Thursday, March 24, 2011

Here Comes Another Bubble: Farmland (FAM)

FAM is the symbol for Farmer Mac.
Staying on the Ag beat we have a subject near and dear to our flinty hearts.*
From Professor Schiller via Project Syndicate:

Bubble Spotting  
Robert J. Shiller
NEW HAVEN – People frequently ask me, as someone who has written on market speculation, where the next big speculative bubble is likely to be. Will it be in housing again? Will it be in the stock market?
I don’t know, though I have some hunches. It is impossible for anyone to predict bubbles accurately. In my view, bubbles are social epidemics, fostered by a sort of interpersonal contagion. A bubble forms when the contagion rate goes up for ideas that support a bubble. But contagion rates depend on patterns of thinking, which are difficult to judge.

Big speculative bubbles are rare events. (Little bubbles, in the price of, say, individual stocks, happen all the time, and don’t qualify as an answer to the question.) And, because big bubbles last for many years, predicting them means predicting many years in the future, which is a bit like predicting who will be running the government two elections from now.

But some places appear a little more likely than others to give rise to bubbles. The stock market is the first logical place to look, as it is a highly leveraged investment – and has a history of bubbles. There have been three colossal stock-market bubbles in the last century: the 1920’s, the 1960’s, and the 1990’s. In contrast, there has been only one such bubble in the United States’ housing market in the last hundred years, that of the 2000’s.

We have had a huge rebound from the bottom of the world’s stock markets in 2009. The S&P 500 is up 87% in real terms since March 9 of that year. But, while the history of stock-market prediction is littered with too much failure to try to decide whether the bounceback will continue much longer, it doesn’t look like a bubble, but more like the end of a depression scare. The rise in equity prices has not come with a contagious “new era” story, but rather a “sigh of relief” story.

Likewise, home prices have been booming over the past year or two in several places, notably China, Brazil, and Canada, and prices could still be driven up in many other places. But another housing bubble is not imminent in countries where one just burst. Conservative government policies will probably reduce subsidies to housing, and the current mood in these markets does not seem conducive to a bubble.

A continuation of today’s commodity-price boom seems more likely, for it has more of a “new era” story attached to it. Increasing worries about global warming, and its effects on food prices, or about the cold and snowy winter in the northern hemisphere and its effects on heating fuel prices, are contagious stories. They are even connected to the day’s top story, the revolutions in the Middle East, which, according to some accounts, were triggered by popular discontent over high food prices – and which could themselves trigger further increases in oil prices.

But my favorite dark-horse bubble candidate for the next decade or so is farmland – and not just because there have been stories in recent months of booming farmland prices in the US and the United Kingdom.

Of course, farmland is much less important than other speculative assets. For example, U.S. farmland had a total value of $1.9 trillion in 2010, compared with $16.5 trillion for the US stock market and $16.6 trillion for the US housing market. And large-scale farmland bubbles are quite rare: there was only one in the US in the entire twentieth century, during the great population scare of the 1970’s....MORE
HT: Real Time Economics 

Our favorite bubble song. Ladies and Gentlemen, the Richter Scales!

March 2011 
Farmland Prices are Still in Boom Phase (AGM)
Feb. 2011
Farmland Boom Provides Bright Spot for U.S. Midwest Real Estate
Feb. 2011 
Fund braves weather setbacks to snap up Australian farms
Dec. 2010 
Farmland: "Pricing the Good Earth" (DE; POT;MON; CAT; MOS)
Some of our links in last month's ""Land Becomes Cash Crop in Farm Belt":

"Is TIAA-CREF Investing In Farmland A Harbinger Of The Next Asset Bubble?"
Société Générale's Dylan Grice: "Higher crop prices 'permanent'" (ADM; SYT)
"Is agriculture the next big investment thing?" (DBA; FUD; MOO; RJA)
Marc Faber: "'Buy farmland and gold,' advises Dr Doom"
Green Acres is the Place to Be: "The UK farmland grab"
"Wall Street Eyes Farmland"
Hedge Funds Buying Farmland
The Last Holdout: "U.S. farmland fetches top dollar despite recession"
The hedge fund manager who bought a farm

There are many more, use the search blog box, keyword farm or farmland.
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