Institutional money managers have emerged as unlikely beneficiaries of a subsidised safety net for US farmers set for expansion by Washington.
Federal crop insurance, a key plank of farm legislation under debate in the US Senate this week, would cost taxpayers more than $90bn over the next decade, according to the Congressional Budget Office.
Proponents say the programme helps protect farmers against failed crops or falling prices. Investors say the policy enhances the appeal of the US as a safe place to buy farms. The benchmark NCREIF farmland index has gained 17 per cent in the past 12 months.
“The fact of the matter is that you can insure your crop at a level which means your farmer isn’t going bankrupt. I’ve got a government-backed counterparty,” said Hunt Stookey, head of farmland investment at AEW, which manages $47.5bn in real estate. ”I can’t have that bad a year.”
Crop insurance, established decades ago, is not the only reason why many investors favour US farmland. They cite the country’s tradition of property rights, low borrowing rates, superior farm technologies and unmatched grain export infrastructure as they scout fertile acreage to wager on rising world food demand or seek an inflation hedge.
Big asset managers such as AEW and GMO have joined TIAA-CREF, UBS and Hancock Agricultural Investment Group in the farmland investment niche. Institutional investors still own only 1-2 per cent of US crop land and are barred from land purchases in some states.
Crop insurance is “just one of many factors that we consider”, said Jose Minaya, head of natural resources and infrastructure investments at TIAA-CREF, the $487bn money manager.
In agricultural investment circles, the importance of the heavily subsidised crop insurance programme is nonetheless acknowledged.
“I don’t know of any other business where you can insure 90 per cent of your P and L,” said an adviser to large farmland investors. “There’s a lot more understanding in the institutional world about this than you might think”.
Philippe de Lapérouse, managing director at agribusiness consultancy HighQuest Partners, compared US farms to US banks. “There’s a backer of last resort,” he said, which enhances the risk profile of a farm operation.
The size and scope of crop insurance is a point of friction as senators debate the farm bill, recurring legislation that outlines programmes from sugar subsidies to food stamps. Lawmakers seek to increase crop insurance as they phase out direct payments to farmers made irrespective of whether a crop is sown.
Under the crop insurance regime, the government pays about 60 per cent of farmer premiums and reinsures companies that write policies covering losses from poor yields or low prices. Last year, the government paid $7.4bn in premiums and $1.3bn in administrative expenses to private insurance companies.
One bipartisan amendment would trim premium subsidies for wealthier farmers, while another would cap the subsidies at $40,000 per farm. There is currently no limit on premium subsidies.
“This open-ended entitlement needs to be reined in,” said Pat Toomey, a Republican senator from Pennsylvania.
German minister rejects plans to pool eurozone debt - BBC News
The German deputy finance minister Steffen Kampeter has ruled out eurobonds, saying "debt is a national responsibility"
Germany's deputy finance minister has ruled out "eurobond-lite" plans to pool part of eurozone countries' debt.
Speaking exclusively to the BBC, Secretary of State Steffen Kampeter said "debt is a national responsibility".
"I don't see any strategies where we socialise and redistribute the bad political decisions made by some who are over-indebted."
The German government has already ruled out full "eurobonds" for now.
That may disappoint investors on international markets whose hopes had been raised by reports that the Germany might be inching toward the compromise mutualisation plan.
The plan, from Germany's so-called "wise men" group of private economic experts, would let countries with debt above 60% of GDP such as Greece issue eurobonds for debt above that level, which would then be paid down over a maximum of 25 years.
In effect, indebted governments struggling to borrow at affordable rates in the commercial markets would be able to take advantage of lower borrowing costs offered to countries within this joint bond, such as Germany.
It was put forward as an alternative to full eurobonds, which would involve eurozone economies clubbing together to issue bonds representing all 17 member nations.
Merkel warningEarlier, Chancellor Angela Merkel said world leaders should not "overestimate" Germany's ability to resolve the eurozone debt crisis.
She told Germany's parliament that the country's options for rescuing the eurozone were "not unlimited".
Mrs Merkel called for more regulatory powers for the European Central Bank, and repeated that growth should not be financed by more debt.
Her speech came ahead of a meeting of G20 nations in Mexico this weekend.
Germany has been central in driving changes within the eurozone and backing the financial support given to debt-laden nations.
But, referring to the G20 meeting, she said: "I say to them Germany is strong, Germany is an engine of economic growth and a stability anchor in Europe... but Germany's powers are not unlimited."
She expected the debt crisis to be the main issue at the summit. "Our country will be the centre of attention. It's a fact, all eyes are on Germany because we are the biggest European economy and a major exporter," Mrs Merkel said.
But Europe would only find a way out of the crisis with a strong "political union" that mandated greater fiscal co-ordination and oversight to put member countries on a "solid foundation", she said.
Mrs Merkel has resisted calls that austerity measures in the eurozone should be relaxed in the hope that it would boost growth. "We must all resist the temptation to finance growth again through new debt," she said.
She also called for the European Central Bank to play a "bigger role" in overseeing banks to avert further turmoil in the industry.
'Misguided'"We need a more independent supervisory authority," she said in an apparent criticism of the European Banking Authority.
Berlin has said the current system is too dependent on national regulators and, in particular, under-estimated Spain's banking problems.
"The EBA conducted stress tests on all European banks a year ago, and the national oversight bodies were very involved," Mrs Merkel said.
"We are now seeing the result. Spanish banks are in quite a different situation than the tests appeared to show."
