Saturday, December 18, 2010

Global Demand: Land Prices Surge

DECEMBER 16, 2010
A Bumper Year

Real estate may be hurting. But farmland has become a hot commodity.

By LIAM PLEVEN, Wall Street Journal

The price of farmland is climbing sharply again. Will a new round of pleas for aid from Willie Nelson be close behind?

The rally in land values stirs memories of the 1980s farm debt crisis, when many farmers borrowed heavily as property values soared, then faced foreclosure after the bubble burst. The farmers' plight prompted musicians led by Mr. Nelson to stage high-profile Farm Aid concerts.

Arable land has again become a hot commodity—despite the struggles of the broader real-estate industry. It's attracting buyers ranging from wealthy individuals and institutional investors to farmers themselves. Many are investing in farmland funds, though some farmers are expanding operations.

"It's just gotten sexy lately," says Shonda Warner, managing partner of Chess Ag Full Harvest Partners, which has a fund with about $50 million invested in farmland in four states.

Farmland values in key upper Midwest states shot up 10% in the third quarter compared with last year, according to the Federal Reserve Bank of Chicago. The Kansas City Fed says prices of irrigated farmland jumped 12% in Kansas and Nebraska in the same period. The recent increases follow a 55% rise in value in real terms over the past decade.

Near and Far

Investors are plowing money not just into prime U.S. soil, but into major agricultural areas abroad as well. Some expect the land to appreciate in value. Others are betting that fast-growing nations will need to import more food to satisfy increasingly prosperous populations, boosting farm income.

George Washington University, in Washington, D.C., began buying in 2007 and now has $80 million of its endowment invested in farmland. One-quarter of that amount is in the U.S., and the rest is abroad—including money in a fund that leases land in Poland.In October, Teachers Insurance & Annuity Association of America—part of the mammoth TIAA-CREF retirement plan for academics—bought Westchester Group Inc., which already managed some of TIAA's farmland investments. TIAA has about $2 billion invested in more than 400 farms in the U.S., South America, Australia and Eastern Europe.

And Luminous Capital, an investment adviser in Los Angeles and Menlo Park, Calif., that serves wealthy individuals, has put $45 million of its clients' money into a fund that plans to buy 20 to 25 U.S. farms growing crops such as corn, cotton and wheat.

"We believe that the emerging markets are going to continue to grow in wealth," says Kim Ip, who oversees the farmland portfolio at Luminous. That, she says, will mean increased meat consumption, which in turn will drive greater demand for feed grains.

Primed for Exports

U.S. farms are well-positioned to benefit from strong global demand for key crops, because they produce so much more than Americans consume. U.S. farms will provide more than half the world's corn exports and over 40% of its soybean and cotton exports this crop year, according to the U.S. Department of Agriculture.

Exports can help farms earn significant revenue, particularly at times when prices are rising. Grain prices shot up this summer after a harsh summer drought in Russia that led to an export ban in that country on wheat. Corn and wheat prices were both up more than 65% recently from June lows, with soybeans up nearly 40%."

U.S. farmland is also growing scarcer, which can bolster its value. The nation's farmland acreage has been declining steadily for more than half a century, from more than 1.2 billion acres in the mid-1950s to a little less than 920 million acres last year, according to the Department of Agriculture.

Perils Aplenty

Farming, however, is a notoriously perilous business. Outside investors typically rely on tenant farmers or management companies to run the farms day-to-day, putting a premium on selecting skilled farmers. Farms are also heavily exposed to nature's whims.

"The biggest risk is operational," says Don Lindsey, chief investment officer at George Washington University. He tries to mitigate the risk by investing in different regions, and with a variety of managers.

Higher prices increase the risk that buyers may be paying too much, says Jim Grant, editor of Grant's Interest Rate Observer, a New York-based financial newsletter. "I worry about the aging Iowa farmers who are paying up for their neighbors' 80 or 100 acres because interest rates are so impossibly low," he said in a speech last month in Singapore.

And then there's the possibility of another collapse in land values.

U.S. Agriculture Secretary Tom Vilsack says the situation now is different. "I don't think we're looking at a bubble, just because I think people have been far more conservative about debt," Mr. Vilsack says.

Nonetheless, the earlier crash has regulators paying close attention.
"We don't want it to become a problem," says Richard Brown, chief economist at the Federal Deposit Insurance Corp., which monitors lenders.

Meanwhile, Farm Aid, the organization that grew out of the original concerts—and where Mr. Nelson remains board president—has focused its recent advocacy efforts on other farm-country concerns, according to a spokeswoman. But, she adds, "we are definitely watching the situation."

Mr. Pleven is a staff reporter for The Wall Street Journal in New York. He can be reached

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