Tuesday, March 15, 2011

Is US Farmland a Bubble?

A few days ago I posted about rising agricultural land values in South America. Well, here is a look at the US market. While the US continues to suffer from prolonged deflationary effects in residential and office space, agricultural land values have soared. Is this a bubble too? Only time will tell. But the year long surge in corn, wheat, and soybeans - some by over 100% - means a correction has been in order for some time now.

Farmland Fund Expects Prices To Keep Soaring
Cheap farmland is hard to find.

Values in Iowa and other key agricultural states jumped 12% in 2010, the second-biggest increase in the past 30 years, according to the Federal Reserve Bank of Chicago.

Nationwide, prices have doubled during the past decade and climbed about 58% when adjusted for inflation, U.S. Department of Agriculture statistics show.

Still, Greyson Colvin is hunting for deals as managing partner of two farmland funds for his agriculture-focused investment firm Colvin & Co., which aims to acquire undervalued properties.

"The farmland market is certainly tighter than it's been over the last 12 months," Colvin acknowledged.

Colvin manages about 1,500 acres of farmland in South Dakota and Wisconsin, worth $7 million, in the Sather Agriculture LP fund, along with about 350 acres held in individual accounts. The fund, which was launched in 2009, had a return of 29.6% in 2010, up from 7.8% in 2009, according to the company, compared with 15.1% and 26.5%, respectively, for the S&P 500.

There are signs investors will continue to reap gains from the sector, Colvin said. He touted farmland as "the one element that you can't replace across the agricultural equation" and said rising global demand for meat will keep pressure on growers to increase production of grain, which is used to feed livestock.

The company targets land that produces corn and soybeans, the dominant crops in the fertile Midwest. Colvin and his brother-in-law, an associate in the company, inspect properties personally before making purchases to check their quality.

He scoffed at observers who warn soaring land values may form a bubble. Agricultural fundamentals are the best in decades, he argued, saying rising farm income and cash rental rates justify the appreciation in farmland.

"We really believe that farmland is actually underpricing commodities at this point in time," Colvin said.

Indeed, farmers have the potential to cash in big on coming harvests, as corn, soybean and wheat futures recently surged above 2 1/2-year highs on concerns about tight supplies. Domestic corn inventories are expected to plunge to a 15-year low by the end of the crop's marketing year on Aug. 31 due to strong demand and a disappointing harvest last fall.

If cash prices for corn, which is trading around $6.20 a bushel, remain above $5 at the end of the year, Colvin said farmland values should be up an additional 10% to 15%. The outlook for corn prices is uncertain because farmers are projected to harvest a record crop this fall to replenish supplies.

Source CME News for Tomorrow
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