James Dyson may have come a bit late to the farmland party.
The inventor of the bagless vacuum cleaner was
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.
That is more than the countrywide average. But buyers have not been afraid to bid prices up, fuelling farmland price gains of some 200% over the past decade
in the UK, a rally echoed in other countries too.
In the US, land values in major Midwest states including Illinois, Indiana and
Iowa, the top corn and soybean producing state, have risen by 52% since
2010, according to the Federal Reserve.
However, the market looks past its bet. Mr Dyson, ranked as a billionaire since 2008, would have
been better buying earlier, and getting onto the farmland ladder on a lower rung.
Signal from gold
There are many reasons for acquiring farmland, including tax
advantages, a bet on political stability, and mere sentimentality.
But two of the most important drivers look past their best.
One is investors' clamour for so-called "safe haven"
investments. Farmland gets a big tick in that box, and has been particularly luring investors keen on spreading risk since the turn of the
century, when share markets faltered.
But the green shoots of economic growth,
which have lifted equities this year, have sapped the appetite for security.
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 land investor 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 driver of land price growth running out of tread is profitability among farmers, whose quest to expand,
and exploit 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, this
bodes ill for growers' profits.
A Creighton University study pegged the breakeven cost of
farmers with rented land at $4.88 a bushel.
Meanwhile, 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. The two grains are rivals for many uses, such as livestock feeding, meaning that their futures tend to shadow each other.
Certainly, it seems difficult to see overall US farm cash
income keeping up with growth pegged by Fapri, the US agricultural study group, at some 70% since 2009 to $136bn last
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.
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 of the three main engines behind the rise in farmland prices - in low interest charges, strong farm profits, and a quest for security - only one is still fired up.
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