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Farmland price rally looks past its best

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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.

Past profitability peak

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 year.

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.

No collapse

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 values.

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

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.

Peter, Indiana

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.

I 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 money?

Adam Thwaites, US

By Mike Verdin

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