Farmers have the banks over a barrel.
There is a rather unobtrusive piece in Berlingske (and forget that it is the “shire”):
In his book, The Dhandho Investor: The Low–Risk Value Method to High Returns, Mohnish Pabrai coined an investment approach known as "Heads I win; Tails I don't lose much." Q3 2021 hedge fund letters, conferences and more The principle behind this approach was relatively simple. Pabrai explained that he was only looking for securities with Read More
The point is:
a) That over 1/5 of all farmers are older than 64.
b) The farm debt is 280 bio, which in dollar terms is closer to $350 billion. DKK real estate mortgage (out of 2400 odd billion DKK in mortgage debt); but on top of that there is 60 bio. in bank debt. Denmark’s total GDP is approximately $330 billion.
c) There are about 18,000 farms over 40 hectares (to ignore the hobby farmers – we are talking professionals here. In round figures it gives an average debt of 20 million DKK pr. farm – say 2½ mio. USD pr. farm.
Now the running of the farm might actually be profitable: Food prices are on their way up – not surprising with all those hungry Chinese.
Poultry and beef are up; but mind you pork will follow (all those non-Obama votes in Ohio, they are about to benefit from what is no merit of his). As to grain – well see for yourself – prices are up 2½ times the level 10 years ago. Fertilizer is about to collapse for a second time in 5 years. So running a farm might actually be good business.
The problem is however, that there will be a shortage of qualified farmers – and those that are qualified will have lots of cheap farms to choose from – if for no other reason: The farmer died!
This makes the banks’ position VERY uncomfortable: They might turn out the defaulting farmer – any day, as he is in no position to serve 2½ mio. in loans. The problem is – in my modest experience – that pinstriped suits go very poorly with wellingtons and changing the BMW for an agricultural tractor is hardly the average banker’s dream of a treat. It is a problem – especially if there is live stock.
There are three options: Either pay someone to trend the farm – can be done (the word usury springs to mind). The other is to lower the price to a reasonable level and finance the purchase of the farm – which means an outright loss. The third is letting the farmer stay on – forgetting about the debt – which the bank and mortgage bank can’t: They have to finance these loans that are not being serviced.
There is a particular quirk to this in Denmark: The owner of the farm is obliged to RUN the farm.
Up to now I’ve been more or less convinced the solution would be to extend service free state loans attached to the farm (in order to avoid a speculative profit if farmland prices went up again).
We have passed that point!
The running of the farm will give a surplus; but the debt can’t be served – so you have to write off debt.
Banks and mortgage banks have – as mentioned – demonstrated losses of say half to 2/3rd of their so called “equity” in losses: Just on agricultural loans. Letting the land lay fallow? With rising food prices and all that machinery?
If I were farmer, I would laugh hysterically, at the stern warnings from my bank and hand them the muck rake, cheerfully announcing that the work day starts at 5 am!
The closest equivalent I can come up with is Europe after the plague (returned once every generation or two) when there was a shortage of labor. That led the gentry to introduce such pleasantness as tying the farmer to the land by force. This won’t do this time: The ones the banks should want to torture haven’t even moved in yet!
There is honestly only one way for the banks: Take the loss and write off debt to a level the farmer reasonably can serve.