13 Agriculture Myths Busted: This Bubble Is Ready to Pop

The contrarian view is a difficult one to take, but often worth considering, especially in this case. There seems to be a prevailing mentality that farmland is a great investment right now. It has some well known and very vocal advocates such as Jim Rogers, George Soros, Marc Faber, Fortune magazine, BlackRock, and a number of hedge funds. It is thought to be something secure during this time when little appears to be secure. People assume it will continue to rise in value because the world’s population is growing and “people have to eat”. It has corporate and political clout because of corn ethanol mandates as well as current agricultural policies and subsidy programs.

I don’t agree with any of the reasons people promote agricultural land as an investment right now. To prove my point, I’ll use a “myth buster” approach.

Myth #1. As world population expands, the demand for arable land will soar.

Just because population increases, doesn’t mean food will be produced and evenly distributed to everyone, and at a price to cover expenses of production. This has been proven many times over during this past century. Commodity prices, like the oil story we are now witnessing, are directly related to the economic health of individual nations throughout the world. Major global food distribution agencies are already seeing decreased revenues in contributions from developed nations due to this global economic downturn. Exports of our U.S. agriculture commodities are lower, except to China, which will likely decrease importing them soon, with its rising unemployment and decreasing export income.

Myth #2. Farmland is proving that it can hold its value through these tough economic times.

Much of recent year price stability has been due to speculation. Many of the investor class have driven farmland values. If farmland values start to go down, or, if commodity prices make farming unprofitable, expect some dumping to occur, because that’s what investors do. If we didn’t have this investment occurring, we’d have already seen greater price reductions.

According to one source, land values have gone down 20% already in other countries, which would suggest the U.S. is lagging in a farmland price correction. Prices are down 18% in Brazil, 12% on the Canadian prairies, 20-35% in Russia and Bulgaria, and 70% in the Ukraine.

Myth #3. Farmland year-over-year value increased the first quarter of '09 according to Chicago Federal Reserve figures.

The increase for the entire year ended up 2% in the Chicago Fed's region. The price trend started downward towards the end of '08. The Illinois, Indiana, Iowa, Michigan and Wisconsin district was down 6% in the first quarter of 2009, the steepest drop in 24 years.

In a survey, thirty percent of bankers in this district of most productive farmland expected farmland values to drop further, while the remainder expected them to be stable.

Myth #4. There is a limited and dwindling supply of land to farm because of climate change.

This statement may or may not be true for the U.S., and only time will tell. Erratic weather and rainfall may certainly cause production problems. Zones are also changing, and we have yet to know how this may help or hurt overall production. Warmer climates generally produce more food. Production has been strong, so far.

Myth #5. Ag land is a great inflation hedge.

Ben Bernanke, the European Union, Bill Gross, and Paul Krugman are worried about deflation. Why are you worried about inflation? Deflation causes assets to decrease in value and this unwinding process is far from over. We all know what this has done to the housing and commercial real estate prices. The process has barely begun in the sector of farmland real estate.

Furthermore, if you consider the rapid increase of input costs, especially when the energy crunch hits a few years from now due to the current decrease of investment in maintenance and new drilling projects, this statement might not even hold up in an inflationary environment.

Myth #6. Ethanol needs will cause farmland values to continue to appreciate, requiring 33% of corn production by 2010.

In 2009, projected corn use for ethanol production will actually go down by 100 million bushels, according to recently released data. This is a very surprising and interesting statistic, given all previously forecasted predictions. Why? Once again, it comes down to the economics of ethanol production. Twenty or more plants have gone bankrupt and around 30% have reduced or stopped production.

When this political product fails, we will have a huge corn surplus. This factor is huge, since ethanol has been the driver of the Midwest’s farm economy in recent years.

Myth #7. Agricultural commodities are headed towards a bull market.

Large corn acreage numbers released a week ago surprised everyone and caused a steep drop in price. The latest commodity figures show corn, soybean, and wheat prices all down this year due to increased production forecasts. Corn must return $4/bushel to break even and it is predicted that it may fall below $3/bushel this season. Inflation-adjusted corn prices are much lower than in the 1970’s, when they would have been the equivalent of $11/bushel. Higher and higher input costs increase risk. Monsanto’s (MON) corn seed price increased 20% this year, and soybean seed 35%. Corn seed prices can be $150-$240 per bag. I'd expect this year to be the final year of increased production, because agriculture production mirrors the economy.

All previous recessions have meant decreased crop production. It seems possible that the dairy model could be a harbinger for the grain model going forward. That is, the cost of producing milk has exceeded its price and many dairy farmers are going out of business.

Myth #8. Urbanization will continue to eat up the best farmland across America.

In the past this has been true, but it won't be going forward. This housing expansion has come to a near halt, due to the credit bubble popping. We have been left with a glut of houses which will take years to assimilate. The current trend is away from suburbs into higher density urban living. Two thirds of American's live in urban areas.

While total acreage numbers may not be impressive, we are experiencing the biggest urban agricultural movement since the Great Depression. Church grounds, empty lots, home yards, and balconies everywhere are being turned into urban gardens. In the rural areas, the opposite is happening. Abandoned farms are still being bulldozed to add acreage, as our industrial farms consolidate and get ever larger.

Myth #9. Land grabs by China, Japan, and "sovereign wealth nations" will be the biggest purchasers of Ag land over these next few years.

While this would be desirable to certain nations, I doubt that governments will sit idly by and watch this happen. This is what wars and takeovers are made of. Who controls a nation’s food supply controls that nation, doesn’t it? I don’t see productive farmland as a politically palatable saleable good. The saleable good is what that land produces. I predict this to be a short lived happening, especially given future energy constraints.

Myth #10. An investor can rent the land to get a high return on his or her investment.

