Wall Street buying up farms?

[Lainey]

http://observer.com/2011/05/hedge-farm-the-doomsday-food-price-scenario-turning-hedgies-into-survivalists/

Came across this article (a year old already) about Wall Street buying up farmland. Looks like it's a combination of money-making and survivalist thinking. Another reason why food prices are going up?

[iris lily]

Farmland is sky high right now. DH just got back from a trip to Iowa. My father in law is worth $2 million on paper these days. But that will change, it always does.

[redfox]

Farmland is sky high right now. DH just got back from a trip to Iowa. My father in law is worth $2 million on paper these days. But that will change, it always does.

Word!

[Gregg]

Farmland has been an investment darling for years now. As Will Rogers said, they ain't makin' any more. Good irrigated cropland around us has recently sold for over $10,000 per acre. It was $4,000 just a few years ago. Crop prices are high right now because of the drought, but with more normal pricing and using the industrial farming methods that are the norm in the mid-west land will typically support a price of about $5,500. Everything above that is speculation.

It has presented some interesting scenarios in big ag country. The small town banks in this area, and there are a lot of them, are stuffed with cash because commodity prices have been fairly high for a few years running so the farmers have generally done pretty well. If you are a bank cash is a liability so you have to make loans to compensate. The only asset class big enough to make a difference around here is land. The banks are lining up to loan money for land purchases. Obviously the bankers are not stupid, they are loaning at 50% to 60% LTV, but even then that is 100% of what the land can support in a non-drought year.

The drought is problematic for industrial ag because, at least here in Nebraska, irrigation is shut down. The crops in the ground right now depend on irrigation water through August or early September to reach maturity. It is now illegal to irrigate so the crops have stopped growing even though they are only 1/2 way to maturity. An average, irrigated field that might yield 230 bushels per acre may get 70 this year. Most of the farmers around here have crop insurance. All the ones who financed their land do. That will help, but if the drought turns out to be a multiple year event all bets are off.

I have a good friend who inherited his family farm of about 320 acres. Over the years he bought adjacent land and now has 2,300 acres with very little, if any, debt. It is some of the most desirable land in our area. I was joking with him a couple days ago and told him to sell it all right now because it would net somewhere around $23,000,000. I told him he could buy it all back for 1/2 that in a few years if he really still wants to farm. Turns out he's already talking with several people about buying all but the original family farm (he'll never sell that at any price). The buyers are not other farmers, they are land speculators. I don't know where they're from, but are obviously people with a lot of cash at their disposal. Dinner's on him when the deal is done.

[ToomuchStuff]

A friend of mine sold the family orchard he and his sister owned a few years back. I don't know how many acres. It was sold to a developer for $30 million and the plan was mostly for high dollar homes. That was right before the market crashed. I've known a few developers and they tend to buy the land when they can get it cheap, even if it isn't in an area that is yet expanding (thinking LONG term). I know what that "farmed" if for a number of years and development finally built up around it, so it was eventually developed. (cheaper tax rate on farmland, and gets some other tax implications with it to offset other income).

[Gregg]

I've known a few developers and they tend to buy the land when they can get it cheap, even if it isn't in an area that is yet expanding (thinking LONG term).

There's a difference between developers and speculators . What you described does happen all the time. Investors buying farm land is a different story. The land is remote compared to potential development land just a few miles from suburban areas. Most of it is not likely to ever be used as more than agricultural land.

It would be interesting to see a follow up to the OP article as a lot has happened in the past year. For example, here in NE direct ownership of ag land by foreign nationals or foreign corporations has been closed off. There was a real fear that Chinese entities were planning to acquire everything they could get their hands on. Beyond that we have a serious drought, rising oil prices, etc.

It is interesting to note that without the completely chemical dependent methods currently employed to raise crops, most of the farmland in the US bread basket is dead. Essentially worthless. So much chemical residue remains in the soil that it would be years before it became healthy enough to grow crops in a sane way. As it is now fertilizer makes crops grow, irrigation keeps them alive, herbicides kill the weeds that naturally gravitate to the fertilizer and irrigation (the crops are modified until they aren't effected by the weed killer), the insecticides kill the bugs (beneficial and otherwise), and on and on. All those chemicals are made from oil and all that equipment runs on it.

