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October 2009 Archive for Farmland Forecast

RSS By: Marc Schober, AgWeb.com

Marc Schober is the editor of Farmland Forecast an educational blog devoted to investments in agriculture and farmland.

Trees cover more farmland than you think

Oct 29, 2009
A recent study from the World Agroforestry Centre (WAC) revealed that approximately 2.5 billion acres, or 46% of world farmland, has tree cover of more than 10%. Over 27% of world farmland has over 20% tree cover. This comes as great news considering earlier estimates were as low as 120,000 acres of farmland having significant tree cover. Dennis Garrity, Director General of WAC in Nairobi said that farmers are being considerate to the environment, "The area revealed in this study is twice the size of the Amazon, and shows that farmers are protecting and planting trees spontaneously."
 
By having tree cover on farmland, the land can benefit in many different ways. Trees add value to almost all farmland and can even be crops themselves. Trees benefit farmland by providing:
 
-            Shade for crops
-         Wind breaks for wind erosion
-         Roots for soil relief for water and wind erosion
-         Foods including fruits, nuts, & coffee
-         Materials such as rubber, wood, & resins
-         Carbon offset
 
This report will certainly be discussed in December at the U.N. global-warming summit in Copenhagen. According to Time Magazine, if farmers were given more incentives for using trees in or around farmland, it could significantly help as a carbon offset.
 
WAC would like agroforestry to spread because it is so easy to practice in some areas. Tony Simons of WAC explained, "Whilst Western Europe has some 250 native tree species and North America has a larger set of 600 trees species-the developing tropics has a staggering 50,000 tree species to manage and utilize. The priority is to find the right tree for the right place for the right use." Where deforestation is occurring to make way for farm fields, farmers can practice agroforestry to still offset carbon from farming.
 
Future of agroforestry
 
Deforestation has been occurring for decades in the tropics, and to finally see evidence that trees are indeed still covering some of the deforested areas is great. Deforestation still does a lot of ecological damage though.
 
Farming is a carbon producing practice regardless of the crops grown, but by offsetting carbon output from farming by utilizing trees, it could make a difference. Trees have so many ways of benefitting a farm field, from an erosion stand point alone. Agroforestry should grow in popularity after the U.N. global-warming summit, where agroforestry incentives will be discussed.

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

Wind blowing on Wall Street

Oct 27, 2009

Wall Street is beginning to invest in wind energy again, after a six month absence according to the Wall Street Journal. Morgan Stanley and Citigroup have each invested $100 million to finance separate wind farms in August in order to take advantage of a new federal program that pays substantial cash grants to encourage wind development. The cash rebates are part of February's stimulus bill.

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 agriculture and farmland at: farmlandforecast.colvin-co.com/

Leasing farmland becoming popular in China

Oct 23, 2009
Leasing land was illegal in China prior to 1984, but a change in government policies has made it possible to lease land rights on farmland. The change in land rights policies from the Chinese government has boosted farm income and productivity over the past 25 years.

Current situation

China has roughly 20% of the world's population, yet only 7% of the world's arable farmland. Despite the limited amount of farmland, the Chinese want to stay self sustaining in agriculture production.

Chinese farmland is typically owned by village collectives (essentially, the local representatives of the Communist Party leadership) according to a recent article from the Wall Street Journal. Local farmers have rights to farm certain plots. Up until 1984, farmland rights could not be subleased or transferred to any other farmers, but now the Chinese government is promoting leases and transfers.

Since the change in laws, land rights have been easily leased or transferred through contracts. According to the Rural Development Institution (RDI), contracts for land rights used to be short in duration, but are becoming longer to provide stability to farmers. Rent on farmland has increased dramatically as well; doubling since 2005.

Future

As the Chinese government has encouraged the leasing and transferring of land rights, land owners can go to work doing something else, while still receiving income from their farmland. Some farmers will even farm half of the year, while renting out their land the other half. 48-year-old farmer, Zhang Deping explains, "It's really a good deal to rent out the land for half of each year. We can make more money than planting on our own."