She said that national banking authorities, on which the EBA relied for its information, had provided results that were as positive as possible "out of misguided national pride".
Mrs Merkel has long argued against what she called "miracle solutions" to the debt crisis, saying that only closer political and fiscal union can solve the problems - something she accepted was a "Herculean task".
Worries in the financial markets that there is still no clear roadmap towards a solution for the eurozone were underlined on Thursday when Spain's borrowing costs hit at a new euro-era high, just days after the country agreed a bailout of its bank sector.
Italy's borrowing costs also jumped sharply amid fears that the country's debt woes were deepening.
Meanwhile, the Prime Minister of Slovakia has said that Greece should quit the euro bloc if it fails to honour its commitments.
Robert Fico said Europe should do all it could to keep Greece within the bloc, but that the country had to adhere to the terms of its bailout package.
With anti-austerity political parties expected to do well in Greece's general election on Sunday, Mr Fico told a news conference: "If the Greeks do not meet the commitments they have made, do not meet their financial commitments, do not repay loans, Slovakia will demand that Greece leaves the eurozone."
The remarks echo similar comments made by the European Council President, Herman Van Rompuy. "We will do our utmost to keep Greece in the eurozone while it is respecting its commitments," he said.
A strong showing for Greece's increasingly popular left-wing and anti-austerity party Syriza is likely to strengthen expectations that the country will leave the eurozone.
Debt crisis: ECB last hope as dam breaks in Spain - Daily Telegraph
Spain is caught in a vicious downward spiral as the property crash accelerates, further undermining the banks and state finances. This in turn is drawing Italy into the fire and threatens to overwhelm the EU's rescue machinery.
"We must have a real circuit breaker," said Sondergaard. "The question is whether the ECB will now blink and go down the route of quantitative easing (QE)".
He said the ECB should slash interest rates by half a point to 0.5pc and "pre-commit" to half a trillion euros of QE over coming months, blanketing the Spanish and Italian bond markets.
Nomura said the ECB must act with overwhelming force rather than engaging in piecemeal bond purchases that fail to restore confidence and have the toxic side-effects of pushing existing bondholders down the credit ladder -- the dreaded effect of "subordination".
"The eurozone has the wrong policy mix across the board. Fiscal policy is too tight; monetary policy is too tight; and the tough regulation of the banks is coming at the wrong time. Together it is all pushing the eurozone to breaking point," he said.
Spanish premier Mariano Rajoy said in a private letter to EU leaders last week that the ECB is the only body with firepower and nimbleness able to contain the crisis at this point.
The pleas have so far fallen on deaf ears in Frankfurt where ECB hawks insist that any such intervention to help EMU's struggling debtors would reduce the pressure for root-and-branch reforms.
The bank said in its June report on Thursday that Spain must make further draconian cuts to meet its deficit target of 3pc of GDP next year. It enraged monetarists by denying yet again that the eurozone faces a serious monetary slowdown or "an abrupt and disorderly adjustment" for banks -- or a credit crunch in layman's language.
"It shows fantastic complacency. They are not complying with their own mandate," said Professor Tim Congdon from International Monetary Research. Critics say that all key measures of the eurozone money supply are now contracting, pushing the whole region into deeper slump. The ECB has missed its 4.5pc growth target for M3 `broad money" by a wide margin.
Mr Spiro said the fast-escalating crisis in Italy may force the ECB to act. Foreigners own half Italy's €2 trillion public debt and they are increasingly shocked by the failure of the EU authorities to halt contagion. "Foreigners haven't been buying Italian bonds, but most have not been selling either. The risk is that they will now start selling en masse," he said.
"Italian banks are under massive financial repression to buy the debt but they are running out of money. The ECB will have to act but it has lost so much credbility already that it will have to buy on a massive scale to make a scrap of difference."
The ECB has already bought over €200bn of Italian, Spanish, Greek, Irish, and Portuguese bonds, justifying it as necessary to ensure the proper "transmission" of monetary policy. The move caused a storm in Germany, prompting the resignation to both German members of the ECB board last year. A chorus of economists have exhorted the ECB to cap Spanish and Italian yields at 5pc or so by pledging unlimited intervention. Yet such a naked rescue of insolvent states would trigger legal challenges in the courts for breach of the EU's no-bailout clause.
Professor Paul De Graue from the London School of Economics said the bank should go ahead anyway and "let the lawyers argue about it for the next ten years."
There are no such constraints on outright QE or money printing by the ECB, in extremis. Monetarists say the bank should buy the bonds of all EMU states to lift the entire region and prevent debt-deflation taking hold in the South.
Fresh data yesterday shows how desperate the crisis is becoming in Spain. The property crash is accelerating. House prices fell at a 12.6pc rate in the first quarter of this year, compared to 11.2pc the quarter before, and 7.4pc in the quarter before that. Prices have fallen 26pc from their peak.
"Fundamentals point to a further 25pc decline," said Standard & Poor's in a report on Thursday. It may take another four years to clear a glut of one million homes left from the building boom.
Mrs Merkel chided the country gently yesterday for letting a "property bubble" spin out of control in the boom years. Her words prompted a furious reaction from Madrid.
Foreign minister Jose Manuel Garcia-Margallo said Spain itself was the victim, flooded with cheap capital from northern European banks. "It is true that Spain and some other countries lived beyond their means but that was because banks from the core made lots of money investing here," he said.
Forex: USD/JPY hovers above 79.20 - FXStreet.com
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