Oxstones Investment Club™By LAUREN ETTER and SCOTT KILMAN, WSJ,
Prices for irrigated cropland soared 9.6% in the third quarter across the western swath of the Farm Belt amid booming demand for U.S. crops, according to a survey released Friday by the Federal Reserve Bank of Kansas City.
The quarterly survey of the region known as the 10th District, which covers western Missouri, Nebraska, Kansas, Oklahoma, Wyoming, Colorado and northern New Mexico, found that farmland prices rose for the fourth consecutive quarter since a drop in the third quarter of 2009, which is when the livestock sector was contracting in face of the steep recession.
The value of nonirrigated cropland in the region rose 6.4% compared with the 2009 third quarter, while ranchland values climbed 4.3%.
The rise in farmland prices is another sign that the U.S. farm economy is pulling out of the sharp recession far more robustly than the general economy, which is burdened by a stubbornly high unemployment rate and weak real-estate values. The U.S. Agriculture Department estimates that U.S. net farm income, a rough measure of profitability, is jumping 24% this year to $77.1 billion.
While most demand for farmland is coming from farmers, there also is growing interest among nonfarm investors who are looking for hard assets with a higher rate of return, and as a potential hedge against future inflation. Rex Schrader, of Schrader Real Estate and Auction Co., based in Indiana, says more outside investors, including pension funds, are buying farmland. “They’re looking at agricultural land as a class of assets that they should have in their portfolio,” he says.
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Interest in farmland as an investment is high because economists expect a planting boom next spring. Prices of several of the major U.S. crops have soared since July as prospects for U.S. agricultural exports brightened. The Black Sea drought that temporarily crippled Russia’s ability to export wheat is creating huge marketing opportunities for the U.S. wheat industry, which is expected to export 42% more bushels of wheat from this year’s harvest than last year.
At the same time, the weak U.S. dollar is making U.S. commodities look like a bargain to emerging and developing nations.
The U.S. is exporting a record amount of soybeans, thanks largely to the protein-hungry middle class within China, a country that will likely buy one-third of all soybeans just harvested in the U.S. The appetite of Chinese textile mills is so strong that U.S. cotton exports are expected to climb 31%, which could drain U.S. supplies by next summer to the lowest level since 1925, according to USDA projections.
The prices of cotton, corn, wheat, and soybeans are up, 119%, 49%, 39% and 35%, respectively, from a year ago.
Dan Basse, president of AgResource Co., a Chicago commodity forecasting concern, said Friday that the broad price rally is signaling U.S. farmers to plant an additional 10 million acres, or 4% more than this year.
Some regulators have begun to wonder whether farm land prices are climbing too high, too fast. Sheila Bair, chairman of the Federal Deposit Insurance Corp., posed the question in an October speech of whether an asset bubble is building in U.S. farmland, the value of which has climbed 58% since 2000 in inflation-adjusted terms, she said.
“While the credit structure underlying U.S. farmland does not appear to involve excessive leverage or inappropriate loan products, this is a situation that will continue to require close monitoring,” Ms. Bair said then.
Write to Lauren Etter at lauren.etter@wsj.com and Scott Kilman at scott.kilman@wsj.com
Tags: alternative investing, China, commodities, corn, Cotton, crop harvest, exports, farmland, middle class society, real estate, soft commodities, soybeans, USA Farm Belt, weak dollar, wheat