Wall Street's $10 Billion Bet on Farmland

Farmland values are amidst a widely documented slump. The grain markets aren't exactly lighting the world on fire either. The latter factor will likely keep more farmers on the sidelines at land auctions that may have seen furious bidding a year ago, one economist says. So will the combination of fewer bidding farmers and lower prices open the door to a flood of new investment entering the market? One thinktank market-watcher says yes.

"The next couple of years for farmland values are going to be a little less certain than the last few years have been. Commodity prices have come down significantly in the last year, so these large returns we've kind of become accustomed to for the last few years have now shrunk. The probability of farmland values staying flat or seeing a small decrease is much bigger than the probability of seeing another double-digit increase," says Purdue University Extension ag economist Craig Dobbins in a university report. "Even though our data confirms the conventional wisdom that farmland has high returns, low risk, and is a good inflation hedge, the current price-to-rent ratio suggests this is not a good time to buy. Those purchasing farmland today should not ignore the prospect of buyer's remorse."

But, Wall Street doesn't feel emotions like remorse. And, especially if Dobbins' foreseen trends unfold, hedge fund managers and other Wall Street players may outnumber farmers at farm land auctions in the near future, according to a report from biofuels and farmland investment specialist and Oakland Institute fellow Lukas Ross. The Oakland Institute has a mission to "increase public participation and promote fair debate on critical social, economic, and environmental issues," according to the thinktank's website.

The investment flood into the farmland market could be a massive one; Ross projects as much as $10 billion in "institutional capital" on Wall Street is "looking for access to U.S. farmland, but that number could easily rise as investors seek to ride out uncertain financial times by placing their money in the perceived safety of agriculture."

The age of the average U.S. farmer could play into this wave of Wall Street into farm country. Ross says his data show a major demographic shift among farmers. In other words, with more farmers retiring, more land could be entering the market, one seen by investors as a safe place for major capital. At the same time, Ross adds, it may not be the easiest market for outside investors to enter.

"In the next 20 years, as the U.S. experiences an unprecedented crisis of retiring farmers, there will be ample opportunities for these actors to expand their holdings as an estimated 400 million acres changes generational hands," his paper says. "And yet, the domestic face of this still-unfolding land rush remains largely unseen. For all their size and ambition, virtually nothing is known about these new investors and their business practices. Who do they buy land from? What do they grow? How do they manage their properties? In an industry not known for its transparency, none of these questions has a satisfactory answer."

Wall Street's crush on farmland got serious during the economic downturn around 2008, with many investors putting land in the same general category as gold -- a safe, "reassuringly tangible" investment that "holds its value very well against inflation." But its roots -- based in simple economics -- go back further than that.

"Even before the economy imploded in 2008, a range of ecological, economic, and political factors were already herding investors toward farmland, often for simple reasons of supply and demand," Ross says. "Over the last 50 years, the amount of global arable land per capita shrank by roughly 45%, and it is expected to continue declining, albeit more moderately, going toward 2050."

• Chat it up in Farm Business Talk: $10 billion waiting on farmland 
• See the full Oakland Institute study

Not every farmer can or will sit on his or her hands when it comes to buying more land in the next year. But an investor may make a tough foe in a bidding war at the next land auction. So how can you compete? That answer is actually easier to reach -- for land purchases and rental agreements -- considering farm income expectations for at least the coming year, Dobbins adds.

"If the purchase fits in well with the plan for the farm business, and there are sufficient cash reserves to withstand a downturn for the next two to three years, then go ahead. But if it in any way threatens the farm business, then I would want to be very, very cautious about making this purchase," he says. "Tightening crop margins may have a more immediate impact in the cash rent market. For those using flexible cash leases or crop-share leases, an automatic downward adjustment in 2014 will likely occur. For those with a multiyear lease established under the assumption that corn and soybean prices would remain high, there may be a need to visit with the landowner."