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Watch equities for farm land direction

Want to know where farm land prices are headed? One good place to watch is the stock market. And, the way things may shape up throughout 2012, that market could be the culprit of lower farm land values.

That's the take of Vince Malanga, president of Flushing, New York-based LA Salle Economics, Inc., who stopped by to visit with farm land managers, ag lenders and other farm land stakeholders at the fifth annual Land Investment Expo on Friday in West Des Moines, Iowa. And, it's a take that factors in a lot of variables around the world, most notably the direction of asset values in the U.S. in the coming year.

"With all the uncertainty out there, it's going to be difficult for businesses to make informed decisions on investments," Malanga says.

The first reason he says "paralysis" is his theme for 2012 is the forthcoming kickoff of an active term of economic policy changes in the U.S., starting with some kind of announcement to "goose the economy, both in an effort to stir up economic optimism and for the Obama administration to bolster the incumbent President's chances in the November election. That will likely come in the embattled housing sector, Malanga says.

The next big policy move of the year will come when the Federal Reserve Open Market Committee meets later in the year, at which point Malanga says the body's likely to keep interest rates at low levels in an effort to encourage more lending activity. Despite these actions, don't look for a lot of upward movement in the economy, at least in the first few months of 2012.

"The idea is to enable long-term rates and mortgage rates to stay down so it becomes cheap to borrow and encourage more people to do so," Malanga says. "I don't think we have hit the low [interest rate] yet. There is very little momentum in the economy, and we expect it to really kind of lay an egg in the first half of the year."

Slowing GDP growth and judicial arguments about the constitutionality of new health care legislation will add to the economic malaise in the coming months. But, more important will be a series of scheduled tax increases at the beginning of 2013 and what those bumps will mean to the face of investment in the U.S. that will ultimately have a considerable effect on the farm land market.

"The amount of fiscal drag accompanying all of those will have an extremely severe contractionary effect on economic activity," Malanga says. "We don't know how that will be dealt with. In the second half of the year, everybody is going to be wondering what the hell they are going to do."

So, why is that so important to the land market? It all boils down to uncertainty, Malanga says. Take corporate profits, for example. In 2011, the economy grew by only 2% despite general corporate profits around 15% higher than the previous year. That shows how much uncertainty -- largely brought on by government inaction on economic stimulus matters -- influenced the investment community.

"The stock market should have done better, right? Investors concluded that profits weren't worth as much as they would be under normal circumstances," Malanga says. "The S&P 500 is a good indicator of government effectiveness on economic measures. So, what happened in 2011: Profits were good, rates were low, but the market didn't respond because of that failure. The same thing will happen again if we don't see progress soon on economic matters and deficit reduction."

If that progress happens, watch out. Many investors who ordinarily would push assets into the equities have moved instead into hard assets -- including farm land -- because of a lack of confidence in those markets. If that confidence is restored, the farm land market could find itself without that surge of investment money.

"These alternative assets have benefited from the disarray on Wall Street. What happens if they start to flip around? If investors start to see the outlook on financial assets starting to improve long-term, we're finally getting some solutions from Washington and finally getting some legitimate tax reform, the allure of financial assets improves and the allure of hard assets starts to decline," says Malanga, who adds he expects corn prices could dip below $5/bushel at some point in 2012.

All these factors, though adding up to a bearish outlook for farm land in the next year, don't spell doom for the market, Malanga says. Instead, it should restore land to its status as a piece of a larger portfolio of diverse investments. As such, investors should continue to view land as a viable option as an asset, but not one that's inexpendable.

"Think about outside investors getting involved in agriculture. Do you think they care about agriculture? Do you think they care about how many bushels they'll get from their land? No. They are concerned about the rate of return for their assets. If they look at financial assets starting to be viewed as undervalued, they certainly wouldn't have any qualms about selling that land and going back into financial assets," Malanga says. "Don't think of farm land as an asset in isolation. Think of it in a basket of assets an investor is going to invest in and think how he is going to look at that asset as part of that basket."

Though that outlook may seem to paint a gloomy picture for the land market's future, Malanga said it's farm from time for investors to bail out altogether.

"I remember what happened in the 1980s, and how things look now, I guess I'd say there's a smaller bubble now than in the 1980s, so there will be less of a decline," he says. "Just stay out of debt. You can live with land and watch it go up and down. But, live with it."



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