With government policies supporting both the production and the income of the corn crop for growers, cropland purchasers over the past seven or eight years have seen the income potential from cropland as a much better bet than zero bound interest rate agreements. And, in an efficiency-driven system that rewards the big for getting bigger, some land owners took their recent year’s farm profits and reinvested them to buy neighboring farmland when available.
As I see it, buying farmland is a very long term hold, so given that policy can change, there are no guarantees that these investments will remain profitable, especially given the complicating issues of changing government regulations and subsidy systems, pollution concerns, water, super weeds, rising input costs, qualified labor, rural demographic issues, and consumers who are revolting against GMO crops and foods. It has always been my opinion that cropland investors, through investment vehicles, are naive about the nature of both farming and investing in farmland – if they are thinking it is a sure bet.
Ernie Goss, in his July report, tells us that the bank CEOs which he interviewed expect land prices to fall by 4.8 percent over the next 12 months, an increase from a rate of decline of 3.2 percent that was expected earlier this year.
This all comes as no surprise, as commodity prices have fallen in price with this season’s bumper crops. Farmland will follow.
Hint: The best future indicator for prices of farmland and commodities themselves can be summed up in two words: Biofuels policies… in the U.S. and everywhere.
Because, in the developed nations, we are still dealing with overproduction, hardly a surefire indicator for buying cropland.
Only from biofuels policies are nations creating new demand to utilize a significant percent of this excess crop production and drive up prices enough to cover their input costs. Through biofuels induced domestic consumption, through the export of biofuels and biofuel related products, and through the tweaking of biofuels policies from year-to-year, perhaps a “swing demander” has emerged for the commodity crops.