A RDI survey found that 58% of farmers that have land rights have an actual certificate proving it. The RDI would like to see that number grow even more.

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

The fight for “food security”

Oct 22, 2009

Farmland is becoming a smart investment, but some may ask why. One reason is growing demand for grains, especially from developing countries. China has begun to reconsider their future “food security” by acquiring foreign farmland.

 

A recent article from the Financial Times explains how China is considering sending expatriate farmers to foreign countries where they will purchase farmland. China hopes this will be an answer to their food security issues. 

 

The main reasons for China’s food supply concerns revolve around the population’s changing dietary habits and growing population. The Chinese are now establishing a “middle class” and are moving away from staple items such as rice to more protein such as meat. One might think that this would hurt farmland and help cattle farms, but it actually beneficial to both. To produce a pound of meat it takes roughly ten pounds of grain, which could increase grain demand tenfold. The growing demand for grain/meat should increase the value of row crop farmland, along with cattle pasture land.

 

According to Biofuels Digest, China’s meat intake per person went from 25kg (55lbs) per year in 1995 up to 50kg (110lbs) in 2000 and is now at roughly 53kg (117lbs) today. Biofuels Digest also noted, “China is consuming four times as much additional grain, since 1995, as the US ethanol industry, and demand is increasing by 615 million bushels each year.”

 

The growing demand for grains overseas will provide strong pressure on the value of farmland. Countries who need grains will either drive up farmland prices by wanting to buy the land, and grow it themselves, or by increasing imported grains from countries such as the U.S.


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

Rural banker’s confidence increases in October

Oct 20, 2009

Rural community bankers are confident that their economies will soon turn around, according to increases in the Rural Mainstreet Index. The confidence index, which gives an outlook on the rural mainstreet economy six months out, rose above neutral growth to 58.7 this month. An index of 50 indicates neutral growth. Even though indexes are increasing, economist and founder of the RMI, Ernie Gross noted that the rural mainstreet economy is still weak.

 

The overall, combined RMI rose to a frail 37.5 from 36.5 last month. The index has been below growth neutral for 20 straight months now, but certainly higher than its record low in February 2009 of 16.9.

 

Farmland prices have remained steady. This month, the farmland price index increased from 41.1 to 43.0. The index has been below neutral growth for 12 consecutive months. There have been isolated farmland sales that have been relatively high though; Nebraska recently had farmland sell for $6,650 an acre.

 

The confidence index reflects banker’s outlook six months from now. This month, the index increased over 15 points from 43.5 to 58.7. The index is the highest it has been since July of 2007.

 


 

Outlook

 

The small increase of many indexes this month, along with the large increase of the confidence index, is a sign that rural economies are slowly coming back. An increase in the confidence index of 15 points is significant, but it is still only slightly above growth neutral.

 

Bankers were asked how much of an increase in FDIC fees they have experienced this year. Banker’s average increase in fees was 320% compared to last year. In addition, the FDIC has purposed fees to be prepaid for 2010-2012, which could make things difficult for small community banks.

 

The farmland price index has remained below growth neutral, but now is the selling season for farmland. In the upcoming few months, the farmland price index will accurately reflect farmland sales since there will be more sales to take into consideration.

 

The Rural Mainstreet Indexes are compiled from a survey of small community bank CEOs from an 11-state region.

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

1 billion people are malnourished across the globe

Oct 19, 2009

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.

Technology has consistently increased crop yields, but to increase yields by 70% by 2050 will be nearly impossible. Not to mention, the American Farmland Trust estimates that farmland is being lost at an alarming rate of 2 acres per minute in the US alone. Meanwhile, the world population is growing at a rate of 154 people per minute according to the Salon Media Group.

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

Farmland yields more than just crops; 12.5% return over past 20 years

Oct 15, 2009

Farmland is unlike any other investment as it can weather economic storms, yield consistent returns, act as a hedge against inflation, and pay investors for holding it. U.S. farmland values have increased roughly 6.7% over the last 20 years and 4.5% over the last 100 years. U.S. farmland has also paid its owners cash rents of roughly 5.8% of its value since 1987. When combined, farmland has returned to investors 12.5% per year over the past 20 years.



