Investing in Farm Land

While Prescott Russell locals view farmland as something we just buy or sell to expand our growing capacity or make a prudent retirement decision, the reality of today’s farming transactions is that pricing, demand and interest are being manipulated by forces that we are not immediately aware of.

When we sip our morning coffee, and share news about who is up to what and who is going where, there is no obvious information source to educate us about how our regional market is influenced by people far away, in an entirely different culture: New York, private equity firms and savvy investors looking for the safe harbour for their piles of money.

The simple fact is that the financial players in cities like London and New York want to invest in farm land for one simple reason: It is a wise place to park money.

People with money tend to pay a premium for better parking.  They are all about the parking:  Where, when, and how much to park.  The good news is that, right or wrong, their collective wisdom is to buy.

While this would not have seemed the case 20 years ago, many local residents already owned, were inheriting farms then, or were buying then.  This group of owners experienced some of the best rural appreciation in market value on the continent.

Now large players, such as the Blackstone Group (a $48BB global private equity firm based out of New York City), want to see how much farther this appreciate will go. Their research shows that it is not only a safe bet, but it is an income producing bet.  They expect to see respectful gains in 5 years.

The Bubble Alarm

Following the herd is never a good idea and being greedy when others are greedy is also a poor strategy.  Yet land, in this previously neglected market, keeps going up.  Why?

Buying a piece of land in the country was once seen as quaint and a fine goal for a city person, but now, in the world of alternate asset management (a fancy name for “not the stock market”), the focus is going rural.  This, compounded with other drivers (such as rising commodity prices), make rural land attractive.

The debate in our home over the dinner table can sometimes drift into bubbles.  Where is the real driver of growth and value?  Are these rising prices sustainable, or will they collapse ‘bubble style’?  Why would it make sense that acres locally could see more than ten fold appreciation between the time your child was born and graduated from high school?

Land has a lot of value it turns out. Nothing is more tangible than a piece of the planet to call your own and unlike other alternative investments, such as gold, land provides an income. While it is possible to bring more land into production, demand is likely to outstrip supply for the foreseeable future.

Let’s Not Forget Food

Wheat is more than twice the price it was 10 years ago. Then there’s the attractiveness to investors of all tangible assets at a time of low interest rates. Add to this the fact that there is greater pressure on land from biofuels and urbanisation and you’ve got a recipe for impressive capital gains.

With the world’s population growing at a great clip and the UN forecasting 1.8 billion people to feed by 2030, commodity prices aren’t likely to be shrinking for a while – compound those facts with the desire for meat among the new middle classes in emerging nations. To produce one kilogram of beef, it takes up to 13 kilograms of grain, ramping up demand all the more.

Even the great Warren Buffett has weighed in: He recently lauded land investment, telling his partners that he expects land to beat gold and other unproductive assets on the medium and long term term.

What Next?

As a real estate professional my job is to help you sell and buy property.  If you want the best deal imaginable, I can’t offer you the time machine to go back to 1980.  What I can offer is some careful analysis on what the value is today and how it got there relative to what it was when you bought it.

If you are looking to sell your land, I can offer a realistic picture of how to market it to the right buyers, for the right price.

As I like to delicately communicate to the most optimistic sellers, “I’m not about getting your listing, I’m about selling your property.”  If it is time for you to sell, and you want it sold within a time frame we select together, then it is critical we set a price that is in line with your expectations, while also in line with what will it should sell for.

 

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