At a time when the housing market is showing double-digit price increases for April, fears are high that the strongest segment of the economy will hit a turbulent patch once the impact of higher borrowing costs begins to filter through the numbers sometime this August.
And according to Jeff Kleintop, chief market strategist at LPL Financial, forget about condos in Phoenix, farmland in the corn-belt is where the new risk lies.
While he's the first to acknowledge that farmland is in no way comparable to the size and scope of the housing crisis, he says there's more going on than just rising rates.
"It has to do with Emerging Market demand for more food," he says. "Very, very low interest rates have allowed these prices to soar." Add in a wet planting season and the fact that grain prices have actually moved lower over the past year, and Kleintop says "farmers are in the position where finances are a little bit tight."
In as much as mortgage lenders Fannie Mae and Freddie Mac are dependent upon steady employment, he says the U.S. Farm Credit System is dependent upon a good harvest.
Kleintop adds, "If we see these rates continue to rise a little bit in an environment where farmers simply don't have the income to make payments, you could see a minor financial problem develop, particularly amongst Midwestern lenders with ties to farmland."
For now, he says it is something that investors should "keep a close eye on" and be on the lookout for any signs of stress in the financial system, such as increases in overnight lending rates.
As for those individual investors who were fortunate enough to ride the wave of rising farm prices over the past five, 10 or even 20 years, Kleintop says, "they may also see some losses after years of gains."
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