Friday, September 05, 2008

Is Farmland Overvalued?

To some, farmland values have now reached scary levels. The average price of an acre in America has almost doubled since 2004. In Britain, the value went up by 25% in 2007 and by a staggering 47% year-on-year in the first half of 2008. Many poor countries have seen similarly dizzying increases.

To improve their food security, importing countries have been snatching up farmland overseas—a trend the United Nations’ top agriculture official has likened to 19th-century colonialism. Hedge funds have become more active too, seeking agrarian alpha. And finance is flowing: a recent survey by the Federal Reserve found banks still willing to back agricultural investments in America, despite capital woes.

In relation to farm cash flows, they are now much higher even that they were in the late 1970s, the last golden age for ploughmen. The ratio of prices to cash-rent rates—the farming equivalent of the price-earnings multiple on stockmarkets—looks frothy too. In farm-riddled Iowa, it is at an all-time high of 24.2 times rent, well above the previous record, set in 1981, according to Farmland Investor Letter, a periodical devoted to land-valuation trends.

Worryingly, property accounts for a very high share of total farming wealth: around 90% in America, compared with 20% for households—though of course a farm, unlike a house, is a producing asset.
Interesting. I was unaware that agricultural land had risen so much. I am not quite sure what the implications are.

Is this is causing food prices to rise or are rising food prices causing land prices to increase? It looks like a bubble to me based on the prices to cash rent rates. I wonder what will happen when it bursts.

I am now also curious how the total value of all agricultural land in the US compares with the value of all other land and real estate.

via The Economist

Update: The NY Times has some interesting stats on the size of farms and the age of the owners:
When the W.P.A.’s writers came through, they wrote that Iowa had 221,986 separate farms on land totaling more than 34 million acres. Today, on only a little less land (31.5 million acres), Iowa has just 88,400 farms. More than half the farmland is owned by people 65 years old or older, an Iowa State University farm economist says, and about half of that is owned by those 75 or older.


Rebelfish said...

One implication I bet is that it will slow the suburban sprawl buy-up of farms. The burbs have been marching out toward my grandparents' farm, but they seem to have stopped recently. Maybe it's the land price, or just the awful housing market in general.

Fat Knowledge said...

Good point.

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