The real bull market

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Who is the biggest owner of farmland in America today? Aside from the American government? If you had asked me a couple of weeks ago, I might have guessed it was a food group, such as McDonald’s, or a wealthy family such as the Rockefellers. However, I recently met with Roger Ferguson, the former vice-chairman of the US Federal Reserve, who now runs TIAA-CREF, the giant American pension fund. According to Mr Ferguson, the TIAA-CREF is one of the largest owners of US agricultural land today. Another large landowner is thought to be the Mormon church.

Yes, you read that right; next time you glance at a rolling American prairie, dairy barn or field of corn, there is a good chance you are looking at the property of canny fund managers or Mormon evangelists. And while pension funds used to spend most of their time watching share prices – rather than muddy fields – groups such as TIAA-CREF have recently moved in. TIAA-CREF for example, currently manages some $470bn of assets for 3.7 million members. Out of that pot, it directly holds $2bn of farmland in the US (and has stakes in other big landowners, too), Australia and Brazil, and this is likely to rise. “It’s an important long-term play,” Ferguson explains. “It’s really focused on the growing middle class around the world and changing eating habits.”

And TIAA-CREF is not alone; many other pension groups and hedge funds are dashing into muddy fields. According to a HighQuest report for the OECD, 54 investment funds now have $7.44bn of agricultural investments around the world, and this is “expected to double or triple in the near to long term”. Much of this has been acquired over the past decade. Indeed, so strong is this trend that the trading floors of Wall Street are currently abuzz with stories of bankers who have now become obsessed with soybeans.

Why? Hard-headed economics is partly to blame. In the past few months, the world’s population has risen above seven billion. That is creating a lot of mouths to feed. And as emerging market countries get wealthier, their populations are embracing richer, meat-focused diets. Taken together, this is raising demand and, unsurprisingly, the level of food prices is rising in almost every agricultural sector. Hence the price of agricultural products – or “soft commodities” to use the financial jargon – has risen by 36 per cent in the past three years. Corn prices for example are up 85 per cent year on year, and soy beans have risen by 37 per cent.

For many of the world’s poor, this has delivered brutal consequences. Little wonder that the governments in many emerging markets are worried about political unrest. However, it is a truism of markets that somebody’s pain is usually someone else’s gain. Thus the unpalatable truth that few American politicians want to admit is that this food squeeze is allowing many American farmers to enjoy fat profits. (The sector is protected by large state subsidies too.) This, in turn, has helped to push the price of agricultural land dramatically higher, as investors (and farmers) bet on this trend continuing. According to the Chicago and Kansas City Federal Reserve Banks, farm land values rose 20 per cent in the past year, making this “the largest recorded price gain since the 1970s”. Indeed, TIAA-CREF reckons that farmland has produced average annual returns above 10 per cent since 1970. That is higher than treasuries, Standard & Poor’s equities, etc.

However, aside from these numbers, there is a second, more subtle cultural factor at work too: namely, a reaction against the past decade of finance. As I have noted in several earlier columns, in recent years the banking world has been turned by what might be called the era of “cyber finance”. Money became so abstract, complex and esoteric, that it was impossible for ordinary people to understand.

Before 2007 this system seemed to work since there was a high level of trust, but since then that trust has crumbled. Thus people are now looking for something – anything – they can understand, value, touch even (think of gold, diamonds, property and timber). And the appeal of farmland is that it looks tangible, timeless and productive. In other words, the world will always need cows – or corn and soybeans.

Of course, there is no guarantee that farmland prices will remain high indefinitely. In some parts of the US prices have risen so fast that conditions seem rather bubble-like, which suggests a retrenchment may occur if that demand-supply balance shifts, or if the level of fear in the markets disappears. But I would not bet on that happening too soon. And even if it does, it seems unlikely that those new land-owners will run away. “I am not sure that farmland prices can continue this kind of rapid increase,” Ferguson admits. “But I do think ... that it will be very good for those who are thinking about providing financial security for many, many years to come.”

After all, he points out, pension funds (unlike hedge funds) have long-term liabilities: thus in theory they should be investing for the long term, and be less worried about liquidity or short-term swings. The same logic well applies to the Mormon church. A church spokesman confirms that it owns farm and ranch property as a long-term investment and to supply food for its efforts “to assist those in need or can be converted to do so if necessary”.

If nothing else, it offers fascinating food for thought for anyone who wants to unpick how America’s economy – and landscape – is changing today. And of course, it may shed new light on the economic clout – or savvy investment style – of the Mormon church. Perhaps someone should ask Mitt Romney, would-be presidential candidate who has close ties to this church, what he thinks about all this American farmland.

House & Home: Playing the fields

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