Farmland has performed well over the past five years due to the ethanol boom, especially in the Corn Belt. Strong ethanol demand, low crop supplies, increased exports, and a weak dollar led to a spike in grain prices. The large increase in grain prices translated into a substantial increase in farmland values.

 

Consistent returns

 

Over the last 100 years, farmland has experienced consistent gradual returns. Farmland prices have only declined in three brief instances; the Great Depression, the inflation boom of the early 1980s, and in 2008. Farmland values are based on expected long-term returns, and values do not fluctuate with small changes in commodity prices and farm income.




Good yield

 

Cash rents have yielded roughly 5.9% of since 1967, although the yield has declined from 6.7% in 1967 to 4.1% in 2008. The cash rent as a percentage of cropland value has dropped over the past few years primarily due to the substantial rise in farmland values. Cash rent yields have increased from the nadir in 2007 and we expect the yield to continue to approach the historical 40 year average of 5.9% as farmland incomes rise.




Strong balance sheets

 

Strong agricultural fundamentals have allowed farmers to strengthen balance sheets. Current debt to asset ratios of 9% are at 40-year lows. The minimal amount of leverage used is very favorable to farmland investors and will limit investors’ potential downside loss.

 

In the late 1970s, farmers used low interest rates to increase debt to over 20% of assets. The sharp rise in interest rates in the early 1980s used to fight increasing inflation put significant downward pressure on land prices. This led to a surge in farm bankruptcies and agricultural bank closings. In the 1990s, farmers used debt sparingly, which has led to financial stability in the farm sector over the past 20 years.




Strong correlation with inflation

 

Historically, farmland values have maintained a high correlation to inflation, often times outperforming during high inflationary periods. Agricultural land in Kansas has had a correlation of 0.94 with inflation from 1880 to 2002 and land in Alabama has had a correlation of 0.98, according to Kansas State University (Correlation is expressed on a scale from -1.0 to +1.0. The closer to +1.0 implies that both variables move in the same direction).

 

Gold is the asset typically relied on during high inflation periods, but farmland offers something that gold does not; intermittent cash flows. Farmland not only offers you protection from inflation, it also pays you to own it.

 

One of a kind investment

 

An investment in farmland offers investors a one of a kind opportunity. Farmland’s consistent track record, high cash rent yield, and ability to hedge inflation place farmland in a category by itself. Farmland also provides a margin of safety to investors, as stock prices can go to zero, but farmland will always have some value.

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

Global Farmland Disappearing

Oct 13, 2009

An investment tip from Mark Twain: "Buy land. They're not making it anymore."

Farmland is disappearing across the world at an alarming rate. Hundreds of thousands of acres across the globe are disappearing due to climate change, erosion, and urban development. The American Farmland Trust estimates that farmland is disappearing at a rate of 2 acres per minute.

The National Soil Tilth Laboratory in Ames, Iowa, highlighted, “Each human on earth lives off the farming equivalent of about a third of a football field today. Population growth and urbanization will shrink that available land base in half by 2050.”

African farmland disappearing

Africa could lose 247 million acres of farmland by 2050 due to climate change according to Environment Science and Policy. This potential loss of farmland is substantial as the U.S. has approximately 246 million acres that support the top eight producing crops.

Much of Africa’s farmland is hot and dry to begin with, and now with changing climates, a substantial amount of farmland is being lost because the crops cannot handle an increase in temperature. Small changes in temperature can cause a significant reduction in production. The National Academy of Sciences estimates that for every one degree Celsius (1.8 degrees Fahrenheit) increase, wheat, rice, and corn yields decline by 10%.

In the African regions, the 90 day grow-cycle needed for many crops is what’s at risk. The growing season is shortening. The farmland will no longer be fertile and be able to produce crops. Environment Science and Policy found that in dry farming areas, one out of six crop seasons are affected by dry climate, and that number is bound to increase.