Farmland prices peaked in 2008. Cropland rental rates increased again this year. This year's rental rates are still based upon last years commodity prices and land values. Now, with the higher input costs and lower commodity prices, rental rates will be forced lower. Renters are feeling squeezed.

Myth #11. Good Ag land is ever scarcer and hard to come by.

If you consider the average age of the Midwestern farmer (and elsewhere), there will be a large amount of acreage turning over in the next decade (perhaps 1/6 to 1/3 of the land). If farm profit margins become tight or negative, much additional land will come on the market.

Myth #12. We need to continue to increase our Ag commodity output.

There is a large amount of overproduction right now due to current agricultural policy. If you’ve ever read anything by Michael Pollan or seen movies such as “King Corn” or “Food, Inc.” you know that corn and cattle production aren’t optimizing land use for food growing, but rather are responding to agricultural policy, which is politics.

Our nation has been blessed with a vast amount of rich agricultural land. If crop choices changed to essential grains, beans, fruits, and vegetables, we could feed many more people. It would become less industrialized, however, because real food is more labor intensive. This would employ more people, have lower profit margins, and, consequently, lower land values.

Myth #13. Farmland never participated in the recent bubble that housing did in the U.S.

According to an inflation-adjusted Shiller graph, the average U.S. house price went up 85% from the start in 1997 of $110,000 to a high in 2006 of $205,000. According to a Calculated Risk blog graph of the nominal average U.S. Agland price per acre from 1999 through 2008, farmland increased 100% from $600 to $1200 per acre.

The same chart, inflation-adjusted, shows an increase of 60%. If you take just the state of Iowa, according to an inflation-adjusted graph from ISU, the increase in price per acre was 100%, from 2200/acre to 4400/acre during the same years of 1999-2008.

Disclosure: No farmland, hedge funds, commodities, or stocks owned.

Comments

[coldcall:]

I dont necessarily agree with all the points, but thanks for a well reasoned case against steamrolling into Agri stocks and ETFs.

Im still marginally bullish on the larger agri producers but its always good to hear the contrarian view.

Jul 12 06:17 AM

[richjoy403:]

I read these articles to get new ideas, and I do welcome contrarian views. In this case, I get the impression the author has pulled together a host of disparate trends/facts and thrown them against the wall.

I know Jim Rogers, George Soros, Marc Faber, Fortune magazine, and Black Rock -- I know their long track records. I don't know Kalpa or his track record.

Here is one example of my reading: First Kalpa says farmland is priced in a bubble, and ready to pop; than he goes about providing data that shows the opposite in Myths #2 and #3.

I'll not take on all his other statements I find fault with (except to note he accepts as facts some assumptions that might be themselves myths, such as "energy crunch" in Myth #5, the death of urbanization and urban gardens in Myth #8).

Again and again, Kalpa takes a recession datapoint (or anecdotal item like urban gardens) and forecasts that it represents the long term future with significant worldwide economic impact.

In sum, I think Rogers, Soros, Faber, et al, are most likely correct that this recession is a providing an unusually good opportunity to buy farm land at favorable prices.

I don't buy farmland, but I do like DBA for my play on increased inflation in future ag prices to be caused by a growing worldwide demand for grains and protein -- and all the equipment, seeds, animal feeds, and fertilizers required to meet that need.

Jul 12 10:14 AM

[bfarms:]

Good points! Very very few people can afford to buy farmland anyway, so how will you sell it if the need arises?
so you are talking high net worth folks.

Jul 12 11:17 AM

[thannagan:]

Done similarly, and ditto, to Artful Dodger. Corporate farms are a different story, though still tough. Everyone BUT the farmer will make the money.

Jul 12 11:49 AM

[Fighting Yoda:]

Agree with the views of the author – Ag had a major bull run – went into a bubble despite a significant pullback all Ags are still overpriced. The Ag and commodity bulls have raised the argument that – demand will continue to increase and supply is constrained – that is simply not true. Firstly supply is not at all constrained – more and more land can be brought under cultivation world over and technology increases productivity – you do not even require that much land.

Ag prices have fallen significantly in the recent past – are people going hungry – there is no evidence to that effect, and recession should not have any meaningful impact to basic food consumption. But based on price and demand data – we can conclude there was a big speculative bubble that has subsided now.

I expect Ag prices to trend even lower with decrease of speculation, same should be the case for Ag suppliers like POT, MON, DE etc.

Jul 12 12:10 PM

[Kalpa:]

Artful Dodger
Thanks for your eloquent writing on owning farmland. Since I grew up a farmer's daughter in the Midwest, and family still farms, I wouldn't know where to begin in telling "my" story. I just visited recently. There is always something depressing to relate. The latest is that they may bulldoze the abandoned farm on the property, which once belonged to my great-uncle. Since I'm a nature lover, and there are many trees, and some native prairie on the place, plus nice old barns, and buildings all hand-built by relatives who were good at carpentry, this would be sad. It is a small wildlife oasis in a sea of corn. But, the bottom line is, they are small compared to corporate farms, and the extra acres could help boost their profit margin. Over the years I've watched as they straightened a creek, removed trees and native prairie and small wetland, all for the same goal. The reason I tell this is that the story has been repeated many times across the Midwest.
Your point about finding labor is also great. I wish I'd included it somehow in my points above. My expectation is that corporate farms will be operated by immigrant labor over time in the not too distant future. This isn't real prevalent yet, where I'm from, but it has begun.
Also add, to all of this, there is a sentiment that goes with farming that one cannot underestimate. There is a deep connection with the land. This is probably what grabbed you when you bought more land years ago. It is what drives other members of my family and friends families who I grew up with, causing heartaches along the way. When I was in gradeschool, a best friend's Dad hung himself in their barn during a difficult farm year and he was dealing with a handicap that made farming difficult. Things like that you never forget and become part of you.
In my opinion, much of the reason for the positive sentiment has been lost because of the new profit driven values of corporate farming. Just look at the average age of a farmer in Nebraska or Iowa or anywhere. The corporate farm model has destroyed the sentimental appeal to the younger generations.
The economics of the story go on and on, too. Like you say weather, labor, long work hours, high costs of modern equipment, inputs, etc. make it an unpredictable challenge every single year.
Anyone sitting in an air conditioned 22nd story of some modern office building in mid-July in some large US city's downtown, who decides to put his or her retirement into a hedge fund investing in farmland hasn't a clue what's behind the scenes, do they?

