Monday, May 16, 2011

Farmland Bubbles?

In the pre-fiat currency days, long term inflation was pushed by rising population.  This tended to make food and agricultural land prices go up, while finished goods prices stayed flat.  The price of labor would go down. 

To update to today’s situation you need to add oil to food, and add loose global money to the velocity of the inflation.  So what used to be a slow gradual increase over decades is now a very fast shift.  It should also be noted that some of the commodity  prices are down at the moment from their peak; although not necessarily down from the time these stories were written.

Regulators, who for the most part have a very supply (of money) driven view of inflation are concerned with the escelating prices.  IMO prices are likely to remain overall high, but the potential for radical swings in pricing are likely to do the most damage.  The interaction of oil demand with its dimishing supply, and food demand with its rising demand is likely to be very volatile.
David Cottle, Wall Street Journal, 29 May 2011
Along with the ever-rising prices of agricultural foodstuffs has come rapid growth in the price of the land on which they’re grown. Indeed, UBS analyst Darren Smith this week described land itself as one of the most sought after commodities of all now.
Rising populations, and rising living standards in the emerging economies, along with the increasing use of biofuels, have seen a rush to plant wherever possible.
According to World Bank estimates, some 35 million hectares across Africa have been bought or leased in recent years by foreign investors. Some regions of Ethiopia have offered as much as a quarter of their best farm land to those who’d like to take advantage of rising commodity prices.
The buyers tend to be from nations with plenty of cash, but little good growing space of their own. Saudi Arabia is often mentioned, as of course is China.
Moreover, the trend isn’t confined to Africa…. Brazil’s recent attempts to restrict inward investment by foreign governments are widely believed to be aimed at limiting Chinese investment in its land…. Across the border in Argentina, Beidahaug Group, a conglomerate of Chinese state-owned businesses, wants to lease land in the Rio Negro area for industrial soy planting.
The imperatives for governments could hardly be greater…. Rising food prices played their parts in the political unrest that has swept across North Africa and the Middle East this year…. Between 1961 and 1990, wheat yields were growing at 3% per year, well ahead of population growth. Between 1990 and 2007, they were down to 0.5%, well below population growth of 1.4%.
Data from the Chicago Federal Reserve pointed to prices for some good U.S. farmland rising 23% in 2010. Kansas City President Thomas Hoenig said in February that soaring prices may be the result of another unsustainable bubble that could damage the U.S. economy when it bursts.
He may be right of course, but at times when regimes are tottering thanks to higher food prices, it seems unnecessary to look too hard for speculative activity.
The problem is rather of real supply, and real demand. Which means higher land prices are here to stay; an additional inflationary tailwind for the already rising cost of food.

Heard on the Street, Wall Street Journal, 18 February 2011

With the value of agricultural land booming on the back of rising crop prices, the Federal Deposit Insurance Corp. is holding a symposium next month aptly titled, "Don't Bet the Farm: Assessing the Boom in U.S. Farmland Prices." One panel will look at how concerned lenders should be about farmland prices. Another will reflect on the agricultural crisis of the 1980s.

The invitation notes that since 2000, U.S. farmland values have doubled, reflecting a 58% inflation-adjusted return. It adds that farmland has become a favored asset class "in an era of high commodity prices and ample liquidity.'

Scott Kilman, Wall Street Journal, 16 February 2011
Farmland values in much of the Midwest are climbing at their fastest rates since the 2008 boom, the Federal Reserve Bank of Kansas City said Tuesday.
Fueled by rising crop prices, the value of irrigated and non-irrigated cropland across the region known as the 10th District jumped 14.8% and 12.9%, respectively, in the fourth quarter, compared with a year earlier.
A combine unloads harvested corn for ethanol production in Missouri. The prices of corn and wheat grown in the Midwest are about double what they were a year ago.
Farmland prices in the 10th District are generating their biggest gains since the third quarter of 2008, when prices of irrigated farmland jumped 23.4% and prices of nonirrigated farmland rose 21.2%.
Farmland prices are heavily influenced by crop prices, which were climbing until the financial crisis and recession popped the commodity-price bubble in late 2008. Led by wheat, U.S. crop prices resumed their upward climb in June 2010 amid harvest problems in places such as Russia, and then the U.S. corn belt, as demand was recovering in the world's emerging economies.
The prices of corn and wheat grown in the Midwest are about double what they were a year ago, while cotton prices are up 155%. Soybean prices have climbed 50%. Those high commodity prices are giving farmers more money to spend on land, as well as attracting the interest of outside investors looking for an inflation hedge at a time when the cost of borrowing money for buying real estate is low.
The U.S. Agriculture Department said Monday that it expects net farm income, a widely followed barometer of the U.S. agriculture sector's profitability, to climb 19.8% this year to $94.7 billion, which would be the second-highest inflation-adjusted figure for net farm income in 35 years.

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