The study claims that if proper action is taken this far in advance, small farm communities can still be saved. Philip Thornton, co-author of the paper, noted “Though unsuitable for crops, the land could still sustain livestock, which are more tolerant to heat and drought.”

Although the African farmland can still be used as pasture, the farmland will no longer be fertile and be able to produce crops. This will significantly reduce the global production of grains and throw a curveball for the supply and demand of farmland globally.

U.S. farmland disappearing

Farmland has also been disappearing in the U.S. due to urban development. Farmland has been used to create new highways, industrial parks, and housing developments. . The American Farmland Trust estimates that between 1992-1997, more than six million acres of agricultural land, an area the size of Maryland, was used for urban development.

There has been a 5% decrease in farmland in the tri-state area of Alabama, Tennessee, and Georgia from 1987 to 2007. Wisconsin's farmland has decreased by 19% from 1978 to 2008. Virginia lost 521,000 acres of farmland from 2002 to 2007.

The decline in farmland has lead to the U.S.'s food supply being grown in smaller areas with a higher concentration. The high concentration of crops is dangerous because of the risk of: drought, floods, insects, disease among crops, and depleting quality of soils. The U.S. food supply could be at risk as any unexpected interruption in the food chain such as flood, disease, or drought, could wipe out a significant portion of food production.

The global land grab

Developing nations have begun to reconsider their future “food security." By 2050, the world will have to feed 3 billion more humans with significantly less farmland. To solve this dilemma, countries such as China, Saudi Arabia, South Korea, and United Arab Emirates have purchased farmland across the globe to ensure a consistent availability of grains. The countries have sent expatriate farmers who will harvest the crops and directly export the grain back to their home country.

Saudi Arabia has spent $100 million to lease land in Ethiopia to raise wheat, barley, and rice. In Sudan, South Korea has signed deals for 690,000 hectares, the United Arab Emirates for 400,000 hectares, and Egypt has secured a similar deal to grow wheat. Private companies are also acquiring land. Sweden's Alpcot Agro bought 128,000 hectares of Russian farmland, South Korea’s Hyundai Heavy Industries acquired 10,000 hectares of eastern Siberia, and Morgan Stanley, an American bank, bought 40,000 hectares of farmland in Ukraine.

How is farmland going to be affected by this?

With this much farmland now at risk of being taken out of production, the demand for farmland will undoubtedly be affected. Farmland is a natural resource with no substitute and cannot be replenished. No more land is being made.

Whenever supply and demand curves become distorted, an investment opportunity can arise. The growing importance of farmland and the limited supply provides farmland the potential to become one of the best investments available over the long-term.

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

Why invest in farmland?

Oct 12, 2009

Everyone has to eat in order to survive. The production of almost all food can be traced back to farmland around the world in some way. Demand is growing for farmland as the world's population and global needs for food are growing.  What many don't realize is that the supply of farmland is not changing, thus creating a severe imbalance in the supply and demand of farmland.

 

An investment in farmland over the long-term will provide a steady stream of income and capital gains due to the increasing global demand for agricultural commodities, driven by the rising world population, rapid growth in emerging markets, and continued demand for ethanol and bio-fuels. Demand for agricultural commodities is outpacing supply, which positions farmland for long-term appreciation.

 

We believe that now is an excellent time to invest in farmland due to the compelling fundamentals of agriculture, the inflation hedge farmland provides, the bottoming of land prices, and the stable return profile.


World and emerging market population growth:

According to the USDA, world population growth is expected to increase at 1.1% per year through 2018. The United Nations estimates that the world’s population will increase from roughly 6.6 billion people to 9 billion people in the year 2050. As the global population increases, demand for food will increase proportionally. This will also cause the supply of agricultural land to diminish due to development, thus increasing the value of existing farmland.



Rapid population and economic growth, primarily in India and China, will increase food demand and U.S. exports. China is one of the largest importers of grain as the country has roughly 20% of the world’s population although only 7% of global arable land. China was a major exporter of grain but increasing incomes and the development of a middle class have changed consumers’ diets, moving away from carbohydrates towards proteins. The continued transfer to protein will significantly increase the demand for grains as one pound of meat requires roughly 10 to 15 pounds of grain.

