- - Sunday, February 3, 2019

ANALYSIS/OPINION:

What child has not enjoyed his first encounter with bubbles? Often made with dish soap and water, the translucent balls could float until they popped in the wind. But there are other bubbles that can pop: The dot-com bubble, housing bubbles, stock market bubbles and even the Bitcoin bubble. But now there’s an asset bubble swelling up in the Midwestern United States, and like all bubbles, it will pop and we’ll be left cleaning up the mess.

Strangely enough, the U.S.-China trade war is the cause. In early 2018 the United States announced tariffs on about 1,300 products, including flat screen TVs, batteries and medical devices imported from China. The retaliation was swift, with the imposition of tariffs on many goods the United States sells to China, such as automobiles, airplanes and soybeans. This stalemate existed until May, when China upped the ante by cancelling all U.S. soybean orders — up until that point the single largest agricultural export from the United States to China.

The response to this gut punch to American agriculture was to impose more tariffs on more Chinese goods. Farmers, now faced with a glut of soybeans — and to a lesser extent a glut of corn and cotton which China also cut back on — saw prices drop by as much as 20 percent. In response to the growing outcry from his Midwestern voter base, in late August President Trump announced a Department of Agriculture program to subsidize farmers hurt by the Chinese response to U.S. tariffs.

And so the bubble began.

But this bubble isn’t in what you’d initially expect: It’s not in soybean or corn prices. Rather, this bubble is being blown by the subsidy payments and is all about farmland. The value of land for agriculture is the cash that land can generate from the crops it produces. Only now, the crops are just the carriers for subsidies. Farmers aren’t getting rich, but they are getting cash for their crops as well as checks from the government. And this new dual cash flow is driving up farmland prices where soy and corn dominate agricultural production.



According to the Department of Agriculture’s 2018 Land Value Survey, the average increase in farmland nationwide in 2018 was about 2 percent. But diving deeper into the numbers at the state level reveals that most saw increases of only about 1 percent, and 12 states even saw farmland value decrease from 2017 to 2018.

Missouri and Texas, by contrast, led the nation with increases in land value of 10.4 percent and 9.1 percent, respectively. What do these states have in common? Missouri’s number one agricultural crop is soybeans, and Texas’ is corn and cotton. And coming in at number three in the nation at 5.3 percent is Oklahoma, where cotton, corn and soybeans are three of their top four agricultural products.

This is a real estate bubble in the making. Only instead of being in the housing market, it’s blowing up farmland values.

Like all bubbles, this one will burst, but only when the cash flow per acre stabilizes or decreases. And a decrease is coming one way or another. Either the trade dispute will be settled and the subsidies will stop, or they will just expire of their own accord. When initially announced, Secretary of Agriculture Sonny Perdue was explicit in pointing out their temporary nature by saying, “It’s important to note all of this could go away tomorrow .” And when they go away, the bubble pops — but what if they don’t go away?

The first farm subsidies and agricultural price supports were implemented in the United States during the Great Depression as a temporary response to the Dust Bowl’s havoc on farmers’ livelihoods. Those 1930s-era government supports are still with us almost 90 years later even though the Dust Bowl conditions of the Midwest lasted only about a decade. Will these new subsidies become part of the permanent government support system for farmers, and likewise a support system for land values?

If these “temporary” subsidy payments become permanent, then Midwestern farmland values should stabilize at their new high levels avoiding the bursting of the bubble. But if they are true to their origin and go away with the trade war, then expect a big pop.

Kevin Cochrane teaches business and economics at Colorado Mesa University, and is a permanent visiting professor of economics at The University of International Relations in Beijing.

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