Monday, May 16, 2011

U.S. Plains States Farmland Boom Continues, with 20% Year over Year Gains

Back in the early days of this website, as I thought out the "long term" in terms of economic, demographics, urbanization, etc trends, I mentioned arable farmland as potentially the best long term investment (talking decades) I could think of.  Shortly thereafter I heard similar thoughts from legendary investor Jim Rogers - his infamous quote now is something along the lines of "today the bankers drive Ferraris, in the future farmers will."  (with the state of our captured regulatory bodies and Federal Reserve, I don't ever foresee a day bankers won't be driving Ferraris!)  Of course this is not an easy thesis to play since there are limited investment opportunities short of a few niche hedge funds, and a few land oriented stocks (mostly foreign).  But, there are second derivative trades such as investing in "heartland" centric themes, or companies who benefit most from the new found wealth of the farmer class. 

Remarkably while the country suffered through the worst recession since the 1930s, many U.S. states' farmland values only suffered 1-2 quarters of outright losses.  And of late are back to 15-20%+ year over year gains per Federal Reserve surveys.  Now as with all things in the country the past few decades, a valid underlying story will be taken to extremes - combined with a tsunami of easy money that the real economy cannot absorb, you will see 'irrational exuberance' as that money needs to find a home.  Hard assets of all types (ex housing) at this time have been bid up - and farmland is especially attractive due to many long term trends plus the spectacular rise in commodity prices (excluding the past few weeks of course).  Despite my long term bullishness, it would be unreasonable for the current pace to continue - in some of these states, at current pace the value of farmland would double every 5 years.  But for now we party on....

There are two Fed districts where the majority of the "heartland" is based, one of which is the Kansas City Fed.  Per Big Picture Agriculture blog here are some of the heady statistics from that region (source material here)

"With robust farm income, farmland values posted sharp gains akin to the swift rise in 2008. Across District states, cropland values surged 20 percent above year-ago levels, particularly in Kansas and Nebraska. Bankers also reported a sharp jump in cash rental rates that echoed the rise in cropland values, especially for irrigated acreage."

First, year over year gains in Q1 2011 - you can see Kansas and Nebraska on pace for doubling of nonirrigated farmland in 4 years at current pace.

Here is the long term chart on a quarterly basis - one can see the explosion over the long term trend starting in 2007.

Finally one comment from a banker in the district:
  • “Current agricultural land prices are a concern to me as I am afraid they may be a bubble in the making.” – North Central Missouri

[Mar 11, 2011: [Video] Former FDIC Head Bill Isaac Talks about the Dud that is Dodd-Frank, and the Potential for a Farmland Bubble]
[Mar 7, 2011: NYT - In Prices of Farmland, Echoes of Another Boom]
[Feb 16, 2011: WSJ - Midwest Farmland Surges Double Digits in Q4 2010 Alone]
[Nov 15, 2010: Farm Economy Headed for Record]
[Dec 31, 2009: Bloomberg - Ethopian Farmers Lure Investor Funds as Workers Live in Poverty]
[Jun 2, 2009: The Economist - Outsourcing's 3rd Wave - Buying Farmland Abroad]
[Jun 14, 2008: Bloomberg: Farmland Reaps Bonanza for TIAA]
[Jun 5, 2008: NYTimes: Food is Gold, So Billions Invested in Farming]

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