Party like it’s 1980…

There is trouble on the horizon.  Most won’t see it until it too late like that shitty Titanic boat captain.  The farm sector is about to be a financial mess.  No the sky isn’t falling, it’s already fell.  Most people in ag have heard stories about the 1980’s.  It was a financial meltdown of epic proportions. 

Let me refresh your memory as I understand it.  I was 3, so I don’t have first hand experience with what went on then, and most guys that do are dead or in a nursing home.  Since they are enjoying their NutterButter at snack time and nobody is ever going to talk/visit with them about this matter, I’m all you’ve got for the time being.  (if that made you feel guilty about not seeing an old loved one, good, go see them jerk)  Basically banks lent capital based on collateral and when the underlying asset (land) went in the toilet, everyone was screwed.  Their balance sheets were a wreck and they then had to sell into a non-liquid falling market that was in the process of deleveraging.  Long and short of it, it wiped out a whole bunch of people and left a very bad taste in everyone’s mouth. 

That bad taste hasn’t went away.  Ag banks still to this day don’t put much emphasis on land collateral.  Yes it’s there and that is nice and all, but this time it won’t matter.  The reason we will revisit the 1980’s style crash is because of debt serviceability. <— (big word) Everyone still looks to land values and wonders if they fall how will it affect the overall health of the ag sector. This is irrelevant because of the point about banks and their view of land assets. 

Most of the country went through the massive deleveraging event spawned by the housing crisis.  I don’t like calling it that, it really should have been called the “greedy gluttonous I want it all” crisis, but people recognize it as a “housing” problem.  Same thing is about to take place in ag for the same basic tenants.  High commodity prices brought about a huge influx of $$$ to people that were accustomed to narrow production margins.  In effect, most guys won the lottery for the last couple of years… and they spent like they did.  Tons of new equipment, vehicles, services, etc… were bought and now all that debt leveraged up on guys balance sheets must be serviced with less revenue for the foreseeable future.  Low commodity prices due to overproduction spurred on by high prices… sound familiar?   Just like the suburban house buyer, they wanted it all, and got it, now it must be paid for.  (no MBS type vehicle in ag sector I think, but maybe worth checking into)  Some justified the purchase citing tax savings, problem is they just traded paying the tax man for paying the ag manufacturing sector.  And, most likely, in order to pay off that debt, they will have to liquidate assets, & that will bring the tax liability back to bite them in the ass…

Question the validity of my argument? Go check out the combine glut sitting on ag equipment dealers lots.  Demand has dried up as all the fun money has been spent and the conservative crowd isn’t biting the same bait.  The buy up and lever up crowd has stocked all the yards with late model used equipment that isn’t selling in the secondary market… sound familiar?  Equipment industry insiders know this, but aren’t about to mention it because the sales of new stuff and gaining market share is their core business.  Only way to keep the party alive is to have enough cash-flow to keep going, and that revenue stream will dry up as commodities fall below the cost of production in a function to buy back demand that was lost due to high prices.

What’s truly sad is this history repeating itself didn’t have to happen.  I don’t blame the equipment manufactures, but I will say it’s easier to get a massive equipment loan than it was to get a mortgage in 2006 IMO.  Guys who get screwed this go around have done it to themselves. We will see how it shakes out.  A lack of rain was a factor that helped bring about the last price surge (2012) in commodities…Most generally, every farmer wants rain, but my fear is that all too soon, some will be huddled with their lenders praying for it to not rain. <— (That’s how you make a big-ass cliché dramatic close to some thoughts people… #face)

Jerod

P.S. If I’m wrong and don’t know Jack shit, it’s on me. If I’m right (which I am) now you can cite this as the “I told you so”

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2 thoughts on “Party like it’s 1980…

  1. Agree 100% . Market correction has arrived big time. Wonder how quick new equipment prices will drop? My old stuff gets the job done

  2. I was 16 in the 80s .
    Farmers were going door to door trying to sell theirs farms.
    The same morons around here who wouldn’t buy a farm for 1400 are more than happy to pay 14000 now.
    They have no concept of a door to small.
    Now the farmers that do have a 200 bushel crop won’t sell for 5 because it’s not enough to gross 1000 an acre. Will be forced to sell at 3 because 2014 s crop will roll right into a 1.8 carry over.

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