Eaton Rapids Joe looks at farmland prices and wonders . . . what can justify them?
In a rational world, it should be possible to estimate the cost of an acre of land from the price of corn. Assuming 200 bushels of corn to the acre and $3 a bushel for variable production costs, the Net Present Value of (Corn Price-$3) over 20 years at 6% discounting should yield a decent first-order approximation of the price of corn ground.
. . .
Iowa is corn country. They grow corn and do it as well as anybody in the world.
But even the most optimistic economists were stunned when a "corn farm" in Iowa sold for $30,000 an acre.
There are only two scenarios where that makes any kind of sense:
- Corn selling between $15 and $20 a bushel
- "Real" interest rates (i.e. interest rates minus inflation rate) going VERY negative.
The market isn't always right. It can remain irrational longer than most short-sellers can stay solvent.
But for me it is eye-opening that there are a couple of bidders out there who are willing to bet very big money that food and fuel prices will triple ($18/$6.5) in nominal prices in the near term (i.e. five year horizon).
There's more at the link. Go read. (His blog is worth following for interesting vignettes of rural and semi-rural life, and some thoughtful insights.)
He has a point. It's simply not rational, in terms of an economic return on investment, to pay that much for farmland . . . unless there are factors unknown to the rest of us, but known to the buyer, that justify it. The question is, what are they? And are they "educated guesses", or based on knowledge, certainty, guarantees?
Makes you think, doesn't it?
Peter
19 comments:
Let's check against realistic inflation.
$100 compounded quarterly at 20% interest for 5 years is: $265.33
$100 compounded quarterly at 25% interest for 5 years is: $336.19
$100 compounded quarterly at 30% interest for 5 years is: $424.79
$100 compounded quarterly at 35% interest for 5 years is: $535.29
The percentage of Iowa farmland that is owned free of debt is said to be quite high.
If successful farmers have cash to invest, where else should they put it than prime farm land?
Especially when a steady stream of anxious-future commentary promotes buying precious metals, which have ZERO return on investment?
Until there are more-attractive things to invest in than Iowa farm land, investor pressure is likely to keep its prices somewhere way up there.
Iowa State University runs the numbers, which is better investment:
www.extension.iastate.edu/agdm/articles/zhang/ZhaJul22.html
Comparing the stock market and Iowa land values: A question of timing
Subject to the assumptions made which is a better investment, farmland or the stock market, depends on when the investment was made and the year of the sale.
It makes me think too. One thing that comes to mind is the land might be a good site for a stone quarry. The amount of money to be made for the construction material would justify the price per acre.
What if they aren't buying it to grow corn?
Or perhaps someone didn't want to be turned down. So the land could be purchased and taken out of production.
So we can all buy form the mega farms...
Or the buyer got good return for soon to be worthless money. Seriously, if you have it buy hard assets.
I'm wondering if the land is being considered for wind farming. Those windmill generators make a fortune for the land owner and current Green Energy push is strong. I know this happened in Texas - ERCOT was planning this far in advance of the wind farm, having pre-positioned the underground utility lines for them already located.
I'm just guessing here.
Corn XXXX Food is going to be expensive in the future.
I saw a comment that two of the highest prices were paid by neighbors; if so they may have reasons to pay over market for those particular parcels.
We've also seen stupid overpayment in other areas before, so that is always a possibility!
Land's location location location, and it's not increasing in quantity. Farmers are willing to pay more for land adjacent to existing fields as well as for land near to their/family homes as a defensive measure against nuisance neighbors, which are largely factory livestock operations or sewage/sludge fields for the same.
Also remember Dutch farmers continue to buy land for new operations in the Midwest above market prices.
And also chance it's investors/wealthy using as a safe haven where they figure they won't lose money long-term, or if financed/leveraged over 15+ years the math changes. All capital must be allocated somewhere, somehow. Or its wealthy using as an actual safe haven rural farm/ranch/retreat with economics removed from crop value.
To echo, or more accurately, tag onto Xoph: "Buy land. It's not like they're making any more of it."
