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Agriculture used to be an asset class for ultra-pessimists only. Veteran Wall Street observer Barton Biggs, in his study of investment returns over World War II, concludes that “an unostentatious farm,” is the best way to preserve wealth if your country faces military occupation. But now, the phrase “bull market” has a literal resonance, as hedge fund managers get their Tod’s loafers mucky and buy up swathes of land. The theory is that the commodity boom has transformed the economics of agriculture. Farm land prices rose by 28 per cent in the UK in 2007, while the Department of Agriculture estimates a rise of 14 per cent in the US. In parts of the former Soviet Union, year-on-year price rises of over 50 per cent have been seen.
Is this barmy? Developed world land prices track farm profits, which have soared with commodity prices. The DoA estimates US “net farm income,” (profits after land, labour and capital costs) rose by 30 per cent in 2007. Given high farm values and productivity, buying this land now is a speculative punt on commodities. If prices fall, income and land values will too. US net farm income in 2002 was half today’s levels.
Things are more interesting in developing territories, for example the ex-Soviet Union. Land prices can be a tenth or less of Western levels. After decades of collective ownership, productivity is appalling: Russia has about five tractors per thousand hectares versus about 30 in the US. It makes sense to consolidate farms, reinvest and run them professionally. Red tape and political risk, not commodity prices, are the dangers.
Whether financial investors are the right agent for this is doubtful: they are too short term, attract political hostility and have no operational competence. Still, the idea is good. Nomura reckons that if Russia’s productivity hit western levels, the rise in cereal production would roughly equate to the rise in global demand over the last decade. In a era of food shortages, that fact is worth taking seriously.
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