A bitter harvest

As the world suffers another food crisis, some industry watchers think farmland could follow tech and real estate to become the next big bubble.

Several horses graze in a farm field near Baldwinton, Saskatchewan. The Canadian Press Images/Bayne Stanley

For fighter pilots, the phrase “buying the farm” holds ominous connotations. But of late, it has often meant riches for investors. Once the exclusive domain of agricultural specialists and pension funds, farmland now attracts wider interest. Iowa cropland prices increased by a quarter over the past year, with the choicest plots changing hands above US$10,000 an acre—far above historical averages. Other states, including Indiana, Nebraska and Colorado, also report significant increases. English cropland trades at record highs. Reports suggest Ethiopia, Ghana, Madagascar and other African countries are in the midst of a colonial-style land grab by foreign investors. Robert Shiller, the Yale economist who acquired fame offering prescient observations about both America’s technology and housing bubbles, wonders whether everyone’s getting carried away. “My favorite dark-horse bubble candidate for the next decade or so is farmland,” he wrote recently. “Farmland, at least in certain places, seems to have the most contagious ‘new era’ story right now.”

Canada may not be among those places. Here farmland is generally cheaper than in other developed countries, and recent returns less spectacular. That’s partly due to foreign-ownership restrictions in key agricultural provinces. (Notably, only Canadian citizens can buy in Manitoba and Saskatchewan.) Farmers also have less access to capital here than elsewhere. Still, farmland (including buildings) has risen steadily in value since 1993, according to Statistics Canada. Farm Credit Canada’s most recent biannual survey shows that for the first half of 2010, prices rose by as much as 4.3% in Ontario; B.C. alone saw a retreat, of –0.9%.

Farmland is a capital asset: prices reflect anticipated income from working that land. And that’s influenced by a host of factors: soil quality, access to water, climate and the growing season, to name but a few. Further complicating matters, the prices for wheat, soybeans, hogs and other agricultural products fluctuate. (Statistics Canada data shows that, in January, Canadian farmers were receiving 9.3% more for their products than they had a year earlier.)

The secular decline in interest rates over the past generation correlates strongly with rising land values. (As bond returns fall, all else being equal, farmland becomes increasingly attractive.) But in places where these fundamental forces don’t fully explain rising land prices, perhaps growing Malthusian fear is at work. The world is in the grips of its second food crisis in four years. Outside Latin America and sub-Saharan Africa, there’s precious little unused arable land. And in many agricultural regions (India’s Punjab, for example) farming practices have degraded soil and water resources, causing yields to fall. Some expect climate change will cause further declines. Meanwhile, citizens of developing nations like China and India are changing diets—eating far more beef, for example. (Raising cattle consumes huge volumes of grain.) As well, increasing quantities of corn, soybeans and other commodities are also being diverted for use in biofuel production. By one calculation, global food production must increase 70% by mid-century to accommodate Earth’s rising population—requiring humanity to scare up new arable land equivalent in size to Brazil.

Farmland has been gripped by speculative fever before. Buoyed by rising farm incomes and a falling U.S. dollar, U.S. farmland prices doubled (from an average of US$1,000 to US$2,000 per acre) between 1975 and 1981. Then the U.S. Federal Reserve declared war on inflation by raising interest rates. Prices for agricultural products fell, and farm prices followed. Leveraged landowners began folding under the pressure, resulting in foreclosures. By 1987, prices returned to levels seen a dozen years earlier. Canada experienced a similarly jarring correction.

Some of the same forces seem to be at work now. Chris Hurt, a professor of agricultural economics at Purdue University in West Lafayette, Ind., said in a recent presentation that the U.S. Federal Reserve’s quantitative easing (that is, the practice of issuing money to buy long-term government debt) likely elevated U.S. farmland prices. That’s because printing money tends to depress the U.S. dollar, lower interest rates and raise commodity prices—all of which tend to make farmland attractive. But as ever, the evidence confounds. Although U.S. farm debt is rising, it remains well below levels during the 1980s bust.

Short of contacting a realtor and touring the scenic countryside, Canadians have few avenues to invest in farmland. There’s a handful of investment partnerships offered by companies like Agcapita, Assiniboia Capital and Bonnefield Financial. Their offerings are available only to institutions or accredited high-net-worth individuals, and minimum investments are in the tens or hundreds of thousands of dollars. Sales pitches are broadly similar: farmland is presented as performing equally well or better than equities and other asset classes, with less volatility. It’s said to be a great hedge against inflation and deflation. And Canadian farmland is arguably underpriced; Bonnefield Financial’s president, Tom Eisenhauer, says it becomes even more so if you further account for risks relating to politics, climate change, water availability and other factors. “I’d defy anybody to tell me you could find better value than Canadian farmland,” he says.

Farmland investing carries its own unique hazards. You can trade soybeans in a flash; real estate is illiquid. Investors face the same risks as farmers, among them drought, flooding and pest outbreaks. Diversification is critical. “Look at last year,” Eisenhauer says. “Poor Saskatchewan farmers got flooded out in the spring and had a real rough time of it. Here in southwestern Ontario, it was bumper crop year. That’ll tell you why a diversified strategy across Canada is a good thing.” That’s but one tactic to help avoid buying the farm while you’re buying farmland.