Monday, December 27, 2010

Farmland: "Pricing the Good Earth" (DE; POT;MON; CAT; MOS)

A question we've pondered a few times, see links below.
From Barron's:
U.S. farm income is solid, debt is low, and crop prices and productivity are high. Does that mean that farmland is a good investment?

In the rush for hard assets over the past few years, some investors have planted farmland in their portfolios hoping to harvest nice gains.

On paper, at least, they have. U.S. land values are rising on strong prices for agricultural products, fueled to a great extent by robust exports to emerging nations. Advocates for owning farmland include big-name investors like Marc Faber and Michael Burry. But skeptics wonder whether the boom is setting up investors for a rerun of the crash that ended a similar period almost 30 years ago.

Back in the early 1980s, the sector was plunged into crisis when overleveraged farmers went bankrupt as interest rates skyrocketed to nosebleed levels during the last of the Carter years and the start of the Reagan administration.

Could a bubble be forming again in the heartland? Even Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., urged caution recently, alarmed that land prices, now 58% above 2000 levels in inflation-adjusted terms, foretell another bust—which could put more pressure on the already battered banks whose deposits her agency insures. But excessive leverage, a big villain in the crash of the 1980s, doesn't appear to be a major threat to farmers today.

"I would say we are perfectly priced for the current environment right now. If it changes radically, we could be mispriced in a new environment," says Michael Swanson, an agricultural economist for Wells Fargo, one of the largest lenders to commercial-farming operations.

Fundamentals are supporting the farm economy, says James McCandless, a managing director of UBS AgriVest. Farm income is strong, he says, while debt is low and crop productivity is increasing. In 1990, UBS AgriVest became one of the first firms to invest in U.S. farmland for tax-exempt institutions. Its farmland investments had a gross value of $544 million at the end of the third quarter.

Harvest This!

Intrepid investors should look at the yields on cropland, even if they don't plan to move to Green Acres. Farmland values have been appreciating nicely over the medium and long term.

While pockets of farmland—in the Dakotas, Nebraska and Kansas, for example—have risen strongly lately, most of the latest gains have been modest. In August, the Agriculture Department reported that the average price of farm real estate nationwide had been $2,140 an acre, as of Jan. 1, 2010, up 1.4% from the level a year earlier—but 86.1% above the level a decade before. And the National Council of Real Estate Investment Fiduciaries Farmland Index, which measures investment property, shows a third-quarter total return of 1.03%.

Gary Schnitkey, a professor of agricultural and consumer economics at the University of Illinois, says that farmland prices in his state—one of the nation's major agricultural producers—are in line with current interest and lease rates (also known as cash rents). Capitalized value, which is defined as the cash rent divided by the interest rate on a 10-year note, now equals about 95% of land prices, he says. In 1981, capitalized value soared to a heady 267%, while from 1990 through 2010, it averaged 107%. Farmers' debt-to-equity ratio is currently 12.8%, according to the U.S. Department of Agriculture, versus 13.6% in 2008; it was as near 30% in the mid-1980s.

One factor working against the development of a bubble is that big institutions—some of which were burdened by illiquid alternative investments, such as timberland, in the recent financial crisis—have done more talking about buying farmland in recent years than they've done purchasing. "There's a low level of participation by institutions…It's mostly individuals who own it, especially in the U.S.," says Jose Minaya, head of TIAA-CREF's natural-resources group, which has $2 billion in farmland investments in the U.S., Brazil and Australia....MUCH MORE
Some of our links in last month's ""Land Becomes Cash Crop in Farm Belt":

"Is TIAA-CREF Investing In Farmland A Harbinger Of The Next Asset Bubble?"
Société Générale's Dylan Grice: "Higher crop prices 'permanent'" (ADM; SYT)
"Is agriculture the next big investment thing?" (DBA; FUD; MOO; RJA)
Marc Faber: "'Buy farmland and gold,' advises Dr Doom"
Green Acres is the Place to Be: "The UK farmland grab"
"Wall Street Eyes Farmland"
Hedge Funds Buying Farmland
The Last Holdout: "U.S. farmland fetches top dollar despite recession"
The hedge fund manager who bought a farm

There are many more, use the search blog box, keyword farm or farmland.
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