Jul 12 12:23 PM

[naidle:]

The issue isn't land, it's high quality land which is in short supply. No one is arguing that there is a shortage of total land. Let's say that we agree though that there is enough high quality land out there - It would still take years to prepare and several years more before you're returning a profitable harvest. It's not a 6 month event.

"production - you do no require much land"

Well IF that's true (which is debatable with high population:farmland ratios like India) then you should be bullish on selective Ag companies such as Monsanto or fertilizers who maximize profits for such land. How else would you maintain high production?

The term bubble gets thrown around a lot and I'm not sure it's fair to say it's the case with Ag stocks. They were certainly bid up to prices but the longterm fundamentals are quite sound. Emerging Markets can only cut supply so far, for so long before there is a rebound. Unless you think China, India, Indonesia, Brazil etc are going back to life pre-1980 then I still like Ag stocks.

Are there deflationary pressures? Sure. But I'd still rather be in the things that will rebound first due to supply/demand fundamentals. If you're a good market timer then great, you're set. I'm bad at it.


On Jul 12 12:10 PM Fighting Yoda wrote:

> Agree with the views of the author – Ag had a major bull run – went
> into a bubble despite a significant pullback all Ags are still overpriced.
> The Ag and commodity bulls have raised the argument that – demand
> will continue to increase and supply is constrained – that is simply
> not true. Firstly supply is not at all constrained – more and more
> land can be brought under cultivation world over and technology increases
> productivity – you do not even require that much land.
>
> Ag prices have fallen significantly in the recent past – are people
> going hungry – there is no evidence to that effect, and recession
> should not have any meaningful impact to basic food consumption.
> But based on price and demand data – we can conclude there was a
> big speculative bubble that has subsided now.
>
> I expect Ag prices to trend even lower with decrease of speculation,
> same should be the case for Ag suppliers like POT, MON, DE etc.

Jul 12 01:52 PM

[Alan Young:]

Great article. I don't know if all these points are right, but there is plenty of food for thought, and enough points with "stickiness" to convince me to stay away from this asset class.

Re: "myth #4" -- what we can predict is that the "most productive" land today probably won't be so in 20-40 years. Deltas, like Bangledesh, will be too brackish, displacing millions of subsistence farmers. If I had a 50-80 year horizon, I would want to buy up ice fields in Greenland: worthless now, but maybe the world's best grazing land when the glaciers melt.

Jul 12 03:35 PM

[Tony Daltorio:]

The one point I totally disagree with is that the price of ag commodities is in a bubble. There are plenty of bubbles around, led by the whole deflation fantasy bubble in Treasuries and the US Dollar.

Also there seems to be a certain smugness or arrogance in the article and by commenters like Fughting Yoda - hey, we'll eat well here in the US, but in those emerging markets with billions of people, let them eat dirt.......

Jul 12 04:30 PM

[platehead:]

Utter nonsense and faulty reasoning.

Jul 12 04:40 PM

[berated:]

Platehead: care to provide any compelling counterpoints...?


On Jul 12 04:40 PM platehead wrote:

> Utter nonsense and faulty reasoning.

Jul 12 06:00 PM

[Ryu Mei Co:]

Finally, somebody with a contrasting point of view.

But, there is something that most of you are missing is the fact that you have to look at the macro economy point of view rather than micro for the next 5-10 years future. In the short term, Kalpa may be right, but in the long term, Jim Roger may be right.

China, India, African nations, South East Asia etc etc have populations that are growing exponentially with living standard and lifestyle improving every year. I do not have the statistic to back up my opinion right now, but it is not hard to assume that if China were to become the Super Power in the future, these rising middle income chinese will not only demanded more food, they will pay more for import products.

Granted that most of the myth are overly hype, but if you look at the stock prices of these agri companies, they are so cheap. MOS at $40, POT at $80.

Seriously, if MOS goes to $30, or Mon down to $50, hell, I will buy more for my son to benefit the profit in the future.

Jul 12 08:34 PM

[cameroni:]

You've seen the trees but missed the forest Kalpa. When Soros, Rogers, Faber and the big Ag-business's like Monsanto see opportunity in farming it is strategic. Their goals are made long-term and negate many of your arguments against buying arable farmland.

Land costs are only relative to the risks at hand from an economy in decline and the opposing forseeable risk such as drought leading to famine as one single example. Food is one of the biggest opportunity areas of the future and the current land prices reflect that demand by investors interested in quality arable properties.

While I cannot disagree that agricultural land prices have both risen and fallen over the last few years I do disagree that any bubble has formed there yet. Lets consider that most productive land must pass the litmus test of profitability before a buyer will buy. It must reasonably be able to yield a crop sufficient to pay it's mortgage or it is overpriced. That is how an investment is judged.

Urban homes on the other hand have failed this test. Rents can no longer justify the cost of homes and furthermore when they do justify ownership there is still the ongoing risk of unemployment increasing, wages declining and taxes on the rise. Residential property for the most part is no longer investment grade. It is too risky. That bubble is bursting and should continue for some time until a balance is reached between home ownership and the revenue that might be recovered should the home be vacant.

In general, that is not the case with farm land. At least not yet.