The increasing global demand for grains needed to feed the growing world population and its changing dietary habits will continue to increase U.S. agricultural exports. Looking forward, the USDA baseline projections show a continuing upward trend with total U.S. agricultural exports reaching $113.0 billion in 2017 from $82.2 billion in 2007.



A recent advertising campaign from Monsanto highlighted the importance of sustainable farming and food production. The campaign highlighted the fact that agricultural output will likely need to double by 2050 to meet the growing global demand. Monsanto also noted that in 7 of the last 8 years, the global consumption of grain has outpaced total production. To meet future demand, Monsanto is predicting that we will need to produce more food in the next 50 years than what was produced during the previous 10,000, putting more and more pressure on future farmers and the land they use to produce food.

The fight for “food security”:

 

In order for developing countries to meet their growing demand for grains, many countries have begun to reconsider their future “food security” by acquiring foreign farmland. Countries such as China, South Korea, and the United Arab Emirates, have purchased farmland to support their growing need for grains in areas such as Africa, Australia, and Eastern Europe. The nations are sending expatriate farmers to foreign countries to farm the land and export the grain directly back to their respective homelands, thus ensuring a consistent supply of grains.

Increasing use of ethanol and bio-fuels:

Concerns regarding climate change and fossil-fuel dependency have led to a significant focus on renewable fuels, such as ethanol, as a replacement for high polluting carbon-based fuel sources. Ethanol is primarily manufactured from crops such as corn, wheat, and sugar cane. According to the USDA, ethanol production in the U.S. has increased from less than 3 billion gallons in 2003 to over 6 billion gallons in 2007 and is estimated to exceed 12 billion gallons in 2020. The Renewable Fuel Standard from the 2007 Energy Act calls for total renewable fuel to reach 36 billion gallons by 2022. The USDA estimates that more than 33% of the U.S. corn production will be used to produce ethanol by 2010

President Barack Obama is expected to continue to be supportive of alternative energy sources. In April, the Environmental Protection Agency proposed raising ethanol limits in gasoline. The agency said it is seeking to raise the limits of ethanol blends in gasoline from 10% to 15%. The increase has largely been driven by a petition initiated by the trade group Growth Energy, which cited a Department of energy study that found raising blends to 20% would result in no significant drivability issues.



Declining ending stocks to usage ratio:

Increasing U.S. exports and ethanol use have caused consumption to increase faster than production. Ending corn stocks to usage ratio (current inventories as a percentage of annual consumption) has declined over the last four years from roughly 20% in 2004 to 9% in 2008.


In the USDA’s May update of World Agricultural Supply and Demand Estimates (WASDE) report, ending stocks for 2009/10 are projected to be down 28% to 1.1 billion bushels, as corn use is expected to exceed production by 470 million bushels. A difficult harvest season, or any unexpected demand for grains, could put a significant strain on global grain supplies, which are currently at record lows. U.S. corn stocks have declined to a 33 day supply, meaning that if corn production was halted, the U.S. would run out of corn in a little over a month.

Strong farm income:

The increasing population, growth in emerging markets, changing dietary habits, and increases in ethanol production will result in higher commodity prices and an increase in farm income over the long-term. The USDA expects farm income to remain strong through 2018 due to sustained biofuel demand and rising global food demand, partially offset by lower government payments and rising farm production expenses.



Low farm sector debt levels:

Strong agricultural fundamentals and minimal use of debt have allowed the U.S. farm sector to maintain conservative balance sheets. Current debt to assets ratios are at 40 year lows. According to Iowa State University, 72% of the land in Iowa has no money borrowed against it. The minimal amount of leverage on farmer’s balance sheets will limit the potential downside.



Aging population will provide a good buying opportunity:

The aging farming population in the U.S. will create a window of opportunity to purchase farmland in large quantities. Typically, farmland is held for long periods of time and is not available for sale until the owner passes away. The USDA estimates that over one-third of all farmland owners have less than 15 years of remaining life expectancy.

