Tag Archives: prices
Four Reasons Farmland May Be the Investment of the Decade
By Igor Zhitnitsky and Victor German NEW YORK ( TheStreet ) — Over the last several years, U.S. farmland prices have seen astounding gains, outperforming most other asset classes by a lot and leading some to speculate that farmland is the latest in a series of asset bubbles set to burst. But while the run-up in agricultural land is cooling off for the moment and the market may be ripe for a temporary pullback, the overall trend is fundamentally positive. Here are four reasons the long-term outlook for U.S. agricultural land is strong: Foreign demand for meat: The rapidly expanding middle class of the developing world has a growing appetite for meat. While China has been able to meet its own demand, its grain production capacity is inadequate to feed its livestock, which cannot be sustained on grazing alone. Per-acre grain productivity is much lower in China than in the West, and so the country has turned to the U.S. and other large producers for feed grains. This foreign appetite has led to a sharp increase in demand for corn and soybean-producing land in the U.S., and that pressure will only increase as the Chinese and other developing world consumers continue to increase their meat consumption. That points to the increasing importance of agricultural land. Historically low grain supplies: The 2012 drought showed that supplies of corn and other grains are unusually low. Average stocks-to-use ratios — an industry standard for measuring the amount of supply cushion available to the market — is historically low and has been trending down over the decade. That indicates that growth in demand is generally outpacing supply, and price shocks like last year’s will likely become more commonplace. Historically low debt levels: During the 1980s, when farmland did go boom and then bust, the market saw high levels of debt. Farmers racked up loans and rushed to buy out their neighbors’ properties before prices went any higher, leading to a crash in land values when grain prices faltered. In this decade, however, farmers’ debt levels are very low and stable. In addition, agricultural lending institutions and Farmer Mac ( AGM _ ) have heeded lessons learned from the 2008 credit crisis and kept lending practices on the conservative side. Technologically driven productivity gains: The per-acre production of U.S. farmland has grown consistently and rapidly for decades, outpacing both the productivity of agricultural sectors in other countries, as well as other industries in the U.S. In this decade, many high-tech productivity drivers are emerging, ranging from the use of GPS for precision farming to the bioengineering of more efficient grain strains. The trend hasn’t gone unnoticed by the elites of the investment community – Ray Dalio’s Bridgewater Associates holds a sizable position in Monsanto ( MON _ )and Warren Buffett’s Berkshire Hathaway ( BRKA ) made a long-term bet on Deere & Co. ( DE _ ) So how can a sophisticated investor benefit from this macro trend? Investing in established companies that dominate the industry is one route, the one taken by some high-profile names. A more ambitious investor willing to take on more risk might also do well by picking winners from among smaller more volatile agricultural ventures springing up in the sector. Companies based outside the U.S., like Adecoagro ( AGRO _ ) and Cresud ( CRESY _ ) are examples, but one should weigh carefully the potential instability and political risks that loom over the agricultural sectors of developing countries. The best way to benefit from rising land prices is the obvious one — to own a geographically diversified portfolio of land. There are unmatched advantages to directly owning farmland, including high reliable yields and tax advantages that other asset classes lack. Owning land, however, is very involved. It comes with complexity many smaller investors don’t think they can navigate on their own — CSR ratings, proximity to transportation and irrigation, working with land managers, protecting land from erosion, commodity hedging, complying with a multitude of state laws affecting absentee landlords and liquidity issues. But for those motivated to finding opportunities in the Corn Belt, a gold rush for fertile land may be the investment frontier of the decade. At the time of publication the author held no positions in any of the stocks mentioned. This article was written by an independent contributor, separate from TheStreet’s regular news coverage. Continue reading
US Farmland Price Rally In ‘Clear’ Slowdown
The rally in US farmland prices is in a “clear” slowdown which has already seen prices fall in some leading agricultural states, a leading farm economist said, warning of a dent to values from falling crop prices. Farmland prices continue to rise, with a monthly market index figure coming in at 58.4, well above the 50.0 stagnation level, above which it has stood since February 2010, a Creighton University survey of lenders showed. However, this represented a fall from the 62.1 the May figure, and was the sixth month-on-month decline out of the last seven readings. And the overall rise concealed declines in prices including Iowa, the top-ranked producing state for both corn and soybeans, second-ranked Illinois and Kansas, the biggest US wheat-growing state. ‘Clear downward trend’ “We are tracking a clear downward trend in farmland price growth,” Creighton University economist Ernie Goss said, blaming the prospect of far lower prices for this year’s US crops than the 2012 harvest/ “This downward trend in agriculture commodity prices has softened the growth in both farmland prices and farm equipment sales.” Professor Goss added: “I expect that growth to continue to fall as the US dollar strengthens and agriculture commodity prices weaken.” A strengthening dollar presses values of dollar-denominated exports, such as many commodities, by reducing their competitiveness to buyers in other currencies. The US share of world corn exports in 2013-14, at less than one-third, will be the lowest since at least the 1960s, bar the drought-affected 2012-13 result, according to the US Department of Agriculture. ‘Excessive air in asset price bubbles’ Professor Goss’s warning follows an observation from officials at the US Federal Reserve’s Chicago bank that “signs of moderation in farmland value gains emerged” in the first three months of 2013. The Kansas City Fed said that “the pace of appreciation moderated somewhat” , noting “slower growth in farm income”, which was limited by “declining crop prices and higher production costs”. Meanwhile, Capital Economics economist Paul Ashworth has warned that “there does appear to be a localised bubble in Corn Belt farmland values”, spurred by last year’s rally in grain prices. Professor Goss also cautioned that 43% of bankers contacted for the Creighton survey concurred the Fed’s ultra-easy monetary policy, which it this week signalled may be withdrawn, had put “excessive air in asset price bubbles such as farmland prices”. However, the survey gave no reading of the breakdown of the other 57% of respondents, and many observers have forecast that interest rates will remain low enough to avoid a repeat of the early-1980s’ crash in land prices. And the latest survey showed farmland price growth accelerating in some states, including Missouri and Nebraska. Professor Goss warned last year over the threat posed by a farmland price “bubble”, before the recovery in crop prices which, with insurance payouts to drought-hit growers, helped lift farm incomes. Continue reading
