T. Marc Schober's  Instablog

Investors are showing interest in global farmland again. Besides individual investments in US farmland, foreign farmland has taken the spotlight. Areas like Canada, Africa, and Australia are becoming targets for farmland investors.

In 2008, while food prices soared to all time highs, farmland values increased by double digits across the US and globally. In the second half of 2008, food prices fell and so did farmland values. The difference between farmland and other investments is that farmland was able to fare the economic storm without too much lost value.

According to the Wall Street Journal, the fundamentals of farmland as an investment are improving due to limited supply, water scarcity, increasing food demand, and food security concerns. These factors are leading analysts to anticipate recovery faster in some areas than others.

This could be the a new beginning of wind development and other alternative energies, such as solar and geothermal. Developers see the cash grant program as such a good deal, it may grow much larger than its Washington creators expect. The Energy and Treasury departments expect to spend $3 billion on the program, but some Wall Street bankers expect applications to grow to $10 billion. A government spokesman said $800 million in grants were submitted during the first four weeks.

The program gives a cash rebate for 30% of the cost of building a renewable-energy facility, awarded 60 days after an application is approved. Investors are also given valuable accelerated depreciation deductions, which help offset taxes.

An earlier government renewable energy program gave wind developers tax credits over 10 years, but as the economy deteriorated over the last two years, the demand for wind development disappeared. The new cash grants are offering the potential for attractive returns. Bankers interviewed by the Wall Street Journal expect deals to provide an annual return of anywhere from 9% to 15%.

Wall Street is not the only investors attracted to the cash grants. Iberdrola SA, a Spanish wind developer, expects to tap $500 million in cash grants for U.S. wind projects. Cash grants will also benefit utilities and wind turbine manufacturers.

Wind energy is going to be an exciting development over the next couple years. One way to play this trend and to capitalize on the cash grants is to invest in farmland. The wind developers have to find somewhere to put there wind turbines and one of the first places they look is farmland.

Landowners have the opportunity to lease farmland for wind development that does not interfere with farming operations. The land owner is compensated through an annual payment per wind turbine that is estimated to be between $2,000 and $5,000 according to the South Dakota Energy Infrastructure Authority. One turbine can be placed on roughly 60 acres.

Wind development will provide substantial income opportunities to farmland owners in the near future.

Read more about farmland and agriculture at farmlandforecast.colvin-co.com/.

Disclosure: No positions
 

Poor countries are requiring more foreign food aid than ever before. The current amount needed is five times what these countries presently receive. The long term solution to world hunger is investments in agriculture, according to the Food and Agriculture Organization.

The number of people who are malnourished rose in 2008 and 2009, after a long decline. The number of malnourished people has recently passed 1 billion, according to the UN. 

Otive Igbuzor, the head of international campaigns for ActionAid International said, "We know a child dies every six seconds of malnutrition."

Nine years ago, nations pledged to cut world hunger in half by 2015. Today it doesn’t look like that goal will be reached. The answer lies in investing in agriculture. Agricultural updates are needed in underdeveloped countries through new machinery and teaching of the latest farming practices. In order to feed the projected 2050 world population of 9.1 billion, global food output must increase by 70%.

Technology can account for some of this increase of food output, but the UN is calling for investments in agriculture for underdeveloped countries. Jacques Diouf, director general of the U.N. Food and Agriculture Organization said, "In the fight against hunger the focus should be on increasing food production. It's common sense ... that agriculture would be given the priority, but the opposite has happened."

While there is a heavy burden on teaching modern agriculture practices to underdeveloped countries as well as providing up to date machinery, farmland values will increase. As the global population increases, food output will have a very hard time trying to sustain. The result will be a steep increase in the demand of farmland, because farmland is essential for growing food.

The supply and demand of freshwater is becoming more imbalanced over time. One day freshwater could become traded like oil if our current tends do not change. In Part II, we highlighted the issues causing an imbalance of freshwater. Part III is finding the answer to bring freshwater's supply and demand back to equilibrium. Acheiving an equilibrium is possible though pumping, filtration, genetically modified foods, desalination, and raising prices.

Pumping

The equity markets have seen a significant run since mid-March on hopes that government stimulus will spark an economic recovery during the second half of 2009. The market is currently pricing in a "V" shaped recovery. When the market realizes the recovery will be slow and more "L" shaped, the markets will sell off drastically to adjust for the lower growth expectations.

Bear markets last longer than most investors expect. The last bear market lasted 15 years (1967-1982), which could mean that stocks will not reach a new high until 2022.

Reasons why the economic recovery will take longer than expected are:

- Conditions for consumers, which make up 70% of overall US economic activity, continue to deteriorate. The US consumer is still over leveraged and is focused on reducing debt and saving money. This is evident by the savings rate increasing to 4.2% from -2.7% in August 2005.

- Housing inventory is still high at roughly 9 months compared to the historical average of 4 to 5 months. The excess inventory may not be liquidated until 2011.

- Commercial real estate will be the next shoe to drop. There are 6.9 million less workers than in December 2007, which means there is a lot of free office space. Standard & Poors expects 160,000 retail stores to be closed over the next 12 months. Refinancing of CMBS is a huge concern if the capital markets do not open up (over $1 trillion needs to be refinanced over the next 18 months).

- The job market will remain weak until mid-2010 and peak in the low double digits. The economy cannot have a substantial recovery until the unemployment number starts to decline. The Federal Reserve Bank of Atlanta estimates the real unemployment rate is 16%, not the official 9.4%, if persons who have dropped out of the labor pool are counted.

We are also concerned over the increasing deficits, which are not sustainable. The deficit for fiscal year 2009 may reach $1.85 trillion by September 30, according the Congressional Budge Office. Fitch Ratings estimate that US Debt to GDP ratio will increase to 83% by the end of the year, the highest level since WWII.

Another big concern is the U.S. government's response to this crisis. Some of the reasons the Great Depression was prolonged was due to poor government response. Mistakes the U.S. government made during the Great Depression were: 1) raising interest rates and contracting the money supply, 2) raising taxes, 3) increasing regulation, and 4) restricting international trade. Unfortunately our present policy makers are making 3 of the same 4 mistakes. The U.S. government has been quick to lower interest rates and pump the economy with liquidity, but higher taxes, regulation, and protectionism will only prolong an economic recovery.

So where should investors put their money? There are many opportunities available to investors, but we believe farmland is one of the best places to put your money. You want to invest where the fundamental are improving, not declining. The fundamentals for farmland are very bright due to the world's growing population, rapid growth in emerging markets, and continued demand for ethanol and bio-fuels. The outlook for the U.S. economy is slower growth, more regulation, and higher taxes.

Finally, investors should identify an asset class that has provided consistent long-term returns. Farmland, through current income and capital appreciation, has done just that. Over the past 20 years, farmland has provided investors with an annual return of 12.5%. Over the past 100 years, farmland has displayed only three brief periods of negative returns (1930s, 1980s, and 2008).

We believe that farmland is the best place for investor's money to be right now, as it is well positioned to outperform in the current state of the global economy. Remember that regardless of how the economy is doing, people need to eat.

Read more at: http://farmlandforecast.colvin-co.com/

Disclosure: No positions