Food costs are on the rise in the big picture. I know that you saw corn prices fall recently but so did the price of crude oil. With oil at $147 then food prices ratcheted up dramatically. Both of these events are closely related but both skewed the charts and can easily distract most people. But they were not normal events, only short term speculative bubbles that are resolving themselves now.

On the issue of land under cultivation I think you are not considering that the best land is what we currently use for agriculture. Would it be any other way. Bringing marginal land into production results in desertification, harms the environment and reduces pasture lands that are used by cattle producers. The amount of good farmlands available that have not been consumed by deserts, damaged by chemicals, blown away in drought and lost to regional conflicts is small and diminishing. The number of mouths to support is not in decline.

Can we farm marginal land? Yes we can. With lots of inputs. Oil again nitrogen, potash and plenty of water......Oh yes...water.

There is one of the single biggest reasons quality land has a good value now and will hold it's value even in a hard recession. Water is under depletion. Not in a small way either. Are you aware that prairie rivers fed by glacial melt-water from the Rockies and essential to irrigation are at risk of disappearing entirely in the next half century? If you are in a region with good precipitation and doing dry land farming grains you can remain productive. But what about the folks who need irrigation. So indeed, not all land is equal and I agree with you there. Some lands will even become worthless in the future.

What about subsidies? We know farms are heavily subsidized and therefore food is cheap for most of us. So cheap that the third world with miniscule wages cannot compete. With a monetary crisis on our doorstep those subsidies are sure to be reduced over time, curtailed and even eliminated in some cases. Will that not affect the price of food? Will that not in turn affect the value of good land that can return high yields?

What about the environment? Shall we just tear up all the rain forests of South America and happily plant potatoes, carrots and onions for all the world to eat? There is good land down there. There are also a thousand ecological reason to not use it all for food production. I am not even being stupid when I say that the global village is dependent on a healthy global environment.

What about oil prices and fertilizer inputs? Those will not drive farmers out of business as you suggest. Far from it. Costs will be passed on to consumers. Higher prices for food won't drive down farm production or reduce land costs where demand is inelastic. It is all relative isn't it.

Going further, should we begin to experience inflation via stimulus the first place that inflation will appear is in energy and food. Again, what provides a higher income to farmers for they're production is not destructive of their land values. On the contrary farmers will seek to buy up more neighboring land and expand their ability to provide what the market demands at prices that make farming a profitable enterprise.

We have in the recent past been at a critical point with global grain shortages. We will be there again. A sharp drought in one region will be cash in the pocket of farmers everywhere else. So while some land will lose value periodically as a result of hoppers, lack of rain or environmental issues, other areas will see demand and a related increase in land values. At the minimum, that land should not experience a devaluation.

Of course I have not even touched on population increases, demand for meat and quality oils from Asia, Agribusiness effects on production or why land is valuable in a global community where we need to produce and share with our neighbors. Nor have I touched on WHO IS BUYING up the best land now nor how a hyperinflation will turn all the theories about farmland prices on their heads.

We may see prices for land fall in the short term. Think of that as a buying opportunity. I think you see where I am going with this. Not all farmland is valuable. I agree with you there, but good farmland is worth it's weight in (grain) and the future is very bright for most agricultural products.

Soros, Rogers, Faber and Fortune Mag are not crazy after all.

Jul 12 08:36 PM

[User 422955:]

I'm pursuing an interest in potash. The more I read, the more I suspect that potash prices will decline in the next year or two. Why? The recent boom in potash prices has encouraged people to start new companies and new potash mines. Thus far, I've found 3 planning to mine in Canada, 1 planning in Ethiopia, 1 in Argentina and several in Australia. And I'm not done looking.

Hope to write an article for SA on this subject.

Jul 12 08:47 PM

[rudolpho:]

Borderline convincing right now. But let's say oil bounces back to $120, and inflation comes back. There is no doubt that funds will flow towards farmland and commodities because the returns will be phenomenal.

Rudolpho.

Jul 13 12:20 AM

[Jabalong:]

I applaud the author for her contrarian analysis, which is always a good thing. However, I'd suggest there is a key problem with this piece and that is that it seems to mostly focussed on farming conditions in the USA. The bullishness of people like Rogers and Faber for the agri sector is not based on the US, but on emerging market demand. Take Asia, living standards are rising rapidly for many. And if you take a more bearish or restrained view on Asia's growth prospects, the numbers are so huge that even small percentages of Asian raising their living standards by small amounts will translate into huge increases in demand on food. And barring some cataclysm, this is only going to increase. If you want to get away from the finance worlds talking heads and look for something perhaps more objective, have a read of this piece in National Geographic:
ngm.nationalgeographic...

Jul 13 12:54 AM

[ArtfulDodger:]

Dear Kalpa:

Thank you much for your kind response.

You are right about my reasoning behind buying more farmland in the `70s. I am a trained classicist—and of course we are all romantics. That doesn’t mean we can’t reason though, and so, I’ve put a relative small amount of my overall portfolio into farming and farmland.

I don’t mean to sound as though I’m complaining about my farming experience; it’s actually taught me a great deal—and it enables me to help a fine family stay in a business that they love.

These are southern folks—the type that you can stop by their place in the afternoon and they’ll make you to come in and have supper with them. You’ll eat well too: fresh goat’s milk and cheese; tomatoes the size of Obama’s (or perhaps even Bill O’Reilly’s) head; lots of beans and okra; and in the summer always watermelon and cantaloupe. And the biscuits—let me tell you, you can’t stop eatin’ `til you’re stuffed. Your water will come from a well; and at night they'll have attic fans running with the windows open. You’ll think you’re in a 1930s movie. I’ll guarantee it.

As far as the environment goes, we’ve had no problems with damaging it. Farmers do more good to the environment here than bad.
However, almost all the old farm homes (made of wood side-slatting and metal or slate roofs) that used to dot the South like kernels on a fat ear of corn are all gone.

