The New Ag Bubble and Climate Change

The Federal Reserve Bank of Chicago is worried enough about rising farm land values in the MidWest it is holding a conference to discuss it. Here in the MidWest, prices have gone up 17% in the last year.

And Bloomberg has a piece describing bankster types scouring farmland the world over for farms.

“I have frequently told people that one of the best investments in the world will be farmland,” says Jim Rogers, 68, chairman of Singapore-based Rogers Holdings, who predicted the start of the global commodities rally in 1996. “You’ve got to buy in a place where it rains, and you have to have a farmer who knows what he’s doing. If you can do that, you will make a double whammy because the crops are becoming more valuable.”

The growth in demand for food, spurred by the rising middle classes in China, India and other emerging markets, shows no signs of abating. Food prices in June, as measured by a United Nations index of 55 food commodities, were just slightly below their peak in February. The UN’s Food and Agriculture Organization said in a June report that it expects food costs to remain high through 2012.

So many investors have rushed to capitalize on food prices in the past three years that they may be creating a farmland bubble. The Federal Reserve Bank of Kansas City, which covers Colorado, Kansas, Nebraska and other agricultural states, said in May that farmland prices had surged 20 percent in the first quarter compared with a year earlier.

“Yes, farmland will be a bubble again; all agricultural products will be in a bubble again,” says Rogers, who is an investor in Agrifirma Brazil Ltd., a South American farmland owner.

Now, I’m interested (and concerned) about the way this will lead to problematic relations between investors and the farmers actually doing the work (“Feudalism returns,” Muniland’s Cate Long says).

But I’m even more rather amazed that the discussion of this doesn’t mention climate change.

Sure, the increase in prices is, in the short term, driven by demand in places like China.

The hedge fund Diggle co-founded, Artradis Fund Management Pte in Singapore, suffered about $700 million in losses. He closed it in March and opened another Singapore-based hedge fund, Vulpes Investment Management Pte. Diggle plans to incorporate his five farms into an investment management group run by Vulpes.

From his vantage point in Asia, where the British expatriate has worked for the past two decades, Diggle says he’s witnessed aspiring locals eating their way up the food chain.

“You can see what a more prosperous China will consume,” Diggle, 47, says. “It means more dairy, more meat — not just pork and chicken.”

But this year’s near-record food prices are tied, too, to weird weather and other disasters: fires in Russia and floods in Australia. Whether or not those disasters were tied to climate change, climate change already has changed productivity.

Sure, the horizon of investment here may be shorter than that which will see areas of the MidWest take on an increasing role in feeding the rest of the country as other parts because less farmable. But that horizon is not that far out.

This farm buying craze may well be a bubble. Or it may be the leading edge of financial changes tied to climate change.

15 replies
  1. noble_serf says:

    Since the financials sector appears to behave like 5 year olds playing soccer, at least to the causal observer, I would say this is just another boom and bust bubble.

    We’re at the point where all the kids are running to the ball. They’ll be around it for a while. Then one of them will kick it out of the pack causing them to all run some more.

  2. nomolos says:

    But this year’s near-record food prices

    No kidding. Thankfully we organically grow most of our own food though I hear horror stories of the food prices in stores. Of course one would never know from the, apparent, static cost of living according to garp The Big Zero.

  3. William Ockham says:

    This is really important. The weird weather that caused the current upswing in crop prices is probably mostly due to normal variation, but climate change certainly made it worse than otherwise would have been and (this is the real kicker) climate change means that the good weather rebound will be attenuated. That has a serious impact on the viability of farming in marginal areas, which leads to future reductions in global crop production capacity.

    One the most overlooked triggers for the Arab Spring was the rising in grain prices. Without global warming Hosni Muburak might very well still be in power. That might seem like a good outcome from global warming, but it is just a side effect that should serve as a warning of future unrest. We are part of a complex system and global warming is fast becoming the driving force in that system.

