Bulls, Bears Weigh in on Land Prices
For the last few years, bulls have dominated the discussion of farmland prices. Now bears are getting in some growls.
The beasts worrying producers as they ponder this debate are bum steers.
In an attempt to identify the good steers, let's sift through the conflicting views.
The cover-story in the year-end issue of Barron's magazine speaks for the bears. In it Steve Leuthold of Leuthold-Weeden Investment Capital in Minneapolis predicts a 15 percent to 20 percent decline in farmland prices in three to five years. Leuthold's view matters, Barron's says, because in 1982 he predicted a 50 percent pullback in farm prices -- which turned out to be optimistic.
Leuthold's current pessimism centers on ethanol. He thinks it makes no sense without subsidies and believes subsidies could disappear in the backlash over rising food prices. If the subsidies disappear, so will the high corn prices that justify high land prices.
Barron's other bearish signs include:
-- A decline from the 2006 peak in prices of ranchland and recreational farmland. Barron's quotes an Oregon realtor who says prices are down 10 percent on average and down 20 percent to 30 percent in some parts of that state.
-- Marc Faber's view that U.S. farmland is "wildly overpriced." Faber is a renowned Hong Kong-based investor who bought New Zealand farmland a few years ago but now favors farmland in Russia, Paraguay and Uruguay.
-- The possibility of a crash in oil prices, which would further undermine ethanol and corn prices.
-- The possibility of a housing meltdown. A convulsion in one part of the real-estate market eventually affects all others, Barron's says, citing Leuthold as authority.
"At this stage, any investor should be wary of betting the farm on a farm," Barron's concludes. "A Miami condo might be a better deal. After all, you can buy a nice one now for just 60 percent or so of what you would have had to shell out three years ago."
To all of which bulls say: "Piffle." "Balderdash." And sometimes, even, "Bull."
"I bought my first farm 41 years ago and there's never been a period of time when I've been more bullish than now," Murray Wise, president of the Westchester Group in Champaign, Ill., told DTN.
"There is such a demand for land that we don't have enough land listed to sell to meet the demand of our customers right now," says Jerry Warner, executive vice president and chief management officer of Farmers National Company.
Ethanol isn't going away, bulls say. In the energy bill enacted in December Congress just quintupled the amount of renewable fuels the country must blend, as Barron's recognizes. "Bruce Babcock, another Iowa State economist, e-mailed Barron's that the passage of the ethanol provisions of the energy bill assured him that there is no bubble building. He went out and bought some corn acreage himself."
And don't forget about China, bulls add. At the DTN/Progressive Farmer 2007 Ag Summit in Chicago, Monsanto Executive Vice President Carl Casale said China, not ethanol, will be the driving force for increased corn demand.
As for oil prices, they could as easily go still higher as fall. DTN Senior Analyst Darin Newsom points out the structure of the crude oil market is bullish. The trend is strongly up and the futures spreads show strong demand for the near-month futures contracts vs. the later months, a bullish sign.
What should producers make of all this? Unlike Hong Kong-based speculators, they have to base their land-buying decisions on the economics of farming. At what price of land can they no longer make money raising crops on it? The answer to that in turn hinges on two other questions: Where are crop prices going? Where is the cost of crop inputs such as seeds, chemicals and fuels going?
To ask those questions is to raise a red flag. Commodity prices go up and down; input costs mostly go up. Most producers remember the 1980s, when land prices plummeted after the U.S. embargoed grain shipments to Russia and oil prices soared. Many farms were lost during those trying years.
On the other hand, opportunities to acquire land don't arise every day. And what if China and ethanol have indeed shifted the commodity-price curve permanently higher? Will those who fail to expand today find themselves unable to compete tomorrow for lack of economies of scale in the future?
Those are the issues farmers face. There are no pat answers. Every producer must assess the risks for himself or herself.
Richard Oswald, a Missouri producer who forwarded the Barron's article to us, attached a cover note that captures this ambivalence:
"Midwestern agriculture is on the cusp of unprecedented profitability, or the brink of disaster," Oswald wrote. "You pick."
Ed Winkle
Bears and Bulls on Land Prices