The families have splintered to and fro around the world, and many of the old farmlands lie fallow or were sold off to developers during the boom.

The good thing about this current downturn is that it’s shut the land-cold builders down! Thank God for that.

As far as some of the comments go regarding farming, some have mixed subjects at least in respect to what I was speaking of. I am speaking of individual investors and the money-making potential for them to go out as Jim Rogers suggests and “buy farmland and learn to farm.”

I think JR is speaking and thinking through his own eyes—someone who has made hundreds of millions of dollars—and not through the eyes of the average investor. I am not at all addressing corporate farming, as it’s called.

Commodities too are another subject—one which I was not at all addressing. At this point all commodities look to be in a sluggardly state. At this point I still like hard commodities—especially the metals used in industrial building, mainly because we know China is running headlong to build a new, vibrant nation. (forty new nuclear plants, e.g., and hundreds of thousands of more railroal lines)

In respect to soft commodities, however, China wants to be self-sufficient in that area—at least they want to buy from other Asian countries, and this is no problem. So the investment potential in that arena is not nearly as clear.

Back in the 1980s I used to trade futures—mainly indices, but some commodities too. And let me tell you the toughest ones to predict are the soft commodities. Of course, the way to make money trading is not to try to predict anything—simply go with your winners and snip your losers quickly. The catalyst you use to get started makes little difference; proper money management is the key to making money trading anything.

Another point to ponder when thinking of investing directly in any type of land is exiting. You can’t always get out of a property investment overnight—as you can a stock or futures contract trade.

As all of you well know, you can buy a stock on Monday morning and if for some reason you decide you don’t like it or you made a mistake, you can dump it that afternoon. You may not get exactly what you want for it—but you can get rid of it. Not at all necessarily so with land—much less farmland.

And why buy something on the order of the DBA? If you’re sure about a commodity price direction, then go to the futures market—the leverage is much greater, and if you can predict a price direction you can make gazillions.

Personally, I have a better sense of buying into a company when it’s out of favor, one that perhaps pays a dividend, and I believe has a decent chance to grow its business and better its margins. Right now I’m in VALE at $11.50 and YZC at $6.00. I have been in CEO, PTR, STO, FCX, and PCU, but sold them last month. They should be good investments again before long if they continue to ease southward.

And indeed, let me tell you again: there are tons of quality farmlands left in the South—and at reasonable prices.

Kalpa, your last paragraph is another good point for individual investors to take note of:
“Anyone sitting in an air conditioned 22nd story of some modern office building in mid-July in some large US city's downtown, who decides to put his or her retirement into a hedge fund investing in farmland hasn't a clue what's behind the scenes, do they?”

For the most part, I would say that they absolutely do not know what they’re getting themselves into. And if you don't think "big agra-farming" is tough, just check out the five-year margin average on a company like ADM. Such thin margins are always a sign that the hoeing is rocky.

Another caveat to think about when betting on a future shortage of soft commodities is that most of this thinking (at least recently) has been based on “global warming” as a fact—and that it is going to devastate the earth to the point that most farming will fail, thereby creating a world shortage of food.

Well, for the last ten years the planet has been cooling—the last three months are excellent examples, in that they’ve set cooling records that go back to the 1890s. This summer the polar icecaps, which were never melting in the first place, are back to their pre-1979 sizes when they were at record large sizes.

Take great heed before making an investment on such predictions as the earth’s cooling or warming, because as the more objective scientists will tell you: the scientific ability to make such longterm predictions is simply not available at this time. Here is an article that points that out:

www.cornwallalliance.o...

Thank you again Kalpa for presenting this article, and thanks to the other commentators for their knowledgeable views.

Pardon my long-windedness, but I'm on vacation for the summer and this is my first post in a while, so I'll shut up now and let the others continue.

Jul 13 01:35 AM

[ArtfulDodger:]

Jabalong:

Thank you for pointing this article out. But let me tell you, National Geographic is just about the most cynical magazine out there, and it always has been.

Back in the late sixties and early seventies, the magazine was dead sure the planet was about to run out of natural resources. I don't read it anymore, but as far as I know they never recanted their failed predictions.

I'd be really wary of investing because of their predictions, because I found several mistakes and misleading statements in the article.

The best to your investing. AD


On Jul 13 12:54 AM Jabalong wrote:
-food/bourne-text

Jul 13 01:43 AM

[GTC:]

Kalpa, These comments are fine if you take a three month view of the world, which is probably what you and your followers do as investors, which is fine when looking at the latest tech fad. Sadly, food supply and security is something you have to take a 100 year view of. Like death and taxes, another sure thing is that populations will rise - they may not all want iPods...but they will all need to eat. I am sure you can figure out what that will do to land prices and food prices in the long run...


On Jul 12 06:17 AM coldcall wrote:

> I dont necessarily agree with all the points, but thanks for a well
> reasoned case against steamrolling into Agri stocks and ETFs. <br/>
>
> Im still marginally bullish on the larger agri producers but its
> always good to hear the contrarian view.

Jul 13 03:17 AM

[richjoy403:]

Very impressive list of responses.

Mine was the 1st, and I've now read every one to follow. Though I still appreciate the contrarian view, I remain unconvinced...it comes down to one question -- does Kalpa's so-called myth-buster article refute the investment advice of Jim Rogers, George Soros, Marc Faber, Fortune magazine, and Black Rock?

Seems to me there is a lot of nostalgia for the historic family farm; also a lot of projecting the recession's low prices/low growth into an assumption that will always be the case; and finally, a disregard for the 3 billion people already living in the 'developing' world who will soon (at the conclusion of this recession) resume improving their diet and living standards. Finally, the population growth of the developing world is quite positive, whereas the smaller 'developed' world is barely maintaining population.

Including all the information provided collectively by the 19 responders, I vote that Kalpa has NOT refuted the advise of those investment legends.