Government farm commodity programs provide a safety net:

Farm commodity programs help stabilize and support farmer’s income by shifting some of the risk to the federal government. Federal assistance exists for roughly two dozen farm commodities and the payments are comprised of direct payments, counter-cyclical payments, and marketing assistance loans. Farm commodity programs, combined with crop insurance, help stabilize farmers’ income and thus reduce the risk of owning farmland.

Opportunity for wind development:

A bonus to owning farmland is that it provides additional opportunities to generate income or capital gains through wind development, oil and gas leases, the sale or lease of water rights, and recreational use.

South Dakota farmland owners are in an excellent position to capitalize on wind energy. According to Dakota Wind Energy, South Dakota has the wind potential to meet 50% of the U.S. electricity demand. Presently, South Dakota ranks fourth in the nation in wind power. Factors that make developing wind energy difficult are that South Dakota does not have the transmission infrastructure to transport energy to populated areas (although projects are being considered) or the policies that are favorable to renewable energy.

Landowners may 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 are estimated to be between $2,000 to $5,000 according to the South Dakota Energy Infrastructure Authority. One turbine can be placed on roughly 60 acres. Wind development could provide substantial income opportunities to farmland owners in the near future.

President Obama’s stimulus package is providing incentives for wind energy by providing grants to renewable energy developers for 30% of the facility cost. Renewable energy developers must apply by September 20, 2011 to qualify for the 30% grants, which should drive a land grab by developers over the next two years.

Inflation hedge:

 

The drastic increase in the last few months of the U.S. national debt and the 24/7 operation of the printing presses increasing the U.S money supply will put significant long-term pressures on inflation and the U.S. dollar.

 

Historically, farmland pricing has maintained a high correlation to inflation, oftentimes outperforming during high inflationary periods. Agricultural land also affords investors the chance to diversify away from stocks and bonds, as farmland is not highly correlated with these more volatile asset classes.

 

The commodity bull market is also likely going to be reenergized given rising prices. As commodity prices continue to climb, supported not only by an inflationary environment, but broader global demand, the land supporting those commodities will further appreciate. A simple comparison of commodity prices in the inflation era of the 1970’s demonstrate the high levels grain prices can reach in a high inflation environment.

Gold is the asset typically relied on during high inflation periods, which is evident by the fact that prices recently surpassed $1,000 per troy ounce. Farmland is a lot like gold, acting like a hedge against inflation. But farmland offers something that gold does not; intermittent cash flows. Farmland not only offers protection from inflation, it also pays you to own it.

Bottom in land prices:

The recent dislocations in the capital markets have provided a once in a lifetime opportunity to invest in farmland. The recent burst of the housing bubble has depressed most financial and real estate assets, including farmland.

We believe that farmland prices have exhibited a bottom in prices in the first quarter of 2009. Regional Federal Reserve surveys have displayed slight increases or flat prices in the first quarter following declines in 2008. The Chicago Fed said farmland prices increased 2%, the Minneapolis Fed said nonirrigated land increased 1% and irrigated increased 3%, and the Kansas City Fed noted that nonirrigated land increased 1.4% and irrigated land was unchanged.

 

The Rural Mainstreet Economy Index, a survey of community bank presidents in a 10-state area from Creighton University, displayed that farmland prices increased the last two of the last three months after hitting a bottom in March.

Historical performance:

Farmland, through current income and capital appreciation, has provided consistent positive returns. In the last 100 years, farmland has displayed only three brief periods of negative returns (1930’s, 1980’s, and 2008).

Over the last 6 years, farmland as measured by the NCREIF Farmland Index has significantly outperformed stocks and bonds. Despite farmland’s strong performance, bull markets in commodities over the last century have lasted an average of 17 years. The current supply-and-demand imbalance will continue to drive farmland values higher.

Farmland provides an opportunity to invest in an asset class that is not directly correlated to stocks and bonds and has significantly less volatility. Farmland also provides a margin of safety to investors as stock prices can go to zero, but farmland will always have some value.

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

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