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Real estate crisis misses farmland: Profit from the agricultural boom

Today's Financial News - Posted September 25, 2008

Farmland isn’t crashing with the rest of the real estate sector. In fact, it’s booming. How can you profit from agricultural land without buying property? And is the boom really safe?

by Stephanie Grimmett

Baltimore — (TFN): A few days ago, Chris Mayer told readers that the next big boom would be in real estate… sort of.

According to Chris, fertile farmland will continue to gain value, even if all of those homes and office buildings that are driving overall real estate prices down stay on the market for years to come.

And now the numbers are proving him right, at least in Europe. From the UK to Spain to Germany, the cost of fertile agricultural land is growing while other real estate crashes.

Prices are up 25% in last year, according to the Wall Street Journal. And you’d think people would be happy about that fact. Instead, investors and regulators are biting their nails in terror of “speculators” in the farmland market and a coming real estate crisis for agricultural property… Yes, I’m sure many “flippers” who can’t turn a buck on condos anymore will soon be hunting down acreage in Iowa to “renovate” and resell at a higher price.

Unfortunately for all of those farmland fear mongers hoping to illicit screaming terror from the masses, the land being bought and sold here has a finite value that can’t be driven up just by added some molding and a new patio. Besides, how exactly does an agricultural bubble inflate when banks are no longer willing to lend Tony from New York City a quarter of a million to experiment with potash, potassium nitrate and various grain seeds?

More realistically, the price of farmland will continue to be determined by supply and demand — not by fabulous flippers from Palm Beach. But that’s enough for some healthy profits. Experts are predicting farmland prices to gain another 8% to 40% by 2009 (those experts are so very specific, aren’t they?).

So what does this mean for Europe? Commercial agricultural companies have already begun buying up smaller contiguous plots to build super-farms that use modern industrial techniques and the latest biotechnology to increase productivity and profits. It may be the end of the family farm in Europe, but it’s the beginning of a beautiful friendship between farmers and investors.

As for specific stock ideas to profit from the ag. land boom, check out the corporate farmer that Chris Mayer says has a great future ahead of it.

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Posted by Stephanie Grimmett · Filed Under Real Estate 

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One Response to “Real estate crisis misses farmland: Profit from the agricultural boom”

  • Agcapita Says:
    October 5th, 2008 at 7:24 pm

    The equity and bond markets have benefited from a long period of low inflation, but ongoing and massive central bank liquidity injections point to a far less benign environment of elevated inflation ahead. Research by our firm, Agcapita Farmland Investment Partnership (Calgary, Canada based agriculture private equity firm – http://www.farmlandinvestmentpartnership.com) shows investors must be prepared to rotate into asset classes with different characteristics. During the last commodity bull market & high inflation period in the 1970’s, equities materially underperformed farmland.
    - Western Canadian farmland went from around $100/acre to $550/acre (550% total return and 176% in inflation adjusted terms);
    - Cash held in a money market account barely kept ahead of inflation (6% inflation adjusted return); and the
    - S&P 500 index returned less than 2% per year (a loss of almost 50% in inflation in adjusted terms)

    We believe the world is still in the early stages of this current commodity bull market. When agriculture commodities prices are compared against their previous inflation adjusted highs they are significantly discounted implying scope for further increases:
    - Corn is US$ 5/bushel currently compared to US$16/bushel in 1974,
    - Wheat is US$ 7/bushel currently compared to US$27/bushel in 1974
    - Canadian farmland is C$ 660/acre currently compared to C$1,100/acre in 1981

    Another interesting metric is the long-term average ratio of the Commodities Research Bureau Index versus the S&P 500 which is currently around 1.5 times. Simplistically, this ratio indicates how much S&P 500 stock you can buy with a fixed basket of commodities. Some important points:
    • During the commodity bull market of the 1970s, the ratio was consistently higher than 2 times for over 10 years – it peaked at almost 4 times.
    • The ratio is currently at around 0.5 times - significantly below the 1.5 times long-term average, just slightly above the 0.15 all time low reached in 1999/2000 and still very far below the almost 4 times multiple reached in the last commodity bull market. We still appear to be at an all time low relative valuation between “hard assets” versus “stocks.”
    • If history is a guide, the ratio of hard assets to stocks will have moved much higher before this commodity bull market is over.
    • How? Stocks will continue to fall and/or commodities will continue to climb – most likely a serious combination of both as investors, fearing inflation, rotate out of stocks into commodities – the cycle of “inflation, rotation, hard assets”.

    Agcapita is a Calgary based, agriculture private equity firm that allows investors to cost effectively allocate a portion of their portfolios to hard assets in the form of Canadian farmland via its professionally managed Agcapita Farmland Investment Partnership. Agcapita Farmland Investment Partnership is the third in a family of private equity funds which has grown to almost $100 million in assets under management. Agcapita’s investment team has over 40 years private equity and fund management experience and over $1 billion in total career transactions and previously managed a group of emerging market funds with almost C$500 million in assets for one of the largest banks in Europe.

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