Jul 13 06:40 AM

[prairiedog555:]

I live in high quality Ag country, Brown Co. Kansas. The run up in prices ($5K per acre here) has a direct parallel to ethanol. Which is a crazy idea and is only kept around because of politics.
The local bankers laugh at the price run up because they have seen it before, and seen it fall. That is why they only loan 50% on farmland.

Jul 13 08:16 AM

[Kalpa:]

Thanks for all of the comments. For now, I only have time to say that I'm afraid some of you naysayers are missing the big economic picture and it all goes back to my third sentence:

Commodity prices, like the oil story we are now witnessing, are directly related to the economic health of individual nations throughout the world.

And, yes, this focuses only on the U.S., and as I stated Ag land prices have already fallen in many countries throughout the world.

ArtfulDodger--
A classicist, I should have known! You pulled me in hook, line, and sinker. My nighttime reading right now is James Joyce.

Jul 13 09:22 AM

[Mark Anthony:]

I have very high respect for Jim Rogers. But on his agriculture love he was completely wrong, because he did not see the WHOLE picture.

Read here to why Jim Rogers optimism on agriculture is misdirected:
stockology.blogspot.co...

Jul 13 10:23 AM

[willynill:]

GTC, Check the demographics, the present birth-rate is less than 2 worldwide. By 2050 the population will decline absolutely and will spiral downward at a geometric rate. Is there anything on the horizon that will cause birthrates to increase? I doubt it. Russia has already tried a "stimulus" program to encourage population growth. Whether it works remains to be seen. People like Jim Rogers are as old as the average farmer in Nebraska, and they have a short-term view because of their age.


On Jul 13 03:17 AM GTC wrote:

> Kalpa, These comments are fine if you take a three month view of
> the world, which is probably what you and your followers do as investors,
> which is fine when looking at the latest tech fad. Sadly, food supply
> and security is something you have to take a 100 year view of. Like
> death and taxes, another sure thing is that populations will rise
> - they may not all want iPods...but they will all need to eat. I
> am sure you can figure out what that will do to land prices and food
> prices in the long run...

Jul 13 10:28 AM

[LIVE FREE O...:]

Excellent comments and response.

My wife's family farm goes back 200 years. Unfortunately anytime the government touchs private enterprise/industry (pretty much most things) it is a killer. Example - price of a gallon of milk continues to rise over the last 30 years, the farmer's profit has deteriorated to the point of "breaking even if they are lucky".

We have started farming but it isn't to make money, we can afford it and enjoy farming. Cut out the government, cut out tax breaks for agribusiness and the entire dynamics would change. Farming costs would decline, competition would increase and prices would come down at the grocery store.

Thanks again Kalpa.

On Jul 12 12:23 PM Kalpa wrote:

> Artful Dodger
> Thanks for your eloquent writing on owning farmland. Since I grew
> up a farmer's daughter in the Midwest, and family still farms, I
> wouldn't know where to begin in telling "my" story. I just visited
> recently. There is always something depressing to relate. The latest
> is that they may bulldoze the abandoned farm on the property, which
> once belonged to my great-uncle. Since I'm a nature lover, and there
> are many trees, and some native prairie on the place, plus nice old
> barns, and buildings all hand-built by relatives who were good at
> carpentry, this would be sad. It is a small wildlife oasis in a sea
> of corn. But, the bottom line is, they are small compared to corporate
> farms, and the extra acres could help boost their profit margin.
> Over the years I've watched as they straightened a creek, removed
> trees and native prairie and small wetland, all for the same goal.
> The reason I tell this is that the story has been repeated many times
> across the Midwest.
> Your point about finding labor is also great. I wish I'd included
> it somehow in my points above. My expectation is that corporate farms
> will be operated by immigrant labor over time in the not too distant
> future. This isn't real prevalent yet, where I'm from, but it has
> begun.
> Also add, to all of this, there is a sentiment that goes with farming
> that one cannot underestimate. There is a deep connection with the
> land. This is probably what grabbed you when you bought more land
> years ago. It is what drives other members of my family and friends
> families who I grew up with, causing heartaches along the way. When
> I was in gradeschool, a best friend's Dad hung himself in their barn
> during a difficult farm year and he was dealing with a handicap that
> made farming difficult. Things like that you never forget and become
> part of you.
> In my opinion, much of the reason for the positive sentiment has
> been lost because of the new profit driven values of corporate farming.
> Just look at the average age of a farmer in Nebraska or Iowa or anywhere.
> The corporate farm model has destroyed the sentimental appeal to
> the younger generations.
> The economics of the story go on and on, too. Like you say weather,
> labor, long work hours, high costs of modern equipment, inputs, etc.
> make it an unpredictable challenge every single year.
> Anyone sitting in an air conditioned 22nd story of some modern office
> building in mid-July in some large US city's downtown, who decides
> to put his or her retirement into a hedge fund investing in farmland
> hasn't a clue what's behind the scenes, do they?

Jul 13 11:22 AM

[ArtfulDodger:]

Dear Live Free or Die:

You are dead right. The government is a huge problem when trying to make money farming.

Love your moniker!! I hope you get to live free and don't have to die, but with what's going on lately I fear the latter may have to come to fruition sooner than most of us would like. AD


On Jul 13 11:22 AM LIVE FREE OR DIE wrote:

> Excellent comments and response.
>
> My wife's family farm goes back 200 years. Unfortunately anytime
> the government touchs private enterprise/industry (pretty much most
> things) it is a killer. Example - price of a gallon of milk continues
> to rise over the last 30 years, the farmer's profit has deteriorated

Jul 13 11:56 AM

[ArtfulDodger:]

Dear Kalpa:

Ah, a tiny wind out there in the vast morass of flesh who enjoys feeding off of my dangling participles, ruptured metonymies, and broken parallelisms. Honored!

