The Wall Street Journal just caught up with the boom in farmland story yesterday. The price of farmland has doubled over the past past 4-5 years in the nation’s heartland. While some question the rise in prices, rationalizations have appeared as is always the case.
Less than 2% of the cropland in Iowa is sold each year, and 74% of it ends up in the hands of local farmers, who tend to buy for the long term and often buy with cash instead of debt.
Except that TIAA-CREF is not exactly your garden variety “local farmer.” The retirement system for employees of nonprofits, has acquired 600,000 acres of cropland worth $2.5 billion, about half of which are in the U.S.
“If opportunities arose, we could double our portfolio,” said Jose Minaya, TIAA-CREF’s head of natural-resources investments tells the WSJ.
“Investors discount worries of a price bubble, if only because the rapid appreciation in land doesn’t seem to be fueled by easy credit. In states such as Nebraska, roughly half the land purchases are for cash,” Mark Peters and Scott Kilman write for the WSJ.
Well sure, but it now takes 6 years worth of a crop to equal an acre of land, when the historical metric is 4 years.
Also, while land prices keep lurching upward, crop prices are going the other way.
Whether leverage is used or not, land prices move up and down depending upon interest rates.
Sterling Liddell, an agribusiness analyst at Rabobank, said Midwest cropland prices could drop 12% to 15% sometime over the next three years to five years if interest rates climb back to more-normal levels, which would make alternative investments more attractive.
This isn’t the first boom in farmland prices and it won’t be the last. Nothing causes memory loss as surely as an investment mania. As I wrote back in July, “Every new bubble feels different.”
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Asset price increases never seem to be fueled by easy credit, that is until they crash. It is nearly impossible for entrepreneurs to identify the difference in a bubble made by QE-?? and one made by real savings. And you can see how hard it is to determine this when the article states that many purchases of farm land are made with cash. But where did the cash come from. It could have come from savings or new debts? Or in the case of MF Global, it came from accounts that they could not legally access.
Did not the Japanese learn about buying US ranch land several decades ago? They were planning to teach us how to raise cattle.
Grain prices on the charts look very stable. I think Jimmy Rogers is right on this bet.
http://www.futuresbuzz.com/wheatlt.html
Wasn’t Jim Rodgers saying that the next dot.com boom will be farms because all that printed up money is going to flow into food prices?
I’ve been suspecting a bubble in agriculture for a while.
The various quantitative easings appear to have been largely taken up by banks improving their cash reserves, and banks have been stung by bad consumer loans, hence very little inflation is apparent in the aggregate consumer price indices.
Agricultural land is however one of the few things which banks are currently willing to lend on, and with currently low interest rates, land is of course an attractive investment, especially as they stopped “printing” new land a while back.
I was at a livestock mart yesterday. 30 month old, fat, galloway (a small beef breed) bullocks were averaging about £1k, a couple of years ago, they’d have been about £300, and had been since the late 1980s.
As a result, input prices are being bid up, and capital investments are being made at too high a rate, for example, new tractors, combines and buildings.
In Britain, demand could collapse over night, all it needs is for the dodo (€uro) to die, being replaced by rapidly, and deservedly falling national currencies (supposedly the Greeks had their new drachma notes printed in Germany about a year ago, and Germany is supposed to be printing new Deutsch Marks).
I seem to remember a BBC piece about increasing corporate land purchases in Africa.
Interesting times ahead?
Yes, this one does feel like the last one. But, when has it paid to expect the same outcome as the last cycle?? If you can tell me if the governments of the world will or will not continue to print money, I would have a good idea whether or not farmland is truly in another bubble.
“Sterling Liddell, an agribusiness analyst at Rabobank, said Midwest cropland prices could drop 12% to 15% sometime over the next three years to five years if interest rates climb back to more-normal levels, which would make alternative investments more attractive.”
Of course, and if pigs could fly, we would have to be more careful when walking outdoors, wouldn’t we. Why would interest rates “climb back to more-normal levels”? Is the supply of money going to decline? Is (qualified) demand going to go up?
“Every new bubble feels different.”
Of course it does. But it often doesn’t turn out the same way it did either. (Read James Gleick’s excellent book CHAOS to understand why.)
Tell me, if you owned a farm and sold it today, where would you put the money? At least, I assume that you must know of a relatively safe place.
Answer to the first question: It is very unlikely that they will stop.
Answer to the second question: The FED will raise the rates.
Answer to the third question: Probably precious metals.