Slower Global Agricultural Production In Next Decade But Prices Above Historic Average, Says FAO
Global agricultural production is expected to grow 1.5% a year on average over the coming decade, compared with annual growth of 2.1% between 2003 and 2012, according to a new report published by the OECD and FAO released this week. Limited expansion of agricultural land, rising production costs, growing resource constraints and increasing environmental pressures are the main factors behind the trend. But the report argues that farm commodity supply should keep pace with global demand. The OECD-FAO Agricultural Outlook 2013/2022 expects prices to remain above historical averages over the medium term for both crop and livestock products due to a combination of slower production growth and stronger demand, including for bio-fuels. The report says agriculture has been turned into an increasingly market-driven sector, as opposed to policy-driven as it was in the past, thus offering developing countries important investment opportunities and economic benefits, given their growing food demand, potential for production expansion and comparative advantages in many global markets. However, production shortfalls, price volatility and trade disruption remain a threat to global food security. The OECD/FAO Outlook warns: “As long as food stocks in major producing and consuming countries remain low, the risk of price volatility is amplified. A wide-spread drought such as the one experienced in 2012, on top of low food stocks, could raise world prices by 15-40%”. China, with one-fifth of the world’s population, high income growth and a rapidly expanding agri-food sector, will have a major influence on world markets, and is the special focus of the report. China is projected to remain self-sufficient in the main food crops, although output is anticipated to slow in the next decade due to land, water and rural labor constraints. Presenting the joint report in Beijing, OECD Secretary-General Angel Gurría said: “The outlook for global agriculture is relatively bright with strong demand, expanding trade and high prices. But this picture assumes continuing economic recovery. If we fail to turn the global economy around, investment and growth in agriculture will suffer and food security may be compromised”. “Governments need to create the right enabling environment for growth and trade” he added. “Agricultural reforms have played a key role in China’s remarkable progress in expanding production and improving domestic food security”. FAO Director-General José Graziano da Silva said: “High food prices are an incentive to increase production and we need to do our best to ensure that poor farmers benefit from them. Let’s not forget that 70% of the world’s food insecure population lives in rural areas of developing countries and that many of them are small-scale and subsistence farmers themselves”. He added: “China’s agricultural production has been tremendously successful. Since 1978, the volume of agricultural production has grown almost five fold and the country has made significant progress towards food security. China is on track to achieving the first millennium development goal of hunger reduction. While China’s production has expanded and food security has improved, resource and environmental issues need more attention. Growth in livestock production could also face a number of challenges. We are happy to work with China to find viable and lasting solutions.” Driven by growing populations, higher incomes, urbanization and changing diets, consumption of the main agricultural commodities will increase most rapidly in Eastern Europe and Central Asia, followed by Latin America and other Asian economies. The share of global production from developing countries will continue to increase as investment in their agricultural sectors narrows the productivity gap with advanced economies. Developing countries, for example, are expected to account for 80% of the growth in global meat production and capture much of the trade growth over the next 10 years. They will account for the majority of world exports of coarse grains, rice, oilseeds, vegetable oil, sugar, beef, poultry and fish by 2022. To capture a share of these economic benefits, governments will need to invest in their agricultural sectors to encourage innovation, increase productivity and improve integration in global value chains, FAO and OECD stressed. Agricultural policies need to address the inherent volatility of commodity markets with improved tools for risk management while ensuring the sustainable use of land and water resources and reducing food loss and waste. China’s consumption growth is expected to outpace its production growth by some 0.3 percent per year, signaling a further but modest opening of China’s agricultural sector, the report said. China’s imports of oilseeds are expected to rise by 40 percent over the next ten years, accounting for 59% of global trade. Both the meat and dairy sectors will continue to expand which will result in higher imports of feed grains. China is expected to become the world’s leading consumer of pig-meat on a per capita basis, surpassing the European Union by 2022. China should maintain its leading role in global aquaculture at 63% of global production and remain the largest fish exporter. China is projected to remain self-sufficient in the main food crops, although output growth is anticipated to slow in the next decade. Key uncertainties around the agricultural outlook for China should be closely monitored and addressed, the report said. These include the sustainability of high levels of economic growth, increasing resource constraints on production, land degradation and water depletion, and greater production variability due to climate change. According to FAO estimates, China’s food security has improved with the number of undernourished falling by almost 100 million since 1990, despite adding an additional 200 million people to its population. Ensuring the food security of the estimated 158 million persons still undernourished remains a major challenge, the report. Continue reading
