With many financial assets in the doldrums and markets spooked by the twin spectres of economic weakness and rising inflation, is it time to head for the hills? Barton Biggs, an investment guru, famously suggested that those wishing to preserve their wealth in times of turmoil should consider buying an “unostentatious farm”. And rural land has long been seen as a good inflation hedge.
But now may not be the most opportune time for investors to swap their wingtips for wellies. After more than two decades in the mire, the value of farmland has soared over the past few years on the back of strong prices for agricultural commodities, low interest rates and urban sprawl. It has become so fashionable that some wonder if it is a bubble waiting to burst.
Bulls (of the figurative kind) point to the biofuels boom and strong demand from developing countries, particularly in Asia, as billions of new consumers adopt more protein-rich diets. This pushes up demand for crops and livestock: farm animals consume a lot of grain-based feed. Though food prices have fallen back lately, thanks to supply strengthening as more grain is planted as well as a general easing of commodity values, they remain high. Stocks of some crops are at their lowest level for many years.
To improve their food security, importing countries have been snatching up farmland overseas—a trend the United Nations’ top agriculture official has likened to 19th-century colonialism. Hedge funds have become more active too, seeking agrarian alpha. And finance is flowing: a recent survey by the Federal Reserve found banks still willing to back agricultural investments in America, despite capital woes.
To some, farmland values have now reached scary levels. The average price of an acre in America has almost doubled since 2004. In Britain, the value went up by 25% in 2007 and by a staggering 47% year-on-year in the first half of 2008. Many poor countries have seen similarly dizzying increases.
Tobias Levkovich, an equity strategist with Citigroup, thinks investors have been seduced by the bulls’ “everyone’s got to eat” mantra and are ignoring the warning signs, just as they did with the housing market in 2005-06. In an uncomfortable echo of that boom-turned-bust, land prices in America have deviated dramatically from their long-term growth rate (see chart). In relation to farm cash flows, they are now much higher even that they were in the late 1970s, the last golden age for ploughmen. The ratio of prices to cash-rent rates—the farming equivalent of the price-earnings multiple on stockmarkets—looks frothy too. In farm-riddled Iowa, it is closing in on the 1979 high of 22 times rent, according to
Farmland Investor Letter, a periodical devoted to land-valuation trends.
None of this makes a crash inevitable. Many still believe that the commodities boom has fundamentally changed the economics of farming. But the recent cooling-off has sown doubt, and a sharp correction would hurt.
Some investors have borrowed heavily to bet on the bucolic—as have some farmers, whose loan-repayment rates are starting to slip, according to the Fed survey. Worryingly, property accounts for a very high share of total farming wealth: around 90% in America, compared with 20% for households—though of course a farm, unlike a house, is a producing asset.
<snip>
Another real estate bubble?
Reply With Quote
Originally Posted by craziii
