U.S. farmland price bubble?
SINGAPORE (Dow Jones)--U.S. farmland prices may be heading for a downward correction after having increased sharply in recent years because of speculative investment, low interest rates and high prices of crops, a Macquarie Agricultural Funds executive said Wednesday.
A bubble may be building up and there is a cause for caution because returns are getting squeezed, Daniel Hough, agricultural product specialist with Australia-based investment group Macquarie, said on the sidelines of an agriculture conference.
There is no justification for U.S. farmland prices to be three-to-four times higher than land where the same crop is planted in Brazil, or 30 times the corresponding prices in Russia, he said. High yielding crop land in the U.S. is now priced around $12,000-$15,000 a hectare, compared with $3,500/hectare in Brazil and $500/hectare in Russia.
Citing data from the Federal Reserve Bank of Chicago, Hough said that in the year to June 30 there was an average 17% increase in farmland prices across Indiana, Illinois, Iowa, Michigan and Wisconsin, the biggest rate of increase for any year since 1977. According to the U.S. Department of Agriculture, farmland prices are up 40%-70% during 2005-2010 in the Midwest.
Gough said speculators are investing in land on the expectation of future capital growth, but returns accruing from production on the land have declined and are now anywhere between 1%-2% annually. Around half of U.S. farmland is now managed by non-owners.
Gough said cheap availability of debt, because of lower interest rates, have helped push up U.S. agricultural land prices. But with diminishing returns investors are turning towards South America and Eastern Europe where capital cost per unit of crop production are lower and sales competitive.
For an importer in China it doesn't matter whether the soybeans are coming from U.S. or Brazil, provided the prices are lower, Gough said, adding farmland prices will suffer as the U.S. government reduces subsidy to rein in the deficit.
-Sameer Mohindru, Dow Jones Newswires; +65-94552449; firstname.lastname@example.org
(END) Dow Jones Newswires
December 07, 2011 07:51 ET (12:51 GMT)
DJ INTERVIEW: Macquarie Executive Warns Of US Farmland Price Bubble->copyright