Saturday, December 25, 2010

Farmland prices soar

I think that there's a lot of money sloshing around the globe right now.  Bond rates suck -- at less than 1%, it's almost the same as stuffing the cash under your mattress.  Houses/mortgages, a traditionally safe bet, are considered toxic.  Commercial real estate loans, the same. 

But people like the idea of owning tangible assets, and farmland has long been seen as a stable investment.  People have to eat, right?   

"We're starting to see more interest in farmland purchases by nonfarm investors," Henderson said. "It's more attractive than other kinds of fixed income investments, CDs, stock market investments. It looks like an attractive rate of return for some investors."

The price of farmland is rising steeply in the midwest; in an era of declining real estate values, it's up more than 10%;  and the rise isn't limited to the USA -- in various countries in Africa there's been an increase in foreign ownership of land.

This is partially driven by the cost of grain; Russia had their grain crop fail last year, and prohibited exports.  Wheat, corn and soybeans are all used for animal feeds; when one of them goes up in price, others will rise as well, as people feeding animals seek the lowest cost feed solution. 

What does this mean?  Speculation never leads to price stability.  I'm guessing that we're going to see higher prices for food in the near term, and some sort of bust cycle, as is usual with speculation, in a few years. 

What's interesting about this is that cropland prices haven't really changed in western Washington.  That's because there's so few people farming there's virtually no demand.  Farmland in Iowa is selling for $7k an acre.  You can get a good, fertile acre of ground here for around $3k. 


bc in France said...

That's an amazing difference in price. You would have thought western WA would have been more expensive given its access to the huge Sea/Tac market and its desire for local produce.

Prices here (le Gers, Gascony, SW France) were about 4k€ a hectare or $2k an acre but I keep hearing gossip about price increases. The neighbors farm just sold for a chunk more than I expected so maybe there's some truth to that.

Anonymous said...

I'm in Western Washington (Snohomish County), and $3k/acre is a bit on the low side. That is, if you have no intention of residing on the land (can't be developed): for myself I felt inclined to live where I farm, so I had to pay substantially more (though nowhere near the price that most comparable properties were going for), for me, just under $4k/acre if you factor out the home value (development); other properties, even undeveloped ones, were closer to $10k/acre. But the price break for me came at the cost of the land needing a lot of work.

But... I agree with the general premise that more "money" is going to flow toward land. It's the cost/price of getting back to the fundamentals (food, shelter and water).

Bruce King said...

You can buy flood-plain land in snohomish county for $2-4k/acre right now. For the $2k an acre, you're going to do a lot of work. for the $4k an acre, you may have to buy a lot of acres -- 40 to 400 -- but that's the current market price.

And the price seems to be decreasing, fighting the trend in the rest of the country. Its only a matter of time before we catch up.