“Answer to the first question: It is very unlikely that they will stop.”
So, we are possibly looking at a situation where the commodity we use to measure the value of farmland is nowhere near constant. What might the odds be that we could see another Paul Volcker come on the scene to precipitate another period like the mid-1980s?
“Answer to the second question: The FED will raise the rates.”
Why? And, what control do they really have? Will we choose to go through another 1930s style depression? (At least before we are forced to do so?)
“Answer to the third question: Probably precious metals.”
I haven’t seen a chart of farmland vs. gold, but if we do see the world’s currencies destroyed, why would gold outperform farmland – relative to any of the world’s currencies?
WIRED NEWS ran a good article recently:
http://www.wired.com/wiredscience/2011/12/when-reinforcement-fails/
It is nothing that a student of the markets does not know, but for those who do not live in the markets, it is an informative read. A quote from the article:
“This problem, of course, isn’t confined to athletes. Investors modify behavior based on recent market performance, even though the market is mostly a random walk. Gamblers won’t leave a casino if they’re on a hot streak. Pundits who make an accurate prediction are convinced they’ve now solved the world. Military generals are always preparing for the last war. Although people can’t help but learn from the reinforcement signals of the world — that’s just the way the mind is designed — we need to remember that these signals come with stark limitations, especially when they emerge from a complex situation. Sometimes, the best thing we can do is not learn from what just happened.”
There is no reason to believe that this cycle is going to repeat the last one. In fact, there is every reason to believe that it will turn out different – at least different enough that it will not be easy to know what lies ahead. Markets are like climate change – a coupled non-linear chaotic system is simply not predictable. This is why I question whether we actually know if farmland is in a bubble and especially how the near future will unfold. (I lived through the 80s, and I remember them quite well.)
The bubbles from the current money printing will probably run a very different path from previous bubbles, but the end point will be very similar; a bust.
Just as Tolstoy’s piece about all unhappy families being unhappy in their own unique ways, still contains two common threads; families and unhappiness.
I’d think it’s QE at work. It always needs time to dripple through the whole system. But in the end we all know QE is just “money printing” and an inflated monetary base, leads to inflation. So it’s a bubble fueled by too easy money. Some see the signs of the end, and are acting accordingly. Currently they still can “buy” obviously enough are willing to sell for the current prices. The money illusion at work, and the races is still open. Will the crashing be faster or the money printing. For now it seems the money printing does it’s work of destruction.
Warning: Beware the government cheese! Bloating and indigestion to result.
If memory serves, the last major boom in farmland prices was back in the late 70′s. Things did not go well for farmers when farm commodity prices fell in the early 80′s. The nightly news was an endless stream of bemoaning the “loss of the family farm.” The USDA enjoyed explosive growth in expenditures, price supports, and foreign tariff/import quotas.
And what kid in public schools could forget the “FREE government cheese!,” butter, and powdered milk from government stockpiles that was already rancid on arrival at the school cafeteria.
Will it be “different this time?” No clue. For the life of the students–please no return of the rancid cheese. Don’t foist these socialist fermentations on children.
Warning: Beware the government cheese! Bloating and indigestion to result.
If memory serves, the last major boom in farmland prices was back in the late 70′s. Things did not go well for farmers when farm commodity prices fell in the early 80′s. The nightly news was an endless stream of bemoaning the “loss of the family farm.” The USDA enjoyed explosive growth in expenditures, price supports, and foreign tariff/import quotas.
And what kid in public schools could forget the “FREE government cheese!,” butter, and powdered milk from government stockpiles that was already rancid on arrival at the school cafeteria.
Will it be “different this time?” No clue. For the life of the students–please no return of the rancid cheese. Don’t foist these fetid socialist fermentations on children.
The large corporate, agribusinesses may feel the pain of the bubble but the small, local farmer who finds the right land in the right location and grows the right stuff for the local community will do quite well in the future. The push for everything local has escaped the radar screen of many economists as more and more people become concerned about the safety of their food – knowing that it is 1000% safer to buy food grown locally than from a large corporate farm in the midwest. This example of the free market filling the gap of customer needs is something that is going on right under the nose of many economists.
Not only is the small, local farmer increasing value of their own land by providing goods and services that are desired by the local community, they are increasing the likelihood of surviving the economic collapse as they feed their neighbors and themselves.
I’m pretty sure Jim Rogers advocates buying farmland as a good investment over the coming years.
LOL!
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