allowing individuals to financially leverage for more appreciation, sets a stage similar to the late 1970s.

Conditions to set the stage for sub-prime bubble in agriculture:

1. Any shift in government policy that reduces incentives for alternative energy could be a crushing blow.

2. An increase in long-term interest rates of 100 basis points or more will create a bear market for land.

3. A slow down of the U.S. and global economic environment reducing the demand for alternative fuel and energy in general would ripple through rural America, resulting in a bearish attitude.

The residential sub-prime lending regulators are tightening lending standards with all institutions. Policy changes could occur with agriculture lenders, as well. Lending institutions will be seeking higher quality financial underwriting standards from borrowers.

The bottom line finds more downside risk potential in land values compared to upside capital appreciation. This fall and winter could be interesting.

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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