Did James Dyson come a bit late to the farmland party?
The inventor of the bagless vacuum cleaner was last month
revealed to have bought roughly 17,000 acres (6,800 hectares) of land in eastern
England for a reported £150m, a price which, if true, would equate to about
£8,800 per acre.
While well above the average, many buyers have paid more of
late, helping take gains in farmland prices to some 200% over the past decade
in the UK, in a rally which has been reflected in many other countries too.
In major Midwest states including Illinois, Indiana and
Iowa, the top corn and soybean producing state, values have risen by 52% since
2010, according to the Federal Reserve.
But Mr Dyson, who was a billionaire by at least 2008, would have
been better buying earlier if he was after capital gains.
Signal from gold
There are many reasons for buy farmland, including tax
advantages, a bet on political stability, or mere sentimentality.
But two of the most important ones look past their best.
One is investors' clamour for so-called "safe haven"
investments, a big driver of farmland prices growth since the turn of the
century, which appears to have lost among the green shoots of economic growth
which have sent equities higher this year.
Indeed, gold's 4% fall on Friday to $1,493.35 a troy ounce, its
lowest since July 2011, should worry land acquirers, given the correlation
between two investments considered stores of value in troubled times.
According to veteran US realtor Porter Martin, Illinois
farmland prices have historically correlated with gold by close to 90%, with the
University of Illinois acknowledging the correlation too.
Crop price falls
The second booster to land price growth which looks set to
run slower is profitability among farmers whose quest to expand their holdings,
and make the most of elevated crop prices, has been highlighted on both sides
of the Atlantic.
If US farmgate corn prices for this year's harvest really do
average $4.80 a bushel, as the US Department of Agriculture predicts, then this
indeed bodes ill for growers.
A Creighton University study pegged the breakeven cost of
farmers with rented last at $4.88 a bushel.
Uralkali, the fertilizer group, this week estimated US corn farmers'
gross margins at $27 per acre, down more than 64% from its January figure.
And, if corn prices drop, it will drag values of many other
crops, including wheat, with it – albeit boosting returns for livestock farmers
given the fillip of cheaper feed.
Certainly, it seems difficult to see overall US farm cash
income keeping up with its recent growth of some 70% since 2009 to $136bn last
year, according to Fapri, the influential US agricultural study group.
Indeed, Fapri foresees net cash income falling back below
$219bn by 2015.
Nor do profitability prospects look so good in many other
parts of the world, including the UK, which USDA attaches in Europe warned this
week could be on for its lowest wheat crop in 30 years after a difficult autumn
sowing season, and delayed start to spring plantings too.
In Brazil, Mato Grosso farmers faced with soybean production
costs of $8.00-10.00 per bushel, and transportation costs to port of some
$2.50-3.25 on top, according to Soybean and Corn Advisor, are expected to
curtail their long-running expansion plans if prices fall too far.
Such an outcome could be in the offing, if the USDA is
correct in believing that growers, in the US at least, will receive $10.50 a
bushel for their 2013 harvest.
Sure, farmland investors still have many forces on their
side, including the long-term growth in consumption of agricultural commodities
and, importantly, the prospect of low interest rates for a while yet.
It was a sudden jump in borrowing costs which sparked the
1980s US land price crash.
Another hiccup in the US weather would revive arable farm
profitability prospects worldwide – growers elsewhere would benefit from high crop
prices, while those in the US would recoup losses in insurance, as happened
And even if farm profitability does fall this year, the
impact will take quite some time to feed through into the market. Expect the
rash of land price reports over the next few weeks to continue to show rising
But just as it was wise for equity fans 10 years ago to switch
some cash into other assets, including farmland, investors overloaded with
agriculture should now consider diversifying too.
Is the farmland rally really past its peak? E-mail your comments to email@example.com
I hope you're
right. I am trying to buy, but cannot afford to at these prices, and don't think
it would be a wise investment.
I do believe this bubble will burst - it is just a question of when.
History tells us that rallies go on until the last sceptic caves in. That obviously hasn't happened yet!
J Roach, New York
Excellent summary. I
doubt many will be listening though.
worked for a very large bank between 1997 and 2008, and no investors,
economists or bankers would dare to conceive that the commercial and
residential property boom could end…
This was a boom based, fuelled and funded,
on expected long-term asset growth.
Inevitably, it went belly up. If
you do a straw poll of most current land owners and investors, they justify the
derisory return on capital by long- term capital growth… Humm, heard that somewhere before?
Land prices will fall. With no capital growth element, UK land
values should average about £2,000 an acre – based on return on capital.
Michael Summers, UK
Sounds all very reasonable. But where else do you put your
Adam Thwaites, US