Maybe someone who sees all those overseas US Dollars coming HOME to roost and the hyperinflation they will create.
Might be a good time to review one of the most successful men in Weimar Germany.
https://www.wealthplaybook.ca/post/who-was-hugo-the-inflation-king-of-1920-s-germany-stinnes
Great Depression 2.0 IF we are LUCKY. Probably more like Venezuela 2.0 but with more electronic surveillance, Chinese style Social Credit Scores and with cash BANNED as E-Dollars give the Gov.com more control of what, when and how you spend "your" money.
I wonder if the corn there goes to food or to ethanol? I think a lot goes to ethanol.
Keep in mind that some investment may involve capital flight. In capital flight, if you lose half of the investment, it doesn't matter because you got the other half of your money OUT of what you were fleeing from.
I think that the issue is the huge difference in wealth we have now. While most of us are struggling a bit, there's a huge swath of people who have so much money they don't have a clue what to do with it. Think about it. There's a fair number of people who are making over 100 million dollars a year. What are those people going to do with that money? They have the boats, the cars, and the house. What they are going to do is buy up assets and just sit on them.
I've seen this in my life on a smaller scale twice. The first time, it worked to my advantage. Some years ago, I lived in a small town in Appalachia. I lived in a house that had appreciated to being worth about $400K, which doesn't sound like a whole lot now, but was a fair amount back then, particularly for a town of about 6000 people. When it came time to move, I had some heartburn, because only about six or seven people in town could afford the house, and they weren't in the market.
Then, out of nowhere, some guy from California came in, and bought the house for the asking price and in cash. It turned out that he had sold his two bedroom small home in southern California for well over a million bucks and left the state, so paying $400K for a good sized house with a pool in the mountains was nothing for him. I could have asked $600K and he probably wouldn't have blinked.
I moved to another town in Appalachia and bought a home. The two properties next to me were undeveloped, and I asked my real estate lady if she knew who owned them. I was thinking about buying them so I wouldn't have someone building a house right next to me, and would have room for a garden.
She looked it up and found out that the land belonged to a couple in Chicago who bought the land on a lark about 20 years ago. They had forgotten they owned it. It turned out they had gone around buying land in various places as potential retirement places *just in case* they decided they wanted to move there. They owned so many properties they couldn't keep track of them.
There are a lot of people out there for whom a good sized spread at $30K an acre is chump change. Two hundred acres at $30K is six million bucks. That's a three bedroom cottage in San Diego. It's peanuts to a *lot* of people. They are buying up the land because they can.
Out where I live in Appalachia, a lot of people are moving in from red states, and a bunch of them have more money than God. The market value of my house has doubled in the past three years. I was talking to my brother-in-law about it the other day. We both were thinking "Man, we oughta cash out on this." But, where would we move to? We'd have to buy another house in this market, and if we wanted cash out, we'd have to downsize like crazy.
It means that the disparity in wealth will only increase, because these people are buying up all the durable assets in the nation. In the end, we'll all be rending and sharecropping.
Different country and different crops, but I think the key economic factors are the same.
In the forty-odd years that I’ve been aware of such things, the per-acre value of my family’s farm has increased by around 2000%.
It is generally argued that the value of land is driven as much by capital gain as it is by the value of its production.
As has been mentioned, a thing is worth what people are willing to pay for it, not what it “produces”. Farm land is like other forms of real-estate… outside some special cases, it is unlikely to lose value. Of course, capital gain doesn’t get realised until you sell it. Which leads to the seemingly odd sight of farmers worth million$, maybe tens of million$ but no cash in their pockets.
What if they're buying it to take it out of production in perpetuity?
Best wishes buying food when corn gets to $25/bushel.
I think that the reason the land sold for such a price is quite simple to deduce.
It's to take it OUT of commercial farming altogether and to leave it fallow.
Expect more such purchases by 'unknown' buyers, taking more land out of production.
How much money does all of the land own by Bill Gates make?
I don't know about the USA but here in the UK agricultural land can be free of inheritance tax. With IHT at 40% over here it can be very cost-effective.
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