When I say classicist, however, I must tell you that, although I have obediently swallowed every piece of literature called classic (except for Hemingway, and that farrago of his bores me to noontime naps), I mean classical rhetoric, philosophy, and my major love, architecture.

In respect to Joyce, though, you’re in another world there. Certainly nothing out there today to compare! I keep paragraphs and phrases and lines from everything I read, and I have quite a few from Joyce.

How about the perfect structure and fine lines in these two paragraphs from “The Dead”:

“The air of the room chilled his shoulders. He stretched himself cautiously along under the sheets and lay down beside his wife. One by one, they were all becoming shades. Better pass boldly into that other world, in the full glory of some passion, than fade and wither dismally with age. He thought of how she who lay beside him had locked in her heart for so many years that image of her lover's eyes when he had told her that he did not wish to live.

Generous tears filled Gabriel's eyes. He had never felt like that himself towards any woman, but he knew that such a feeling must be love. The tears gathered more thickly in his eyes and in the partial darkness he imagined he saw the form of a young man standing under a dripping tree. Other forms were near. His soul had approached that region where dwell the vast hosts of the dead. He was conscious of, but could not apprehend, their wayward and flickering existence. His own identity was fading out into a grey impalpable world: the solid world itself, which these dead had one time reared and lived in, was dissolving and dwindling.”

Lots of rhetoric to dissect and discuss in those two (makes my heart swell!), but I better stop, because I know the folks on this site and they’re going to curse us now for deserting the subject—and, rightly so I suppose.

Have a good week and thanks again. AD

PS: Keep up the good work. This was really a worthwhile article!

Jul 13 02:18 PM

[Kalpa:]

Subsidyeye and Derengow:

The sources for your 2 questions are as follows:

1) In 2009, projected corn use for ethanol production will actually go down by 100 million bushels, according to recently released data.

in.reuters.com/article...

2) According to one source, land values have gone down 20% already in other countries, which would suggest the U.S. is lagging in a farmland price correction. Prices are down 18% in Brazil, 12% on the Canadian prairies, 20-35% in Russia and Bulgaria, and 70% in the Ukraine.

www.economist.com/dail...

Now, Dodger you have outworded me and I cannot keep up and I also fear that the censor police here at SA will lock you up, but it was good to laugh out loud today! I imagine that a small % of readers here appreciate James Joyce but I might be wrong and I wish I could read German to fully appreciate him. As, for architecture, I won't comment or I fear I'll get you started down another off topic path and punish these dear readers who are serious about farmland values and have important decisions to make!

Jul 13 03:29 PM

[Living4Divi...:]

Good article and great data, thank you.

Wouldn't it make sense to leave investing in farmland to the farmers ?

Jul 13 03:34 PM

[mkreisel:]

Those following "gurus" blindly will be wiped out.

Jul 14 04:35 AM

[milkguy:]

I am also highly sceptical about "investing" in farmland without actually running an operation. Farmland is a living ecosystem that needs careful management, when it is done correctly, its intrinsic value goes up in time (appreciation vs depreciation of other assets). If it is used wrongly, the resources are depleted and the intrinsic value (capability to produce) can go down very fast and is very expensive to restore. There comes the problem of outside landlords: you don't want short-term tenant, because he will take whatever he can quickly and then you are left with depleted land. On the other hand, having truly long-term tenant decreases your bargaining power. I have no idea, how farmland investors intend to deal with this issue.

Agri-commodities "bubble" is a whole different story, though. The prices jumped in 2007 because for the first time in decades the world was running out of grains and dairy products. Of course, plentiful money supply amplified the move, but still the key reason was shortage in physical grain supply. And this was not one-time effect, this situation took almost 20 years to develop, as the biggest surpluses in food were recorded in early 80s.
The subsequent crash in prices was leveraged on the way down with shrinking money supply, just as it was leveraged on the way up. The key reason for price decrease was still the bumper crop of 2008, partly due to excellent weather conditions everywhere (rare event!) and eager response to the jump in prices.
I remain unconditionally bullish for grains, though. Very light inventories worldwide are a fact; growing consumption is a fact as well. My bet is that the demand keeps on rising at its longer-term trendline, while supply increase will be much slower to come along - the farmers have fresh experience what consequences the increasing supply can bring along. Therefore, in order for the supply to increase similarly, the prices must either shoot even higher that during the last boom; or somewhat lower prices must hold for significantly longer. Otherwise the farmers will not move, they will simply accumulate cash or pay back debt instead of investing in expansion.

Jul 14 08:39 AM

[skeptic123456:]

I am always skeptical about comments on seeking alpha because while the comments may be relevant, they are only relevant for a certain time frame so "analysts" should be forced to disclose the time horizon upon which they are commenting.

Jul 16 05:23 PM

[Southern Du...:]

Say what you want, but the laws of supply and demand (economics) stay the same. Commodity prices will continue to fluctuate; politics and the weather will be highly variable; and often, it will still be better to be lucky as good. Farming (and hunting) will continue to satisfy those primal urges built into our genetic pool over thousands of years, even though just surviving is about all the average farmer can expect.

Now, owning farmland is much different than farming. It is a very rare year that you lose money on your investment. And, if you put some money into maintenance, you can pass on better than you bought. Only 2 things are needed to be successful:

1) Buy land when it is near the bottom of its price cycle.
2) Set your priorities: Improve/protect ground, profit, wildlife/nature.

Remember what Scarlet's father told her, "Land, its the only thing that lasts."

Jul 20 07:16 PM

[foreignfarm:]

Well, this article is just more fodder for debate, a flip of the coin may be more indicative of the future....
And, please..."irradic?" erratic would be the term you needed. I thought most computers had spell check???

