Archive for October, 2010

The Case for Current Farmland Prices

Friday, October 29th, 2010

With the recent run-up in commodity prices, it’s safe to say that in the next few months farmland prices will surpass the record levels of 2008 and continue moving higher.  For many, the next question is… “are prices too high?” As discussed in last week’s blog, current FDIC Chairwoman Sheila Blair believes the answer is “yes”.  In fact, she warns that farmland may be the next investment bubble to burst.  And there are others in the industry that agree with her…but not all.

University of Illinois Professor Gary Schnitkey recently posted an article on the University of Illinois “farmdoc” web site (FARMLAND PRICE OUTLOOK: ARE FARMLAND PRICES TOO HIGH RELATIVE TO RETURNS AND INTEREST RATES?) that makes a case that current prices are actually in-line with historical capitalized returns that take into account interest rates, cash rental rates, and other factors.  He does admit, however, that a significant increase in interest rates, or a significant decrease in commodity prices (the main component in determining cash rent) could bring a sudden halt to the party. 

I personally don’t think that the Federal Reserve is inclined at the present to start raising interest rates while the general economy is stagnant.  Trying to predict grain prices is a bit more tenuous. It only takes one good widespread weather year to create a crop surplus.  Most importantly though, is a factor that the supposed experts typically fail to account for (though it is hard to quantify) – the emotional attachment to owning a piece of land.  Unlike the equities market, when a person is ready to sell, sell, sell when his individual stock or fund has a 20 % correction, people that own a farm generally have the mindset of hold, hold, hold regardless of price trends.  They own land because they like it, not because they hope to reap a huge financial windfall.  (Note – some may argue that institutional investors are driven solely by the bottom line… and they are.  But they make up such a small percentage of the overall market that their actions really don’t have a huge long-term impact.) 

In summary, while both Chairwoman Blair and Professor Schnitkey create interesting arguments, I think the “love of the land” may be the biggest buffer against a land price collapse.

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The Possible Farmland Bubble

Thursday, October 21st, 2010

FDIC chairman Sheila Blair sparked some discussion earlier this week when she warned that farmland could be the next bubble to burst, following the residential real estate market and the stock market (Farmweeknow – FDIC chair warns of possible farmland bubble).  While I agree with Ms. Blair’s comment that an eye should be kept on the market, that is something any savvy investor would do in any economic environment.  I disagree with Ms. Blair that the farmland market is being set-up for the same downturn it experienced in the early 1980’s.  First, the amount of farm purchases being fully leveraged in the early 1980’s was much more significant than in today’s market.  Second, the fact that agricultural lenders and buyers went through the tough times 30 years ago caused the ag credit lending system to re-evaluate and correct itself…something residential lenders are now going through.  Finally, buyers are by and large still seeing favorable returns from the purchase of agriculture properties.

With worldwide demand for US produce remaining strong, prices for commodities will remain strong, which will continue to drive the farmland market.  A shift in demand, an increase in interest rates, years of consecutive poor yields and other variables could have a definite negative impact on the farmland market in the future.  However, simply saying, “The bubble burst in the 80’s and it is the farmland market’s turn again” is not enough evidence for me.

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Is Current Agricultural Output Lagging?

Saturday, October 16th, 2010

For those involved in agriculture, it’s easy to be proud of the gains that have been made in productivity over the past several years – higher yields with fewer inputs, more efficient use of our natural resources, etc.  And in truth, total ag output has been increasing steadily.  However, the bigger longer-term question now is – will this increased productivity still be enough to feed the rapidly growing world population?

A report released this week by the Farm Foundation and the U.S.D.A.’s Economic Research Service (The Global Harvest Initiative 2010 GAP Report) addresses this very issue.  And based upon their analysis, the food chain is going to have to increase their productivity even more if there is even a hope of filling the global needs in 2050.  Sara Wyant of AgriPulse summarizes many of the report findings in this article (GAP Report Shows Ag Output Lagging Demand Growth).  The challenge in the next 40 years is likely to be quite similar to the challenge that the late Norm Borlaug faced in the 50’s & 60’s in India and Mexico with the Green Revolution.  At the time, most thought that there was no way that production could be increased enough to keep large populations from starving.  Fortunately, they were wrong.

I firmly believe that this food challenge can be met, but only with the foresight and support of all the stakeholders – farmers, consumers, land owners, governments, scientists, environmentalists, and others.   It won’t be easy but the consequences are too great if the parties don’t work together.  Perhaps the quote from retired NASA Flight Director Gene Kranz sums it up best… “Failure is not an option.”

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Lower Yields Lead To Rally in Markets

Sunday, October 10th, 2010

On Friday, the USDA confirmed what many farmers have been experiencing first hand this fall – crop yields in many areas are not going to be as robust as previously expected.  The USDA’s updated prediction lowered their September prediction for corn production nearly 4% and their soybean production over 2%.  The result from these revised predictions was a rally in the futures markets, with corn and soybean prices both soaring.  With worldwide demand continuing to grow and depleting existing stocks, and a lower than anticipated yields across the Midwest, we could very likely continue to see the futures markets remain bullish for the foreseeable future.  We in the farm real estate industry will continue to monitor how higher commodities prices will affect the farmland market.  In areas where yields are not being affected, and with farmers being able to take advantage of higher prices, it could very well translate into an active farmland Market.  To read more regarding the latest USDA crop prediction, head over to Bloomberg (Corn, Soybeans, Wheat surge by Exchange Limits as U.S. Cuts Supply Outlook)

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