  4. P J Evans says:

    I expect that some of the first areas to be hard-hit by climate change will be the Rio Grande valley and the Imperial/Coachella valley, both locations for early and otherwise out-of-season produce. (The Rio Grande valley also is a source for winter citrus, especially grapefruit.)

  5. prostratedragon says:

    Are there yet any highly confident forecasts of agricultural productivity changes by smaller regions, i.e. states of the US-kind of size? I recall a few years ago climate scientists that I heard on the subject were still highly uncertain about things like rainfall pattern changes that could matter a great deal for farming.

    Of course, there can be other uses for land that does not pan out agriculturally. Combine that with uncertainty that might not be resolving itself for a few decades and you get a tendency for speculative ownership to pile up with the big ops or their taksmen.

    Ref: 1) Broadside for The Crofter and the Laird by John McPhee, a modern tale of Argyll and Bute; 2) Colonsay, Scotland, about which McPhee wrote 40 years ago, today; 3) The Campbells Are Coming (40sec is more than enough)

  6. Bob Schacht says:

    I know a farmer in Iowa, who should be retired by now, but still works his farm. He told me several years ago that it would be impossible to start a farm like his, now, for an ordinary farmer. To buy the land, and the farming equipment one would need, as well as the farm house, barn, etc. you’d need a million dollars. His farm has grown by accretion over a lifetime, a year at a time. He and his wife could sell it all, and live in comfort for the rest of their lives. But none of their kids wants to go into farming, even though he could give them their whole farm.

    Bob in AZ

  7. rg says:

    “…buy in a place where it rains and have a farmer that knows what he’s doing”.

    Your feudalist concerns are justified; it seems the investment advice is to buy a farm and a farmer to go with it.

  8. emptywheel says:

    @Bob Schacht: That’s true, but at the same time, smaller farms are now more viable then they used to be, with the flourishing of local markets.

    If you click through to the Fed report, within the MW region it talks about, IA and IL–which are both commodities focused–have experienced higher increases than, say, MI, which has commodities, but also more diverse smaller farms.

    Of course, it’s the latter kind of farm that will best weather climate change.

  9. posaune says:

    Wonder what comparisons could be made with Poland? Poland was the only Eastern Bloc country to maintain family owned farms under the Soviets — who never managed to cooperatize the farms. As a result, the “poor” family owners never used pesticides. Now Poland is the biggest EU exporter of organic food. And the mushrooms are to die for, too.

  10. P J Evans says:

    @Bob Schacht:
    I suspect that until recently, the machinery was the biggest single expense – a tractor will run into 6 figures, on the high end. You pretty much need to be a corporate farm to afford combines or cotton-strippers, which is why there are businesses specializing in harvesting: farmers contract with them, and the crews and equipment travel with the harvest season, north and south.

  11. Bob Schacht says:

    “…MI, which has commodities, but also more diverse smaller farms. Of course, it’s the latter kind of farm that will best weather climate change.”

    Exactly. A few years ago, when she could still walk, I took my Mother and sister to the parcel of land that her great grandfather had once farmed. From one end to the other, it was one giant cornfield (a.k.a. “monoculture”). My Mother took one look at it, and said, “That’s not the way we used to farm.” She was talking about diversity: A few acres of this, a few acres of that, a fallow hay field, a garden near the house, a barn with at least one cow and one horse, and some chickens, and maybe a pig. Diversity is good insurance against changes in climate.

    Monoculture amounts to putting all your eggs in one basket. But it also means you can get corn on the cob for 10 cents a cob at the supermarket, in season, most years.

    I did not live on a family farm as a kid in the 1950s, but I had an uncle who did, and family friends who did. Those families, and their children, are no longer living on farms.

    My hat goes off to all those who are trying to live on a family farm. May they live long, and prosper.

    Bob in AZ

  12. ryan says:

    I don’t think farmland is a great investment for outsiders, because the American tax system doesn’t lend itself to large-scale non-resident ownership of land. The serfs get to set the property tax rate.

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