Jul 22 08:48 AM

[sbenard:]

Not sure how this plays into this discussion, but I recently read a few articles, mostly at Farm Futures magazine, discussing the impact of Cap and Trade and its higher energy costs, on farms, and especially family-owned farms, which still represent more than 98% of all agricultural land. Suffice it to say that Food is going to cost significantly MORE! How this will impact the price of ag real estate is debatable, but certainly worth adding into the discussion.

Personally, I hope the author is correct and that ag land will decline in price. I'd like to buy some, too!

Interesting ideas in this thread. Thanks for sharing, all!

Jul 27 10:47 AM

[Delta Ag:]

The article was thought provoking and while I can add little in the way of facts to dispute the article's premise, I would like to add a mildly different perspective. I am a 56 year old college educated guy in the Deep South that grew up from infancy on and still live on a family farm. I farmed this farm, which had been in my family for 2 generations prior to mine, for approximately 25 years and never planned to do anything else. I was not able to make it financially and approximately 10 years ago rented my land out and became a real estate broker , primarily dealing in ag properties. That should give background and cast either legitimacy or suspicion on any thing that follows. #1 World population will expand and food demand will increase. Whether there is money to pay for it has always been the question. Inflation could grow the world's money supply so as to help. #2 Farmland thus far has held its value in the U.S. Is it really legitimate to compare U.S. farmland values with values in countries with political instability(compared to the U.S.) or ones where the economic and political structures are still reeling from 75 years of a centralized way of thinking? Investment grade, highly improved, and irrigated farmland in MS had increased at an annual rate of 10-12 to 15% (while additionally providing positive cash flow in the form of rent which returned a net of 4.5-6%)prior to the fall of 2008 when the economic world as we knew it came unglued. Since then prices have largely remained flat, but still at the fall of 2008 levels. #3 Where I live the values have not increased since fall of 08, but have not fallen. What other investment vehicles can say that? The reason our values have not dropped may be because we have very few motivated sellers. Summer 08 we had many buyers and few sellers, today we have fewer buyers but still very few sellers. The people I contact in the search for farmland sellers almost to a person tell me they would be interested in selling if they had an alternative investment they felt as secure owning as they do with farmland. #4 While I cannot speak to climate change, there is less and less U.S. farmland every year because of urbanization and development. The rate of farmland conversion may slow, but there will still be less available U.S. farmland.#5 Deflation may be the norm today, but how can it be advisable to get out of an asset that by the article's own admission has thus far largely avoided deflation damage? Farmland has been shown in past inflationary times to be a great hedge, whether that is true for our next round of inflation remains to be seen, but I would not be afraid of it at all. #6 May or may not happen but most present day and on the horizon ethanol sources require land to grow, algae is an as of now unproven source of fuel but still requires land.#7Maybe, but if not now then later. Farmland cannot be successfully viewed any other way than a long term investment. #8Available farmland acreage is being reduced every year. Don't forget that our Federal government is a significant player in the land locking up business. That will not cease. While much of what is acquired by our government is not prime ag land it still reduces supply of available U. S. land. There may be a slowing, but the reduction will continue.#9 May be true, but there are plenty of places where the powers that be in those countries do not tolerate a lot of dissent. If the money is right then the countries you mentioned will be successful in buying up land.#10Farmland will show a decent rate of annual return, here in MS we can usually receive a net of 4-6%. The larger return in the past has come from untaxed appreciation. Hopefully that will continue but no guarantees.#11This myth is true. The better quality ag land has always been scarce. The turnover of better quality land is almost zero. Land as a whole is in stronger hands financially than ever before and this trend will continue. While it is true that the average age of farmers is creeping up, there are no certainties that that land will ever leave the families involved. Farmland often is kept by heirs and if sold a neighbor or institutional type investor/buyer is usually more than willing to pay top price.#12The mouths are there, but can they afford it?It is true that fruits and vegetables would feed more people, but all farmland and climates are not suitable for such and where would all the extra labor to tend these crops come from?#13There has been a farmland price increase though I hesitate to call it a bubble. The farmland price increase has not been fueled by debt however. Farm balance sheets and debt to asset ratios are very solid today. This was not intended as some scholarly thesis since those can only be done by scholars, of which I am not. Farmland is not an investment for everyone and is not a short term investment for anyone. I trust farmland and have been well pleased with my ownership. I would be scared to death of investing anything in farmland outside the U.S. We often take for granted our property rights and legal system that while flawed appears to be better than anyone else's. I at present am looking for buyers for our quality soils with plentiful cheap irrigation water. Come on down.

Jul 29 11:47 PM

[Kalpa:]

delta ag
Thanks for your informative comment. My only response is that, as far as deflation is concerned, one should avoid debt, so I would not want to see anyone taking on a huge debt burden right now to buy farmland. If they inherit it or pay cash it would be ok, especially if they plan to live on it. As for labor, I see more migrant workers on industrial farms and as jobs are lost in this deflationary period forthcoming some of those workers can go to the farms, but I'd expect the local/regional fruit & vegetable markets to be based primarily surrounding cities and towns. One more consideration would be to expect higher and higher taxes on farmland because this nation needs to tax everything it possibly can to pay off this massive debt burden. I should have another article up soon addressing some of these other issues (now on my blog).

Aug 16 01:49 AM

[Grant Hende...:]

"If you consider the average age of the Midwestern farmer (and elsewhere), there will be a large amount of acreage turning over in the next decade (perhaps 1/6 to 1/3 of the land)."

Land doesn't turn over because a farmer passes. The remains in the family and they rent it to a neighbor. The neighbor expands his acreage and gains economy of scale against his equipment costs. Good land never comes on the open market, it is swallowed up by family or extended family... the only and I mean the only time when good farmland (central and southern Iowa) comes on the market is when prices are high, if prices aren't high good land hides and produces solid cash flow.

Oct 22 10:32 PM