Southern Bread Blog

Ok, so Bloomberg reports on what Thomas Hoenig (the President of the Kansas City Fed branch) said the other day:

Federal Reserve Bank of Kansas City President Thomas Hoenig said soaring farmland prices may be the result of an unsustainable bubble that could damage the U.S. economy when it bursts.

“My nagging concern remains that current distortions in financial markets are increasing the risk that imbalances in asset markets will catch agriculture — and the U.S. economy more generally — by surprise once again,” Hoenig told the Senate Agriculture Committee today, according to his prepared testimony.

“This run-up in farmland values has occurred, however, amid financial markets characterized by high levels of liquidity and unusually low interest rates,” he said. “It is nearly impossible to determine how much of the farmland boom may be an unsustainable bubble driven by financial markets and how much results from fundamental changes in demand and supply conditions.”

–Joshua Zumbrun, Bloomberg

Maybe I should go light on Hoenig here since he appears to be the only semi-rational person employed by the Fed at times. But he’s wrong about a farm land bubble. Guys like Jim Rogers and George Soros predicted a surge in farm land and agricultural products as far back as late 2008. Their rational was like this:

“We’re still going to eat, probably; we’re still going to wear clothes, probably. Farmers cannot get loans for fertilizers right now. So the supplies of everything are going to continue to be under pressure,” Rogers said.

He is the director of two funds which are buying greenfield land in Brazil and existing farms in Canada and starting to farm it. The funds are clearing the land, fertilizing it, irrigating it and hiring farmers and, Rogers said, some day will probably sell the land but that is a remote prospect.

“If I’m right, agriculture is going to be one of the greatest industries in the next 20 years, 30 years.”

Food inventories are at their lowest in 50 years, Rogers said, while the oil and mining sectors are also good bets.

“Even if demand goes flat or down, as it did in the 30s, as it did in the 70s, you can still have a nice market,” he told CNBC.

–Jim Rogers, CNBC Interview (Mar. 2009)

To say that the rise in agricultural prices is a speculative bubble at a time when the world is literally tossing dictators out the window because of soaring food
prices shows the depth of misunderstanding at the Fed. When there actually was a real estate bubble they told us there wasn’t one. I give you Bernanke from 2005:

Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, “largely reflect strong economic fundamentals”…

Many economists argue that house prices have risen too far too fast in many markets, forming a bubble that could rapidly collapse and trigger an economic downturn, as overinflated stock prices did at the turn of the century. Some analysts have warned that even a flattening of house prices might cause a slump — posing the first serious challenge to whoever succeeds Fed Chairman Alan Greenspan after he steps down Jan. 31.

Bernanke’s testimony suggests that he does not share such concerns, and that he believes the economy could weather a housing slowdown.

–Nell Henderson, WaPo (2005)

Now, when there’s actual demand backing the rise in farm prices they tell us it is a bubble. There are food shortages everywhere, but somehow people buying farm land is a speculative bubble. Oh lord. It’s terrifying to see how clueless these people are who run our entire economy. We’re doomed.