Deja Vu All over Again

8 May

In 2006, we wrote of the impending credit crisis, when we commented that ” The combination of an overly willing lender combined with an overly aggressive borrower can only lead to the types of credit events which instantaneously transform the capital markets’ appetite for risk”.  However prescient that statement may have been, the  similarities in todays current  credit environment might suggest that the near death experience in 2008/2009 was simply a bump in the road. One might think that until one realizes that this “bump” was significant enough for global central banks to enact 503 global rate cuts creating $11.6 trillion in Central Bank liquidity over the past 6 years. This suppression of the yield curve, across all bond markets globally has made the reach for yield a dying grasp for anything other than zero. While it is easy to see this stampede towards yield in the public markets, we have seen this spillover into the agricultural markets as well.  We have followed the ag markets for years, having managed a farmland partnership years ago, and we have rarely heard the term ” Cap Rate” applied to agriculture until very recently.  There is a feeding frenzy going on in many markets such as tree nuts and wine grapes, based in some part on this incessant demand for yield. In fact, the Fed advisory panel itself stated that ” Members believe the run-up in agriculture land prices is a bubble resulting from persistently low interest rates”. We disagree with the use of the term bubble, as we define a bubble as a market in which there is an inordinate level of demand  being driven by some flawed premise ( i.e.  housing prices only go up, etc..).  We do however feel that agricultural prices are being somewhat skewed by the ultra-low level of rates, however we can’t help but wonder whether this  aggressive demand is also being driven by investors need to allocate more capital towards hard assets.

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