Saturday, November 12, 2011

Farmland - the next bubble?

Farmland - "the dark-horse bubble candidate for the next decade " Robert Shiller.

This is an interesting analysis from a leading bubble and housing expert. Still the economics are very different. There will not be any great increases in farmland at any time in the future. Housing can be built. This is not the case for farmland. 

The best land is already being used. Any new lands are marginal and have highe risks. Any uncultivated farmland outside the US is also declining. The best land in Latin America is also in production. The best land in New Zealand and Australia which has limited political risk also has been put to use. The only new land that could be employed is in Africa and the "stans".  The long-term play is very strong; however, the short-run could be more diffcult.

With price highs in grain hit earlier this year, there is a greater chance of margin compression in the farm industry. Debt levels and interest rates are lower than the last timewe had a US farm land crash, but the price of farm land is still tied to the prices of commodities. Unfortunately, the talk of a bubble is based on the the delinking between land and prices.  The growth in land prices has moved ahead of commodity prices and does not reflect the volatility in commodity prices. This is the basis for the bubble story and the reason for short-term caution.

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