If the hedgies are right about stuff hitting the fan its highly likely that oil prices will soar out of control. If that happens every single line item cost in every phase of modern food production will expand exponentially. In other words, the people who own the land might not be able to afford to farm it. Take a guess what grocery prices do then. The article says its difficult for us regular folk to invest in agriculture. That may be, but its easy to start a hedge fund of our own. All you need is some seeds and a little dirt.

[bae]

My county has a lot of lovely farmland, that in years past produced large amounts of food.

And we have some programs in place to retain that farmland, keeping it from being paved over and developed.

A problem we've had during the past decade is wealthy folks from elsewhere buying up this farmland (which was $8-$10k/acre 10 years ago, and hasn't gotten any cheaper), leaving it as "agricultural land" to maintain the tax-favored status of agriculture here, but not actually *really* farming it. They leave it in hay, mow it now-and-then, but don't grow veggies/grains/fruit or raise livestock. Because real farming is smelly and dirty and messy. They generally rebuild or replace the old farmhouse with some palace, visit here 2-3 weeks a year, and look out over the lovely fields of grass.

[RosieTR]

Farmland has been an investment darling for years now. As Will Rogers said, they ain't makin' any more. Good irrigated cropland around us has recently sold for over $10,000 per acre. It was $4,000 just a few years ago. Crop prices are high right now because of the drought, but with more normal pricing and using the industrial farming methods that are the norm in the mid-west land will typically support a price of about $5,500. Everything above that is speculation.

It has presented some interesting scenarios in big ag country. The small town banks in this area, and there are a lot of them, are stuffed with cash because commodity prices have been fairly high for a few years running so the farmers have generally done pretty well. If you are a bank cash is a liability so you have to make loans to compensate. The only asset class big enough to make a difference around here is land. The banks are lining up to loan money for land purchases. Obviously the bankers are not stupid, they are loaning at 50% to 60% LTV, but even then that is 100% of what the land can support in a non-drought year.

The drought is problematic for industrial ag because, at least here in Nebraska, irrigation is shut down. The crops in the ground right now depend on irrigation water through August or early September to reach maturity. It is now illegal to irrigate so the crops have stopped growing even though they are only 1/2 way to maturity. An average, irrigated field that might yield 230 bushels per acre may get 70 this year. Most of the farmers around here have crop insurance. All the ones who financed their land do. That will help, but if the drought turns out to be a multiple year event all bets are off.

I have a good friend who inherited his family farm of about 320 acres. Over the years he bought adjacent land and now has 2,300 acres with very little, if any, debt. It is some of the most desirable land in our area. I was joking with him a couple days ago and told him to sell it all right now because it would net somewhere around $23,000,000. I told him he could buy it all back for 1/2 that in a few years if he really still wants to farm. Turns out he's already talking with several people about buying all but the original family farm (he'll never sell that at any price). The buyers are not other farmers, they are land speculators. I don't know where they're from, but are obviously people with a lot of cash at their disposal. Dinner's on him when the deal is done.

That seems totally crazy to me. Don't the speculators pay the least bit of attention to world/national events? Ummm, something called the housing crash? Because that same sort of thinking and situation led to that. Who are these people? if oil begins to climb, which is likely, how is oil-dependent ag land going to become *more* valuable? Sheesh.

[SteveinMN]

That seems totally crazy to me. Don't the speculators pay the least bit of attention to world/national events? Ummm, something called the housing crash? Because that same sort of thinking and situation led to that. Who are these people? if oil begins to climb, which is likely, how is oil-dependent ag land going to become *more* valuable? Sheesh.
When the price of gasoline jumped to $3+ here, home sales in the outermost Twin Cities suburbs took a dive as people finally started adding the cost of commuting to the mortgage to figure out the real cost of what they were buying. It's hard to say if prices were going to recover from that because then the housing bubble burst.

But there are people who believe that an "affordable" supply of oil will always somehow be present and that people will still choose to live in more far-flung locales. If you adjust the price of gasoline for inflation, a gallon now costs about what it did in 1918 (http://www.inflationdata.com/inflation/images/charts/Oil/Gasoline_inflation_chart.htm). Granted, that is not the full price of a gallon of gas, but it's how people have calculated it over the years, so it provides a comparison.

Not that I agree with the assumptions the speculators are making; just seeing that there is a case which could be made for what they're doing.

[Gregg]

But there are people who believe that an "affordable" supply of oil will always somehow be present and that people will still choose to live in more far-flung locales. If you adjust the price of gasoline for inflation, a gallon now costs about what it did in 1918 (http://www.inflationdata.com/inflation/images/charts/Oil/Gasoline_inflation_chart.htm). Granted, that is not the full price of a gallon of gas, but it's how people have calculated it over the years, so it provides a comparison.

Exactly. That "full price" of gas in 1918 came from a domestic supply. Straightline inflation keeps the price at the pump relative, but we've become masters of overlooking or reassigning costs associated with non-domestic supply.



That seems totally crazy to me. Don't the speculators pay the least bit of attention to world/national events? Ummm, something called the housing crash? Because that same sort of thinking and situation led to that. Who are these people? if oil begins to climb, which is likely, how is oil-dependent ag land going to become *more* valuable? Sheesh.

Actually speculators pay a lot of attention to the news, they just hunt for what could be extreme events that could result in extreme profits. Ag land will become more valuable over time simply because we don't have a way to replace the crops generated by industrial ag. People will still want to eat so food will still be produced. The biggest problem I see with this speculation, from an investment standpoint, is liquidity. If the price shock predictions do come true the extrapolated cost of the land will go so high that no one can afford to buy it from the speculators even though the crops produced on it are extremely valuable.

IMO a garden is still one of the best investments going. I am working on a plan for next year's garden for us. If we get average production from all the plants and figure in today's grocery store prices an income approach to valuation would put us at about $120,000 per acre. Makes me want to plant a bigger garden!

[awakenedsoul]

I know what you mean, Gregg. I have a 567 square foot cottage on a 7,400 square foot plot of land. This year I really applied myself to growing food. It's been exciting and very rewarding. I've always had fruit trees, and I mulch and compost the land every year. Once you get an organic system in place, it's very healthy. I see such an ecosystem back there now. Lizards everywhere, tons of birds, worms in the soil, and even a pair of falcons in my poplar tree. There are plenty of fresh vegetalbes every day. My diet is a bit repetitious, but it's worth it. I have enough to share with my neighbors, too.

I plan to invest in more fruit trees, vegetable seeds, and limit my consumption of meat and chicken. If I had to, I could raise chickens for food, but I don't like to butcher.

[Gregg]

Wow awakenedsoul, you already have going what I'm aspiring to. We just bought a 874 sq.ft. house on a 7,370 sq.ft. lot. Looking at my plan right now. Most of the work right now is on the house so we can move in by the end of the year, but we're going to get things rolling with the big plants this fall. The plan has 3 dwarf fruit trees along with all the shade trees, some for privacy & wind screening and several varities of big bushes, berries and brambles. A friend is a landscape architect so he's helping us out. I gave him my copy of Gaia's Garden to get him into the permaculture mode (with only moderate success). We're planning a chicken coop with 6 or 8 laying hens. We love eggs! We'll see how it goes down the road when they reach the end of their laying days...

[awakenedsoul]

That's great, Gregg! I find this size lot is ideal. It's a challenge to keep the weeds down sometimes, but straw mulching helps. Another thing I wish I'd done was to plant all standard size fruit trees from the beginning. My dwarfs only give me a few pieces of fruit a year. I read on Dave Wilson's website that he recommends keeping standard trees trimmed to 10 feet high. I do it this way now, and my trees are loaded with fruit. They also have wide root systems, so I don't have the weeding problem. I'm still trying to work it out so I have things fruiting each month, if possible. I hope to grow a lot more melons next year.
With all those chickens, you'll have plenty of manure for your compost. I'm also interested in putting in more tropical fruit trees: cherimoya, guava, lychee, etc...The longer I garden, the more I choose food that I love. Fruit trees take a while, but once they take off, it's really exciting and rewarding! Keep me posted!
I have a 15 year old chicken who still lays eggs! My neighbor gave her to me...

[Gregg]

Awakenedsoul, I love our conversation so far, but it is WAY off topic here. I copied what we have so far and posted it in Gardening and Farming as a new thread so we don't further derail the topic here.